Climate change on insurance industry’s radar: Berkeley Lab Research

The insurance industry, which faces average climate-related losses of approximately $50 billion annually, is enhancing efforts to manage associated risks, notes a new study out of the United States.

“Weather- and climate-related insurance losses today average $50 billion a year. These losses have more than doubled each decade since the 1980s, adjusted for inflation,” reports Evan Mills, a scientist with Lawrence Berkeley National Laboratory’s Environmental Energy Technologies Division, and author of the study published last Thursday in Science.

With a portfolio of $25 trillion in assets, the insurance industry has become a significant voice in world policy forums addressing the climate change issue, and a market force, Berkeley Labs notes in a statement.

Seeing risks to investments in polluting industries and opportunities in being part of the clean-tech revolution, the statement says, the insurance industry has invested at least $23 billion in emissions-reduction technologies, securities and financing, and $5 billion in funds with environmental screens.

“Insurers have become quite adept at quantifying and managing the risks of climate change, and using their market presence to drive broader societal efforts at mitigation and adaptation,” Mills states.

The study indicates that 1,148 climate change adaptation and mitigation activities have emerged from 378 entities in 51 countries, representing $2 trillion (of 44%) of industry revenue. As an example, the statement notes, insurers have brought at least 130 products and services to market that encourage the spread of more energy-efficient homes and commercial buildings by paying claims that encourage rebuilding to a higher level of energy efficiency after a loss.

With regard to pay-as-you-drive insurance policies, Mills suggests “the price signal of lower premiums for miles actually driven could reduce U.S. driving by 8%, and oil use by 4%, reducing the cost of driving by $50 billion to $60 billion per year because of a lower chance of accidents and reduced traffic congestion.”

Three global initiatives between 1995 and 2009 have spurred 129 insurance firms from 29 countries to engage in activities ranging from supporting climate research to quantifying and disclosing climate risks. The activities seek to reduce climate-related losses among their customers, as well as their own exposure to risk, “which is rising in step with the magnitude and frequency of extreme weather-related events,” the statement adds.

The study adds that these insurers – together with reinsurance companies, industry associations, brokers, catastrophe-loss modellers and partners in the research community – have been using sophisticated analytical tools to quantify and diversify their exposure to climate change risk, more accurately price and communicate risk, and get adaptation and loss-prevention efforts up and running.