Climate change is transforming the insurance industry

Five years ago, even among insurance company executives, climate change was something only discussed on occasion. 

Today, however, the industry is shaping the discourse with governments and talking to clients about mitigating their own risks. They’re also underwriting in ways intended to discourage carbon extraction and encourage sustainable practices, and many companies are aligning their investments to do the same.

“Insurance brings credibility that the issue needs to be dealt with,” says Paul Kovacs, senior researcher with the Insurance Institute of Canada (IIC) and founder and executive director of the Institute for Catastrophic Loss Reduction (ICLR) at Western University in London, Ontario. “To have the insurance industry near the front, talking about solutions and proposing solutions really helps government officials and others who are trying to solve this.” 

Pushing the agenda 

With its long history of being conservative, cautious and careful, he adds that having members of the insurance industry pushing the agenda has changed and improved the conversations being had about the problem. “It makes it a healthier and more credible conversation, especially for those that are more skeptical or having more difficulty coming to the table.” 

The industry, however, being made up of many different companies and organizations, does not move as one entity. Kovacs says some are very much at the forefront of the issue, doing groundbreaking work and talking about it with stakeholders and interested parties, while a larger group are working on the file, simply by being engaged in their core business. “They are not leading the way, but they are contributing, and they are helping,” he says. “Just doing the business of insurance allows better understanding of how much damage is occurring and the cost. Just by doing its job, the industry is helping society understand and measure.” 

Investments and emissions 

He says the group of insurers that is pushing proactively and doing more, is doing exciting work, not only in pricing the risks, but also in encouraging customers to behave differently. “The insurance industry is talking about adapting current behaviours in society,” he says. “They’re helping Canadians and customers dealing with climate related losses, as would be expected, and they’ve adapted really well.” Now he says companies are pushing beyond that focus to also think about their investments and their own emissions.

“Climate change is transforming insurance,” he adds. “At one point in time, insurance was the business of insuring the risk of fire to a building. At another point in time the main reason people thought about insurance was because they might be in a crash with their car. I think today, increasingly in the next 20 or 30 years, the main reason people think about insurance is because climate change is going to do damage to their building or their vehicle.” 

This presents the industry with some real opportunities in the coming decades that he says will far outweigh the risks. “Growth in revenue from coverage for flooding, wildfire, severe wind and other climate-related risks is expected to keep pace with further increases in severe weather damage claims,” he writes in the IIC report, Climate Risks: Implications for the Insurance Industry in Canada. “Over time, climate-related risks may displace auto coverage to become the leading coverage provided by the insurance industry in Canada. KPMG, for example, predicts that the introduction of collision reduction technology and an increase in vehicle sharing will result in a 60 per cent reduction in personal auto insurance premiums over the next 25 years. This will free up capital to support sustained growth in coverage for flooding, wildfire and severe wind.” 

Assessing the challenge 

Although the challenge is daunting, the report further suggests that companies, and the industry as a whole, should embrace the opportunity (and manage the risks) presented by severe weather and climate change, proactively disclose how the industry is handling climate risks, and share industry knowledge and provide incentives to motivate action on the part of clients, competitors and governments alike.

The suggestions align with just a few of the recommendations made and expectations laid out by the Canadian Council of Insurance Regulators (CCIR) in their 2017 findings report and position paper, Natural Catastrophes and Personal Property Insurance. In its list of recommendations, the CCIR encourages collaboration among industry stakeholders so aggregate data is more readily available. They also suggest companies focus on improving risk modelling tools, they encourage companies to handle claims efficiently, no matter what has transpired before during or after a natural catastrophe. The council also encourages members to work with governments to increase consumer awareness and understanding of insurance and ensure that governments are aware of the industry’s concerns in general.

“Some of the industry is absolutely at the forefront of that and some are coming along,” Kovacs says.

Among the recommendations made in the ICC report, it notably encourages stakeholders to be alert to the risk of political interference in pricing and product innovation.
 

Potential for rate regulation 

“A threat to consumers and the industry is the potential for rate regulation. The industry will need to be proactive in defending the importance of innovation and rates that fully reflect the risk of loss,” the report states.

It also discusses how insurance coverage in the future will likely be tested by courts, describes the climate changes expected to come, the reasons damage costs are increasing and the uncertainty that remains about the assessment of liability for climate change.

“Considerable uncertainty remains in the assessment of liability for climate change,” it says, adding that few legal actions currently exist in Canada – these have generally targeted governments. At the same time, however, they add that actions being taken in the United States and elsewhere will still have implications for Canada. “The insurance industry learned from liability costs incurred by the tobacco and asbestos industries and has been working to ensure that any finding of liability for major emitters will not be transferred to the insurance industry.”

