Insurance combines investment and risk management activities, covering life, health, and property and casualty risks among others. The investments of life insurance companies, which are among the largest institutional investors, are increasingly scrutinized for their climate and environmental commitments. The number of insurance or reinsurance companies that have signed the Principles for Responsible Investment (PRI) or other commitments to neutrality in their financial portfolios is increasing.
Beyond their investments, (re)insurers must also work on the transition of their risk portfolios. The financial solidity of insurance companies may be questioned by the unprecedented increase in claims related to the consequences of climate change. In 2022, a year marked by record temperatures and a very large number of extreme weather events, insured claims reached $120 billion (uninsured claims reached $270 billion). Insurance companies are now on the front line of bearing the costs of physical risks related to climate change and must play a leading role in the adaptation and resilience of our societies.
2023 will surely be a pivotal year for the insurance sector, with a lot of work expected. First and foremost is the revision of the Solvency II Directive. Several European NGOs have called for the strengthening of prudential obligations to better integrate climate risks (Solvency-ii-final_2022-11-30-135234_zbpp.pdf (shareaction.org). The subject of the financial solidity of institutions does not exhaust all concerns even though it is essential. The rating agency Fitch published a report in November 2022 indicating that insurers’ credit profiles could change significantly depending on ESG strategies and transition plans, most notably on transition risk for non-life insurers exposed to losses from weather events). The rating agency expects premium increases and the possibility of some companies exiting market segments.
To meet these expectations, the entire insurance value chain must be transformed: innovations in claims management must enable to accelerate and secure payments in the event of extreme circumstances, and advice (at the time of underwriting and during the life of the policy) must take into account environmental hazards and explain them clearly and precisely to policyholders. Finally, insurance also has an essential role to play in risk prevention, and the adaptation of societies and their resilience to climatic and environmental shocks. The reform of crop insurance in France is a good example of the complementarity between insurance and public compensation, which could show the pivotal role of insurance if the organizations fully play their role. The publication of the net-zero insurance alliance report (Launch of NZIA Target-Setting Protocol Version 1.0 – United Nations Environment – Finance Initiative (unepfi.org) announced at the World Economic Forum in Davos marks a step forward by committing the 29 member companies to publish transition plans containing successive targets leading to carbon neutrality by 2050. Beyond the objectives, the climate urgency now requires the insurance sector to undertake large-scale actions that will allow the transition plans to be realized. 2DII is firmly committed to putting forward demanding proposals for the insurance sector, both in terms of investment and risk management. Insurance mechanisms in emerging markets will be a critical approach to promote a fair transition.
