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Climate Change: How The Insurance Industry Gets The Risks

Category 5 cyclone

If any industry truly “gets” climate change, it would be the insurance industry. The very way the industry conducts business requires it to develop policies based on risk analysis. And since climate change poses one of the biggest risks to the future human population, insurance companies have a vested interest in calculating what that risk is.

However, calculating the risk of climate change and breaking it down into monetary terms is a difficult task. This is especially the case since increasing greenhouse gas concentrations and a warmer planet are all projected to increase the likelihood of extreme weather events such as intense rain, hurricanes, tornadoes, and other potentially damaging activities. A higher incidence of flooding and property damage could cost the insurance companies dearly down the road if they improperly incorporate them in their risk analysis. Already over the last thirty years, catastrophic economic losses have risen with global temperatures.

However, you could also say that the insurance industry has a vested interest in stopping climate change, since extreme weather events make its business endeavours more risky. If the future climate were to somehow remain stable due to concerted efforts to reduce greenhouse gas emissions, insurance companies would be better equipped to calculate future risk in a more stable planet.

Therefore, it doesn’t come to much of a surprise that several insurance firms formed ClimateWise in 2007 to deal with the risks associated with Climate Change. The overarching goals of ClimateWise are to promote environmental business practices, accurately assess the risks associated with climate, and support climate awareness amongst their customers. More and more insurance companies are joining ClimateWise as the risks associated with climate change become ever more real.

For instance, the recent episode of tornadoes in the US Midwest will have cost insurers over $7 billion – costs they would rather have avoided. And Ernst & Young has gone as far as labelling climate change the biggest risk to insurance companies.

Clearly climate change is serious enough for the insurance companies to invest time and money in properly calculating its risk – it’s about time more governments followed suit.

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