A riskier environment

Although insurance companies themselves produce few emissions, Canadian greenhouse gas emissions per capita do remain among the highest in the world. Craig Stewart, vice president of federal affairs with the Insurance Bureau of Canada (IBC) points out that the country is also warming at twice the rate as the rest of the world. “We are already experiencing climate events that are worse than expected. The Fort McMurray fire was not predicted by our wildfire models. The heat events in British Columbia and the flooding events that we experienced in 2017 and 2019 were all worse than our models suggested they would be. What we are witnessing is a riskier environment in Canada, a riskier commercial environment to operate in,” he says. 

The ICC report puts numbers to the phenomenon: “Between the early 1980s and 2019, the Canadian insurance industry successfully adapted to a twenty-fold increase in severe weather damage claims, with claims paid doubling every five to 10 years. Further increases in extreme weather losses over the next 10 years and beyond is expected to drive profound, transformative change in Canada’s insurance industry,” the report’s authors write. “The average annual severe weather claims paid by insurers in Canada could more than double over the next 10 years, increasing from $2.1-billion a year to $5-billion a year, and must be accompanied by an increase in premium income.” 

Since the report was published, Kovacs says more evidence has come to light which shows that the need for action is even more urgent than previously thought. That said, he says the advice contained in the report remains the same: Take the business of responding to customers who have damage very seriously, be careful to collect enough money, give advice to consumers so they are better prepared for the weather that’s coming, think about investment portfolios and the impact companies could have in that respect, and get ready for regulators to come out with more rules. (The report also includes a full discussion about regulation, along with an extensive list of links to resources for those who would like to learn more.)

To effect change, meanwhile, the industry has two key levers at its disposal, namely their capacity to invest, and their role as underwriters of risk. Firms are also looking in new ways at rebuilding efforts when property is destroyed, at awareness efforts, and several are also at the table, shaping public policy efforts.

Insurance companies and others in the financial sector are starting to pay closer attention to the sustainability of their portfolios. At Aviva plc, for example, the company has pledged to become a “net zero” carbon emissions company by 2040.

“We’re moving our investments to reduce carbon intensity bybig swaths every five years until we get to zero carbon emitting investments,” says Phil Gibson, managing director of personal insurance and data science with Aviva Canada. “The insurance industry, we’re big investors. Investors can move markets.” He adds that some investments will simply become less attractive over time. More, he says “when investors move their money, businesses tend to respond.” 

Kovacs, meanwhile says many others in the industry are also considering their sway as investors and the risks they may be exposed to if they don’t actively consider climate change when making investment decisions. “If I make investments in people, in companies and organizations that are leading the way on climate change, I’ll probably make more money. It’s the smart thing to do. If I make investments in companies that are behind and not doing as well on climate change, probably over time my investments won’t do so well,” he says. “They’re actively analyzing their investments, thinking about their investments and being much more creative about their investments.” 

A closer look at underwriting 

In addition to moving towards greener products, the experts say companies are also trying to move their underwriting practices to create a more resilient portfolio.

“Insurers are changing their underwriting practices in areas such as coal and oil and extraction. That is happening,” Stewart says. “There is a global insurer alliance changing underwriting practices to essentially move away from carbon extraction. A number of Canadian insurers have joined that coalition.” 

Rebuilding better 

A very different approach is also being taken by insurers when rebuilding damaged or destroyed homes.

“When we’re rebuilding, are we building back the same or can we build back better? Can we build something that is more resilient? Can we use more green materials?” Gibson asks. “Are we taking things to recycling? Are we trying to repurpose? I don’t know about others, but I wasn’t having these conversations five years ago. Now it (features in) the majority of the conversations I’m having.” 

At the IIC meanwhile, formed by the industry more than 25 years ago, “we spend all of our time in the laboratory and in the field trying to figure out how houses and buildings could be built so they’re less likely to be damaged by climate events,” Kovacs says, adding that efforts are currently underway to rebuild in Lytton, British Columbia, a town which set the record for the hottest temperature ever recorded in Canada before it burned to the ground in late June 2021. “All of those people are doing something else right now because they have no place to live. We look forward to helping them rebuild next summer.” 

