Climate change risks are pressing for the insurance industry. After all, they face climate-related financial risks for their investments and liability due to their property and casualty underwriting.
And so, industry leaders are starting to commit to a sustained effort to help decarbonize the global economy.
For example, insurance companies are increasingly conducting climate change stress tests to assess their exposure. These tests use possible future scenarios to imagine various risk outcomes. A typical stress test considers three primary types of risk:
- Physical risk: such as flood damage caused by extreme weather events
- Transition risk: such as policy and regulatory changes implemented to reduce emissions
- Liability risk: such as legal suits brought by stakeholders for inadequate mitigation action
Using the results of the stress tests, insurers are rethinking their investment and asset allocation strategies as the economy transitions to low-carbon practices.
Eight of the world’s leading insurers and reinsurers – all European companies – are leading the way. These companies formed the UN-convened Net-Zero Insurance Alliance (NZIA) as founding members in July 2021.
Today nearly 50 companies have committed to NZIA and transitioned their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas (GHG) emissions by 2050.
These companies have committed to:
- Set science-based underwriting criteria and guidelines for the most GHG-intensive activities within their underwriting portfolios.
- Engage with GHG-intensive clients about their decarbonization strategies and net-zero transition practices.
- Integrate net-zero and decarbonization risk criteria into their risk management frameworks.
