The industry raised the alarm on global warming risk decades ago, and it can play a critical role in addressing it.
It has been exactly 50 years since Munich Re, the world’s leading reinsurance giant, first warned about the growing risks of climate change. This year, the insurance industry needs to heed its own warnings, turn its words into action and become a much-needed champion for climate action within the corporate sector.
Insurance companies are the hidden hand behind modern industrial development and a critical pillar of the fossil fuel industry. Without their risk cover, few coal mines, oil rigs, pipelines and liquified natural gas terminals would go forward, and most ongoing fossil fuel operations would grind to a halt.
On top of incalculable human suffering, natural disasters caused economic costs of at least $260 billion in 2022, and almost half of these losses were covered by insurance. Faced with growing and increasingly unpredictable climate impacts, several reinsurance companies have already thrown in the towel and stopped underwriting the risks of natural disasters. As we cross critical ecological tipping points, the insurance industry will struggle to keep its cover for such risks available and affordable.
Insurance companies are the hidden hand behind modern industrial development and a critical pillar of the fossil fuel industry.
Given their exposure to climate risks, their privileged access to climate science and their past warnings, the insurance industry should be a natural champion for bold climate action. Under pressure from non-governmental organizations (NGOs), 41 insurers have adopted coal exit policies in the past five years, 13 have adopted restrictions on their oil and gas business and 29 have committed to net-zero targets as members of the Net-Zero Insurance Alliance (NZIA).
Thanks to such efforts, the insurance cover available for coal power plants has dwindled to a mere tenth of the capacity available for other types of power projects. It has become much more expensive and cumbersome to cover the risks of coal operations, and new coal power plants have become all but uninsurable.
And yet the climate actions of most insurance companies have so far fallen way short of their rhetoric and responsibility. First, numerous insurers readily dropped the coal sector — a sunset industry that accounts for a mere trickle of their premium income — but are resistant to following climate science on oil and gas. While Allianz, Munich Re, Swiss Re and a few smaller insurers have adopted substantive restrictions on oil and gas, even prestigious companies like AXA, Zurich, AIG, Chubb and Tokio Marine continue to underwrite the expansion of oil and gas production. Lloyd’s of London, the marketplace of specialty insurers, has so far not adopted any binding restrictions on underwriting for fossil fuels at all.
Secondly, as members of the Net Zero Insurance Alliance (NZIA), 29 insurers have committed to halving the emissions they insure across the global economy by 2030. And yet the new protocol for setting emissions reduction targets is marked by massive loopholes and an utter lack of ambition. Instead of the 50% they pledged, NZIA members will get away with emissions reductions of a mere 34% by 2030. They can ignore the business lines which are typically used to insure new projects (including in the fossil fuel sector) when they address their emissions. And they don’t have to measure the scope 3 emissions of the companies that they underwrite, which leaves the door wide open for greenwashing.
Numerous insurers readily dropped the coal sector — a sunset industry which accounts for a mere trickle of their premium income — but are resistant to follow climate science on oil and gas.
In 2023, net-zero claims will be put to the test. By July, NZIA members need to define their emissions reduction targets for the coming years. Insurance companies that would like to be seen as climate leaders don’t need to and shouldn’t exploit the loopholes their industry has allowed in its lowest-common-denominator protocol. They should follow the science, start phasing out their support for all types of fossil fuels and set in place incentives for decarbonizing other sectors such as the automobile, cement and steel industries.
Fifty years after they first warned about climate risks, insurance companies will face their moment of truth in 2023. They can continue to slow-walk climate action or can become drivers for a much more ambitious shift from fossil fuels to clean energy. NGOs will pay close attention and will call out the climate leaders and laggards in the process.