Climate Change Calls For a Shake-up of the Insurance Industry

Climate change impacts insurance companies by causing premiums to increase, which could affect financially buoyant communities. It will also cause insurers to have to release new products. Insurers may collaborate with environmental or meteorological organizations to prepare for weather eventualities.

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Eric Stauffer is a former insurance agent and banker turned consumer advocate. His priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best place to get it.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Nov 2, 2021

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After decades of research and billions of invested dollars, the climate change fog is far from clearing. It continues to split governments, scientists and communities across the world with unresolved theories and unanswered questions. Is climate change an imminent disaster? Is it the result of human activity? Will it lead to an increase in catastrophic weather events around the world? If the answers are yes, then we face some monumental changes in societal behavior  And while rare skeptics are in doubt about the real risk climate change poses, it’s important for powerful economic influences like the insurance industry to take a firm stance on preparing for any possibilities.

The World Bank Report

On 19th November 2012, the World Bank released a report that aimed to raise the alarm bells to compel governments, organisations and individuals into immediate action. Figures included:

  • 97% of scientists agree the earth’s temperature is increasing
  • If we continue as we are, the world will be 4°C warmer by 2100
  • Rising temperatures are a result of human activity like burning fossil fuels and deforestation
  • Higher temperatures will result in major natural disasters

According to leading scientists, even global temperature increases below the World Bank report could lead to more extreme weather patterns. A 2.2% increase will intensify cyclones by up to 10% faster[1]. A mere 1% temperature rise could mean up to 28% more bushfires[2]. What seems like tiny temperature shifts, like a butterfly effect, could cause mass destruction[3].

  • Widespread heatwaves – more bushfires, areas and communities destroyed
  • Greater cyclone intensity – increased wind speeds means more physical devastation
  • Flooding – rising sea levels will flood and wipe out low-lying cities

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The Cost of Disasters and Who Pays

Hurricane Sandy raged its way up the east coast of Central and North America in October 2012, causing extensive, domino-style destruction on an unprecedented scale. Latest figures suggest damage of up to $50 billion – big enough to reduce US growth this quarter by half a percent[4]. The bursting cities of New York, New Jersey and Pennsylvania suffered most of the damage and analysts have estimated that the losses incurred from intense and unrelenting floods and wind were split in the following ways:

  • $30 billion from property damage including homes, cars and businesses
  • $20 billion from reduced economic activity including businesses not operating, cancelled flights and no casino activity

Mostly government-funded institutions and insurance companies cover the enormous cost of disaster relief, but even their substantial fund pools can run dry. In the aftermath of Sandy, there is mounting concern that these organisations do not have the funds to cover all claims; individuals can either expect to have their claims denied or significantly reduced[5]. With an already fragile economy, how many more disasters can the world afford? How can we expect to recover with catastrophes continuing to knock on our door? And who should take responsibility – the insurers, government, private individuals or all three?

The Insurance Industry: Charging ahead of climate change?

Insurance is the largest industry in the world. From their premiums alone, they earn combined annual revenues of over USD $3.5 trillion. Their investment incomes add a further USD $1 trillion on top of this. But, like the buildings they protect, even insurance companies are prone to collapsing the face of disaster. After Hurricane Katrina, some insurers were forced into bankruptcy[6].

If our climate is changing and our natural disasters becoming more powerful as a result, then it is fair to say that climate change poses the greatest threat to the insurance industry in to date. Insurers weary of an economy uncertainty should be turning their attention to instability from an unpredictable and volatile natural world. They need to recognize the risks that lie ahead for their business and prepare plans accordingly. The good news is that intelligent insurer responses to climate change could mean expanded revenue streams, paving the way to even higher profits.

Let’s take a look at three key ways that climate change could change the insurance industry.

1. Premiums will increase and the balance will shift

Premiums will increase, particularly in areas that insurers begin to identify as high risk. This could lead to population redistribution and a major impact on formerly financially buoyant communities. Alternatively, individuals with insurance budgets could begin to reallocate their funds – removing them from insurance industries (in the fear they might not accept their disaster claim) entirely or adjusting their insurance product balance.

2. New insurance products will be launched

Insurers will have to expand and diversify their insurance products portfolios to ensure their business remains sustainable in line with a rapidly changing world. These products would cover the climate change risks and responses, from higher premiums for at-risk areas to cheaper premiums for carbon-friendly cars that contribute to reducing the effect of greenhouse gases.

3. Insurers might collaborate with environmental or meteorological organisations

While the weather might be almost impossible to predict with 100% accuracy, insurers might need to prepare themselves for weather eventualities – well in advance in order to act before its too late. Researching weather patterns, investing in green technology to combat climate change and its effects will help them try to mitigate risks that they might end up paying for.

Is the global insurance industry doing enough?

No, they need a stronger response to the risks

In 2011, Ceres published findings that reported that an alarmingly low number of US insurance companies had climate change policies and 60% had no formal processes in place for assessing climate risks. Australian findings in 2012 indicate that while 73% of insurers believe that climate change is having an impact on weather extremes, many of them do not have a formal process in place to tackle the risks presented to them.

Yes, they’re making progress

The insurance industry is based on risk assessment and response. Tackling climate change is financially in their interests – arguably more so than any other industry. In recent years, insurers have started taking action on climate change and weather extremes. Government collaborations, research investment, economic partnerships are all forming to tackle the problem and develop solutions that will help alleviate the impact.

The earlier we take action to evolve with the earth’s weather changes, the more prepared we can be for the future. Government bodies, insurance heads and financial institutions need to collaborate to clear up any grey areas and cement a more solid future. This includes:

  • Understanding the threat of climate change around the world
  • Investing in research and development of secure infrastructures
  • Identifying high-risk areas and developing solid protection plans
  • Developing new insurance products and services that will help protect victims
  • Creating innovative insurance policies to encourage greener consumer behavior
  • Educating consumers on the tangible impact of climate change on their lifestyles

As one of the world’s most powerful industries, insurance has the force and financial capabilities to pave the way for a greener world that can withstand the weather threats that confront it. By taking the lead on developing clear and coherent policies, the insurance industry will better equip us for any climate change problems we face.


[1] Mills et al (2001)

[2] Mills et al (2001)


About The Author : Mark Stevenson is a former employee of NRMA Life Insurance. However, it should be noted that the opinions expressed in this article are his own and not those of his current or former employer.

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