04 Nov 2021
by Andrew Millard

The COP26 summit seeks to accelerate action to limit the increase in the global average temperature to less than 2℃ above pre-industrial levels. The insurance sector has a key role to play, supporting initiatives to help achieve this goal.

The implications of climate change are particularly pertinent to the insurance sector, with higher temperatures increasing the risk of weather events, such as storm and flood. This can be seen in Aon’s Weather, Climate & Catastrophe Insight report, which tracks the effect of climate change on weather events.

The latest report, which covers events in 2020, highlights worrying trends. It found an above average number of natural catastrophes were recorded over the year, resulting in an economic loss of US$268 billion – ten per cent higher than the 21st Century average. As well as leading to more claims, if left unchecked these trends could make more properties uninsurable, with serious implications for individuals, businesses and society.

Working together

Public service organisations are already well engaged with tackling climate change. Over the past ten years councils have rolled out a wide range of initiatives including retrofitting buildings to make them more energy-efficient; investing in, or setting up, renewable energy companies; and encouraging a shift away from traditional combustion engine vehicles.

Building more resilience into the community is also on the agenda. Factoring climate change risk into every planning decision ensures that as more properties are built, communities are as energy efficient and resilient as possible.

The insurance market is supporting this work. For instance, at Aon, our meteorologists and data analysts inform and support organisations in planning and preparing for work being undertaken around climate change.

Using data to model different scenarios can help public service organisations quantify the impact of climate-related events. Both conventional insurance and parametric solutions are available to create appropriate programmes to manage the risk.

New approaches

The insurance sector is also exploring other ways to support COP26 goals. A good example of this is in credit insurance. The Organisation for Economic Cooperation and Development (OECD) estimates that US$6.3 trillion of infrastructure is needed every year to meet development goals, so there is a clear need for green finance to support this.

The insurance sector is responding to this need in a number of ways. A green credit insurance product was launched recently, which seeks to invest any premiums back into green investments, and an MGA is also imminent that will purely support green project finance transactions.

Credit insurers are also bringing environmental, social and governance (ESG) KPIs into their country and buyer ratings. For instance, last year Euler Hermes announced it had downgraded 25 countries following the integration of additional ESG metrics. Other initiatives are also helping to shift the dial on delivering a positive ESG impact. These include withdrawing cover for industries such as coal or adjusting premium in line with ESG criteria. This could see businesses rewarded for fulfilling a set level of ESG requirements or seeing their premiums loaded if they fall short.

The scale of the climate change project cannot be underestimated. By working with other organisations, whether in the public or private sector, it will ensure that everyone pulls together to tackle climate change and achieve the goals set out in the Paris Agreement and the UN Framework Convention on Climate Change.

Data led decision-making will be key to achieving positive climate impact. Aon, like many insurers, is working with clients through data analytics to help businesses achieve their climate goals and manage associated risks where conventional insurance solutions cannot.