Climate change: The big challenge and opportunity for insurers

Convenor says climate change "quite a hot topic" amid rising global temperatures

Climate change: The big challenge and opportunity for insurers


By Terry Gangcuangco

With global temperatures projected to reach record levels in the next half decade, climate change also continues to be an increasingly hot topic for insurers. It is among the risks that remain high on insurance companies’ risk agendas, and with it comes both challenges and opportunities.

Speaking with Insurance Business, New Zealand Society of Actuaries (NZSA) Enterprise Risk Management Committee (ERMC) convenor Deniz Sumengen (pictured) said: “What I’m seeing in New Zealand, and at the same time globally, is that climate-related risks are becoming more important to manage for companies. That’s the one I see as something that insurance companies will also need to start preparing for today, rather than, say, in a year’s time.”

Specifically in the Kiwi market, Sumengen pointed out, climate change is top of mind amid mandatory climate-related disclosures. Under new legislation, around 200 large financial institutions in New Zealand, including insurers, are required to publish disclosures in relation to climate.    

“You’re obliged as a board of director to an insurance company to review the transition-to-zero strategies of a company and sign it off, saying, ‘Yes, I am comfortable that we have a transition plan, and the risks around it are being monitored and mitigated’ and so on, so forth,” the NZSA ERMC convenor said.

“That’s what I would highlight as the key one that’s concerning New Zealand insurers. That’s what I see as one of the key topics that’s on the agenda for the board, on the agenda for the management.”

Climate change impact

In a report by the NZSA ERMC, it was noted that climate-related risks are divided into physical and transition risks.

“Physical risks are direct effects from rising temperatures which result in catastrophic weather events such as floods, wildfires, and landslides,” the 12-page document said. “They can be acute and potentially transient and diversifiable or chronic and systemic, but they do not consider any behaviour or policy response.

“In contrast, transition risks are permanent shifts driven by policies, technologies, laws, and similar actions designed to shift the economy toward lower fossil-fuel consumption.

“Insurers are exposed to physical risks as underwriters of insurance products. Due to the rise in the severity and the frequency of catastrophic weather events, insurers will experience a rise in insurance claims worldwide. Insurers are also exposed to transition risks through their asset portfolios which can fall in value if invested in emissions-intensive sectors, for example.”       

Earlier this year, meteorologists reported that Central Auckland experienced more than 45% of its yearly rainfall in January 2023. At the time, it was described as the wettest month in at least 170 years.

“What used to be one-in-200 events are now happening one in every few years, and they are causing bigger damage to impacted regions,” Sumengen said. “This, in turn, is increasing the number of claims that an insurance company will have to pay.

“They always price these things based on extreme events not happening as regularly, and therefore their insurance premiums will not compensate for the claims they will have to be paying going forward. So, that’s the big dilemma for the insurance companies.

“Physical assets are starting to become problematic in terms of insurability, so that’s why it’s quite a hot topic for insurers. How are they going to view what, say, in two or three years’ time, the insurable population looks like? Is it affordable? Also, insurance policy wording-wise, will it continue to be the way we used to cover it, or will there be more exclusions from the policies?”

The convenor believes climate change is going to be “quite an interesting topic” that insurers will be dealing with over the next months or years.

Opportunities for insurers

With the challenges, meanwhile, come corresponding opportunities.

“Part of the climate change-related activity is in relation to your investments,” Sumengen said. “If you’re ahead of the game, you can actually choose to be in the right types of investment strategies which will enhance your future returns. In a way, there’s a big opportunity there about planning for responsible investment, planning for sectors that are going to be the stronger ones going forward – say, the renewable energy sectors.

“It’s all those types of information that you can use to your advantage to think about your investments going forward and planning for that whole transition to zero with a mindset of thinking, ‘Actually, we can also look for investment opportunities, while mitigating risks in the investment portfolios, from climate-related changes.’”

In Sumengen’s view, from an actuary’s perspective, there are these types of risks that can be turned into an opportunity by insurance companies.

“Insurers and other businesses alike can identify more opportunities by outlining their long-term risks and by using multiple-scenario analysis,” she said. “This way they can prepare for future risks and uncertainties, and also create commercial advantage over other similar businesses. What-if scenarios allow you to think outside the box and to be ahead of the game.”

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