Swiss Re sets out a clear way forward in the fight against climate change.
Reducing carbon emissions is the priority, says the reinsurer. Then, all unavoidable emissions must be removed from the atmosphere and permanently stored.
The challenge is huge. Global emissions must be reduced by half by 2030, and be net-zero by 2050. In addition, net-negative emissions must be sustained through the second half of the century, Swiss re says.
This will require up to 10 to 20 billion tons of negative emissions per year in 2050 and beyond. “If it takes a trillion-dollar industry to provide for all the oil and gas that causes 20 billion tonnes of emissions today, it will take the next trillion-dollar industry to remove that same amount from the atmosphere in 2050+,” the reinsurer says in its report The insurance rationale for carbon removal solutions, published in July.
The main obstacle to the deployment of carbon removal is economic viability, Swiss Re continues. "In the absence of a fee and policy mandates, there is little incentive to cut, let alone collect and store emissions,” the study finds.
Insurers equipped to help
Taking its analysis further, Swiss Re argues that the insurance industry has an important role to play as providers of risk transfer capacity, risk knowledge and long-term investment. They can also stimulate the market as an early buyer of carbon removal services.
As an example, Swiss Re points out that many elements of the carbon removal value chain are familiar to reinsurers. Existing property and casualty lines of business already cover a range of risks during the operational phase of decarbonization projects. “More challenging are potential long-term liability exposures arising from the risk of carbon storage reversal,” the reinsurer's report notes.
Insurers’ role does not end there, Swiss Re says. In another study published in April, entitled The economics of climate change: no action not an option, the reinsurer argues that insurers must also pursue their primary mission, which is to cover the risks posed by perils due to natural causes. “Importantly, weather-related risks remain insurable. This is due to the short-term nature of most property re/insurance business, which allows for continuous adjustment of risk views.”
Swiss Re considers that the main effect of climate change on insurers is the increase in the losses they incur. The effects of rising temperatures are already leading to higher insured claims (e.g., for property damage, crop shortfall, business interruption) from some secondary perils, including heat waves, wildfires, droughts and torrential rainfall.
The reinsurer adds that the insurance industry must ensure that natural peril risks remain insurable, despite their increase in number and the intensification of the risk they pose. Swiss Re consequently recommends more research on these new perils, in order to increase the industry’s confidence and ensure that risk models represent the current climate and socio-economic circumstances.
Insurance is an important tool by which households and businesses can strengthen their resilience to better manage rising natural catastrophe risks, the reinsurer says.
Even so, the reinsurer estimates the current global protection gap for weather-related losses at 70 per cent.
How can this problem be solved? Insurers and reinsurers must step up to the plate. “They need to insure more risks to prevent the entire economy from being disrupted by climate change. This requires a better understanding of climate change,” say Swiss Re analysts.
Insurers and reinsurers would thus benefit from considering public-private partnerships, and from supporting their clients in their green transition. “They can also encourage behavioural change by setting appropriate risk prices and work on new products and underwriting solutions as new hazards emerge. Similar to developments in cyber and other emerging risk lines.”
Swiss Re recognizes that insuring green infrastructure and technology can be complicated at first given the lack of historical loss experience. "Parametric solutions can provide alternatives where traditional indemnity products face limitations to insurability,” it explains.
