The insurance industry is in the crosshairs of climate change, and with the recent U.S. presidential election and the anticipated lack of policy action on global warming, the sector is going to face increasing risk.
Executive SummaryInsurers have an important role to play, and a keen business interest, in helping the world mitigate global warming impacts. Directors will need to be more involved in assessing the strategic challenges climate change poses to their business and will have to make the right decisions for setting their corporations up for long-term sustainability and success.
Business faces a challenge—a paradox that Bank of England Governor Mark Carney called the Tragedy of the Horizon in a speech to Lloyd’s of London last year. Since the most catastrophic impacts of climate change will be felt on a timescale beyond today’s short business planning cycles, companies aren’t organized to tackle greenhouse gas emissions now. Yet, by the time business is faced with more severe impacts of climate change as a result of accumulated greenhouse gases, it may be too late to effectively manage the risk.
Consider this quandary using the most basic insurance lens. “A world that warms 2 degrees may be insurable, but a world that gets warmer by 4 degrees would certainly not,” argues Henri de Castries, former CEO of French insurer AXA, one of the largest insurers in the world. This is why insurers have an important role to play, and a keen business interest, in helping the world mitigate global warming impacts.
That makes the role of the corporate boards of insurance companies more critical than ever. Directors will need to be more involved in assessing the strategic challenges posed by climate change to their business. They will have to make the right decisions for setting their corporations up for long-term sustainability and success.
Insurer Boards Taking Action
So what are the boards of insurance companies doing? In our recently released “Insurer Climate Risk Disclosure Survey Report and Scorecard,” we examined the responses of nearly 150 insurance companies to the National Association of Insurance Commissioners’ climate risk survey. These companies represent 71 percent of the U.S. insurance market by premiums.
We found that:
- The largest insurers—those writing more than five billion in direct premiums—had the most proactive governance practices for climate change, including board oversight of climate and sustainability risks.
- Property/casualty insurers are making strides, though many still lack the engagement by leadership that is needed to improve their climate risk management practices.
- Health insurers are laggards, frequently displaying a lack of understanding of the climate risks they face, including growing scientific evidence linking climate change to increased morbidity and mortality impacts.
Drilling down into the report highlights examples of board involvement in climate change and sustainability issues. At life insurer Prudential, for instance, a specific board committee is in charge of overseeing corporate sustainability measures. At the same time, to make sure that the board has the key skills it needs to guide the company going forward, Prudential’s board members’ environmental credentials are considered as part of their nominations.
German multiline insurer Allianz takes another approach. Several board committees—including the risk and finance, underwriting, and investment committees—monitor and take action on climate change issues that could impact the company. The company’s Environmental, Social and Governance Office, responsible for making climate change thinking part of investment and insurance activities, reports directly to a board member and regularly updates board members on sustainability issues.
Ceres’ report, “View From the Top: How Corporate Boards Can Engage on Sustainability Performance,” identified more examples of how boards can take proactive roles in preparing their companies for sustainability and climate change, gleaned through interviews with dozens of corporate board members, investors and governance experts. The report offers a number of recommendations for how corporate boards can oversee sustainability effectively, including putting in place explicit oversight systems for sustainability; building competence for sustainability at the board level through recruitment and training; and integrating sustainability into board member decision-making on strategy, risk and compensation.
Political elections don’t diminish the challenges that insurers face from climate change. Directors are already getting a preview of how much climate change could impact the economy—since the 1980s, annual insurance losses from weather disasters have jumped to an inflation-adjusted average of $50 billion from $10 billion, according to Munich Re. This and other climate risk trends are why boards at leading companies are pushing the case for acting now rather than reacting later.