Sustainable insurance in a sustainable world

Sustainable insurance in a sustainable world | Insurance Business New Zealand

Sustainable insurance in a sustainable world

Unless climate change risks are reduced, parts of New Zealand and the world will become increasingly uninsurable. The Economist recently analysed the global situation and concluded we are losing the battle on climate change.

The changing risk landscape is leading to diverse and complex risks and opportunities. A resilient insurance sector depends on managing these risks in a far-sighted manner. For its part, ICNZ is a supporter of the UN’s principles of sustainable insurance which includes promoting Environmental, Social and Governance (ESG) issues as they interrelate with each other.

What does that mean? Well, changes to the environment may damage assets, disrupt supply chains, shift demand for goods and services, make some resources scarce, increase costs, affect balance sheets, and carry implications for borrowers and the credit risk in banks’ loan portfolios. So, the social impacts and governance implications for communities, boards and governments are profound.

One way insurers and reinsurers are responding to climate change is by starting to withdraw from coal investment and not underwriting new coal development. More fundamental changes to financial reporting for all sectors are afoot. The G20’s Financial Stability Board has developed a strategic framework for companies to report their climate change exposures. While not mandatory, stock exchanges are seeing increasing numbers of companies adopting this framework. Transparency of risk exposure will inform investment enabling a capital market-driven response to transition to a low carbon economy.  

Sixteen global banks, including ANZ and NAB closer to home, released a report last month under the aegis of the United Nations Environmental Programme’s Financial Initiative on how to measure the risks and opportunities of climate change in the property, agricultural and energy sectors. For the property sector, the analysis shows extreme events will decrease house prices and have a flow-on effect for loan-to-value ratios and the probability of default. The agriculture and energy sector analysis examines the impact of incremental and extreme events on declining productivity, revenue, costs and the probability of default.

Across the Tasman, the Centre for Policy Development and the Future Business Council released an influential legal opinion on company directors’ legal obligations to consider the impacts of climate change. It found that directors who fail to properly consider and disclose foreseeable climate-related risks to their business could be held personally liable for breaching their statutory duty of due care and diligence under the Corporations Act. Geoff Summerhayes from the Australian Prudential Supervisor, APRA, has drawn this reference to the Insurance Council of Australia.

So, what are the implications for D&O policies with respect to disclosures, exclusions and occurrences?

ICNZ recently submitted on the Government’s Zero Carbon Bill Issues Paper, arguing strongly that adaptation (risk reduction) must be included in the proposed Climate Commission’s mandate alongside mitigation (emission reductions). Surprisingly, some business interests think this will dilute the focus on reducing emissions, but we say adaptation and mitigation are bound at the hips. Adaptation and mitigation overlap with building designs that need to be more resilient and energy efficient, as they do when farm businesses seek to be more financially sustainable by substituting to more resilient crops. Allocating resources or communicating about risk will need to be coordinated by the Commission taking a long view of both adaptation and mitigation. If risk is not reduced well, then insurance will become less affordable or even unavailable for some.

Sustainable insurance depends on a sustainable world and a financially stable world depends on sustainable insurance. Some of the initiatives the finance sector must do to support this include:

  • Improving disclosures on climate risks
  • Clarifying investors and directors’ duties
  • Aligning finance with the longterm
  • Setting standards of sustainable investment
  • Enabling consumers to align their finances with sustainability
  • Government support in building sustainable infrastructure.