While the automotive and energy sectors were the first to take on climate change, insurance companies have been picking up steam to deal with the issue. But this will only take place seriously if climate change is discussed right at the top – at the CEO level, according to speakers at a recent McKinsey podcast.
“Sector by sector, we typically see one or two companies with a sort of outsized voice and the CEOs who really get it leaning forward and trying to define the future path for the industry,” said Dickon Pinner, senior partner and global leader of McKinsey’s Sustainability practice.
“They know…that the industry or the sector is at threat if they do nothing and they realize there’s a competitive advantage if they get ahead of it.”
It’s difficult to identify a function within insurance that is not affected by climate change and its risk, said Antonio Grimaldi, a McKinsey partner from the firm’s London office.
Everything from underwriting to pricing and claims, risk mitigation and capital management need to make a “profound change,” said Grimaldi.
When it comes to underwriting, for example, traditional models and past loss experience will not be predictive of the future, he said. Insurers will also have to delve into the correlation between more frequent floods, for example, and the economic activity in a given region, making the work of underwriters even more complex. “In a way, underwriting will need to become even more strategic,” he said.
But while the top echelons of insurers have their work cut out for them, Pinner said there is also a need for public-private partnerships. Without a successful or at least a good collaboration between private sector insurance and the public sector, the consumer and the government hold all the risk.
Grimaldi said several insurers, especially those in Europe, are increasingly thinking about environmental, social and corporate governance (ESG) issues and how they can become responsible underwriters and investors.
Insurers should promote ESG as not only protecting the Earth, but the economy as well, said Kia Javanmardian, a partner and leader at McKinsey’s North American property and casualty practice.