Finance & Investment
New Report Urges Insurance Companies to Stop Underwriting Climate Change

WWF Switzerland and Deloitte Switzerland have co-launched a report that offers a first comprehensive insight into the impact of insurance companies' underwriting business on climate change and biodiversity loss, and how this trend can be reversed to achieve global climate and biodiversity goals. It covers a wide range of non-life underwriting fields — including liability insurance, marine and vehicle insurance, and property insurance — with real-life examples from various industry sectors.

Underwriting Our Planet: How Insurers Can Help Address the Crises in Climate and Biodiversity finds that, rather than addressing the twin crises, many economic activities underwritten by insurance companies fuel climate change and nature loss. Although some insurance companies have started to integrate environmental considerations into their business strategies, actions undertaken fall short of what is needed. For example, while there is an overall increasing awareness of the considerable risks caused by extreme weather events, the insurance sector is barely addressing how the underwriting business is contributing to those risks.

“The insurance industry has the power to play a leading role in our effort to work towards a sustainable future,” says Marcel Meyer, Head Sustainability Services at Deloitte Switzerland. “With their reach to all industries, insurance companies have the ability to incentivize sustainable practices and promote responsible behaviors of their customers. By incorporating environmental considerations into their business practices, insurers can help protect biodiversity, mitigate climate change, and build a more resilient and sustainable future.”

As the report asserts, the most powerful action insurance companies can take to mitigate the risks they face is to become catalysts — in their twin roles as institutional investors and risk underwriters — for reaching global climate and biodiversity goals. Whereas their role as investors has been covered extensively, the relevance of the underwriting business to achieving those goals has been largely overlooked. Many insurance companies still do not fully acknowledge the responsibility they have for the economic activities they insure: For example, according to unpublished estimates from industry analyst Insuramore, insurance companies make US$30 billion annually in gross written premiums from underwriting oil and gas extraction; and many large insurance companies still have coal policies that are not compatible with global climate goals.

“The impact of insurance on biodiversity may seem abstract — but it is not,” Lukas Stricker, Head of Further Education at ZHAW’s Institute of Risk & Insurance, says in the report. “Insurance is woven into almost all economic activity and hence can help transform it from destroying nature to building it up again.”

Through the report, WWF and Deloitte are urging the insurance industry to fulfill its underlying purpose — to protect its customers and their assets — by acknowledging its important enabling role as underwriters and embracing its responsibility for the effects of the economic activities it underwrites. The report aims to shed light on the positive and negative links between insurance underwriting and climate change and biodiversity loss by examining the relationship of underwriting activities to the four main drivers of biodiversity loss:

• changes in land and sea use

• direct exploitation of organisms — for example, through overfishing

• climate change — particularly, as it’s impacted by fossil fuel production and infrastructure

• pollution.

While there are encouraging signs from individual insurers — such as Aviva, which integrates subjects such as plastics, deforestation, industrial pollution, sustainable protein, and the circular economy into its engagement programs — and collaborative efforts such as King Charles’ SMI Insurance Task Force, for the most part the insurance industry has been slow to take the initiative when it comes to addressing its increasing climate-related risks. As the report points out, with $6.86 trillion in gross written premiums (2021), the industry has enormous potential to reduce the negative impact of climate change and nature loss through its underwriting business and to speed up the transition to a climate-resilient, nature-positive economy. Instead, many companies are responding to higher expected losses by increasing insurance premiums, limiting coverage or completely withdrawing from markets.

In 2022, global economic losses from natural disasters were about $275 billion — but only $125 billion of the total loss was insured; and those figures do not include the non-monetary harm to people and nature. In Florida, flood insurance costs this year are expected to double or even triple for thousands of homeowners in areas prone to flooding. Meanwhile, in California, after several seasons marked by devastating wildfires, at least three big insurance companies have ceased to underwrite new policies for home insurance.

Recommendations

The report highlights several options for insurance companies to stop supporting activities that continue to drive negative environmental impacts and to become catalysts for a fast and fair, climate-resilient transition. Taking swift action on climate and biodiversity is in the best interest of insurance companies in the face of the threat of uninsurability. WWF recommends insurance companies implement the following measures in their underwriting business:

• Strategically align underwriting policies with global climate and biodiversity goals and implement corresponding transparent and measurable transition plans.

• Engage with clients and insurance brokers to align with those goals, and advocate for a fast and fair, climate-resilient transition.

• Promote climate-resilient choices by clients; the adoption of new, clean technologies and practices; and the implementation of circular principles through the design of insurance products and claims-management processes. For example, insurance companies should offer new products for renewable energy or recycling projects, nature-based solutions, incentives for homeowners to (re)build to the highest sustainability standards, and foster circular behaviors and principles by favoring “repair over replace” during claims management.

• Review policies to eliminate “harmful” incentives that impact the environment and people (“moral hazard”) and instead, engage clients and other stakeholders to adhere to the highest environmental standards.

• Exclude the most environmentally harmful economic activities and sectors — such as expanding fossil-fuel industries, deep-sea mining, deforestation; or illegal fishing from insurance policies — and projects that do not benefit from free, prior and informed consent by Indigenous Peoples and local communities, or in any other way infringe on their rights.

• Communicate clear phase-out of any fossil-fuel-related business in line with the International Energy Agency’s Net-Zero Emissions by 2050 scenario.

The report urges policymakers, insurance regulators and supervisors to help insurance companies to reach global climate and biodiversity goals by aligning insurance regulation, policies and supervision with the above recommendations as part of their transition planning towards a climate-resilient, nature-positive economy.

"This summer, we witnessed devastating heatwaves and wildfires across Southern Europe, Northern Africa, Asia and Northern America,” says Thomas Vellacott, CEO of WWF Switzerland. “Insurance companies are particularly affected by these events as cost increase is leading to greater payouts and entire regions become uninsurable. It’s high time insurers address these risks and align their underwriting business with global climate and biodiversity goals."