In Calgary, meanwhile, he says a team is in place to help create a rebate program to get more people in Calgary to install a hail-resistant roof. “Our biggest program we’re trying to get the companies to work on right now is called Insurers Rebuild Stronger Homes,” he adds. The program is scheduled to roll out in the coming year. “There are small things that can be done at very little cost that can put the house back better. We have this list of things that we are recommending should be in homes that most of the time aren’t there right now. Can they add these things that weren’t there before? This is a whole new approach for insurance companies.” 

Internationally, meanwhile, Mark Carney, former governor with the Bank of England, has been leading a global conversation with banks and insurance companies. “He’s got a fairly long list of companies that are participating, including a lot from the insurance industry,” Kovacs says. It’s not everybody, but it’s impressive.

Companies everywhere are also being invited to discuss their emissions.

In government circles too, awareness is also at something of a high. Stewart points out that 2021 was the first time that climate adaptation featured strongly in the election platforms of leading parties. “To be elected in a number of ridings across the country, you needed to have a strong adaptation platform,” he says. “We are getting the sense that Canadians are getting the message.

Flood mapping 

He adds that the Canadian government has committed $67-million for much needed upgrades to flood mapping in the country and $3.4-billion to sustainable infrastructure investments. “There’s a taskforce on flood insurance and strategic relocation that will deliver its final report in spring 2022. It’s being co-shaped, co-created by our industry. There’s a lot going on this area. We’ve been very successful in helping shape the discourse around climate adaptation and resilience in Canada.”

He also credits the industry for its efforts to advance the development of a national flood action plan and a national adaptation strategy which extends current thinking about flooding to also consider wildfire, wind, hail and heat. “That strategy will be completed within a year,” he says. “I would say insurers are playing a major role in coming up with solutions to increase resilience in Canada. We need to ensure that Canadians are financially protected given what’s we’re going to experience in the decades to come.” 

Time for action 

Kovacs says leaders in the insurance industry are going out of their way to try and help officials locally, nationally and even internationally. Despite this, he still says there is considerable room for more action. 

“I have a little bit of impatience. I’m concerned about awareness. Awareness leads to the steps that come after awareness,” he says. “I believe that awareness has improved in 2021. I think awareness has improved in the last 10 years and awareness is really a helpful foundation for all the good things that come after. My greatest frustration for 2021 and for the last 10 years or so, is that I would have preferred to see more people moving past awareness.” 

More, he says a lot of the sentiments and plans outlined at COP26, the 2021 United Nations climate change conference in Glasgow, Scotland, were still not detailed, not specific, “and not as clear as I was hoping we would be at this point in the conversation.” 

The sentiments are echoed by Intact Financial Corporation’s CEO, Charles Brindamour. In a recent LinkedIn post created following his return from the same conference, he calls on government to set priorities that are clearer and better focused, exhibit behaviours that are consistent across departments and throughout the regulatory and tax regimes and make adaptation a top priority.

“There is no shortage of investment capital available to support the transition to a low carbon economy,” he writes. “However, governments and the private sector need to work together to lay the groundwork to free up and de-risk this capital.

Future-proof infrastructure 

In an op-ed published before the gathering in Glasgow, he further urged governments to future-proof critical infrastructure, invest in and use natural infrastructure as a first line of defense, and build right the first time. “There’s a misconception that it’s more expensive to build right the first time,” he writes. “In fact, it’s more expensive to retrofit or build back.” 

Kovacs adds that thousands of hours have been devoted to discussion about reducing greenhouse gas emissions but conversations about the damage being caused around the world are decidedly brief. “For some reason one part of the conversation has completely overwhelmed the second conversation.” 

Despite the fact that the conversation has been one-sided, he says insurance companies have still continued to focus on the job of designing products to cover risks and finding the money to pay for repairs, while continuing to give advice to consumers about avoiding damage in the first place. “The heart of the conversation that should be getting more attention and has been missing, is dealing with the damage side of things.” 

Going forward, he says insurance companies that understand the problem are generating clear actions that are meaningful and can be explained to customers. “I think as time goes by, customers will be attracted to that more and more. Those that lag behind on thinking about what climate change means for their company and their customers will have a reputation of vulnerability that could lead to people choosing to go elsewhere,” he says. “They need to be absolutely aware of what climate change means for their company and they need to be able to articulate it.” 

Gibson concurs with the sentiment. “We have gotten a lot of feedback on our pledge of being a net zero carbon emitter by 2040. I think you’re going to see other businesses moving in that direction.” 

He adds that the coming year will likely be a year of tests, pilot projects and learning on the part of insurance companies. “I think 2022 is the year of test and learn, where 2021 was the year of awareness,” he says. “I think you’re going to see a lot of action in 2022.”