Sustainable finance and climate: Insurers can provide practical solutions

Insurers have long been concerned about the impact of climate change. The industry will play a key role in mobilizing communities to intensify natural disaster mitigation efforts, many experts say.

OnOctober 7, the fourth day of the Sustainable Finance Summit, three industry experts suggested solutions to strengthen insurers’ role in ensuring the adaptation and resilience of nature and society.

The Summit was organized by the United Nations Environment Programme Finance Initiative (UNEPFI). The discussion was moderated by Butch Bacani, Program Leader for the Principles for Sustainable Insurance Initiative at UNEPFI.

Bacani notes that efforts to limit global warming to 1.5°C are currently woefully inadequate. The most recent report of the Intergovernmental Panel on Climate Change (IPCC) confirms that greenhouse gas (GHG) emissions are rising steadily.

Since 2018, many groups in the financial services and insurance sectors have been formed to boost collective efforts to reduce GHG emissions, Bacani notes.

At Intact  

Mandy Dennison is Director, Social Impact & ESG (Environment, Society and Governance) at Intact Financial Corporation. She points out that Canada is already experiencing profound upheavals associated with climate change, even though the average temperature has risen by only 1.1°C compared with the pre-industrial era.

In 2020 worldwide, it is estimated that only 40 per cent of damage caused by natural disasters was covered by insurance, she adds. Canada is doing slightly better than the global average: 44 per cent of damage was insured.

Before 2003, forest fire damage exceeded $10 billion only once. Since then, damage has exceeded the $10 billion mark in five other years, the worst being 2016 with the fires that devastated the Fort MacMurray, Alberta area. This year will likely join that list due to the extreme drought that has sparked many fires, particularly in British Columbia.

It is not just the role of governments to fight climate change, it is the role of society as a whole. We need to mobilize collectively, and insurers play a key role in this effort, Mandy Dennison argues.

The first step in improving community resilience is to upgrade the electrical and water supply systems, along with the road infrastructure. We saw how important road transportation was to the food distribution network during the pandemic, she says. Underfunding of public infrastructure has been going on for decades and must be stopped, Dennison adds.

This infrastructure must be well designed and better built from the start, even if it costs more. Every dollar invested in risk mitigation saves about six dollars in damage down the road, the Intact director points out.

Insurers can educate municipalities about the importance of preserving forest cover and wetlands, as well as on the need to be cautious about development near flood zones.

From her office in downtown Toronto, near the provincial legislative building, Mandy Dennison has noticed water and sewer system maintenance work in progress. She wonders whether this work is being done with the future in mind. She encouraged Summit participants to consult the Intact Centre on Climate Adaptation’s free online publications, which discuss modernizing public and private infrastructure.

Personal property insurance has long been focused on fire risk, Dennison continues. In 2010, Intact found that 40 per cent of P&C claims were related to water damage. We nearly exited that market after we made that finding, she says. Instead, the entire business model was revamped, from underwriting to risk assessment and pricing.

Data collection and analysis now support customers, communities and governments by proposing risk mitigation methods, she adds. Specifically, they recommend disaster plans, land use planning and changes to building codes.

At TD Insurance  

Moira Gill is Associate Vice president of Environment, Government and Industry Relations at TD Insurance. She believes the summer of 2021 was yet another indicator of the extent of climate change and the damage it causes. Constant news stories about heat waves, fires, flooding, etc. can be depressing. They are also an urgent call to action, she says.

TD Insurance is a founding member of Climate Proof Canada, a non-governmental organization focused on the environment, protecting people from climate change and fostering community resilience. Gill says that every insurer must educate the industry as a whole and the communities in which they operate if the necessary shift is to be made.

Collective action is essential to counter the immediate impacts of climate change, increase resilience, and address long-term challenges, she says.

Climate change is not a concern for the P&C insurance industry alone, Gill continues. TD Insurance also has a large life and health insurance portfolio. Natural disasters have a significant impact not only on personal property, but also on people and their quality of life, she notes.

The Canadian Medical Association has pointed out that heat waves, fires, evacuations and air pollution have obvious health impacts, she adds. These impacts are not distributed equally in society, Gill notes.

The people least prepared and most affected by climate change are often the disadvantaged. This gap in insurance coverage between social classes accentuates inequality, she continues.

The federal election campaign waged in September coincided with devastating heat waves and fires. These disasters forced elected officials to take the climate issue seriously, which is good news, Gill says. The topic had been pretty much ignored on the October 2019 ballot.

This time, all the political parties had to talk about climate change and resilience in their platforms, she says, adding that the pandemic has underlined the importance of preserving trees, parks and green spaces in urban areas.

Admittedly, the information large companies convey to consumers is not always considered very credible. People put more faith in what their family, friends and peers think. We need to get closer to community-based sources of information if we want to mobilize people in the fight against climate change, Gill says.

In California  

The third panelist in the session was Michael Peterson, Deputy Commissioner on Climate and Sustainability in the California Department of Insurance. In this western U.S. state walloped by drought, heat waves, and wildfires over the past several years, the gap in insurance coverage has widened between social classes. Peterson says this gap must be narrowed if communities are to be mobilized in the fight against climate change.

He suggests a variety of ways to promote this engagement, such as developing tree planting and tree cover protection projects, along with other methods of mitigating natural disaster risks.

His department has recently published an action plan called the California Sustainable Insurance Roadmap. He says it is difficult to prioritize the actions that need to be taken because they are all urgent. Fires, heat waves and floods are the three greatest risks associated with natural disasters. In California, drought-stricken for the past few years, many communities are underinsured against the risk of flooding, Peterson said.