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Insurance not enough to offset financial risks climate, analysts say

Financial risks related to climate change are growing.

From homeowners facing higher flood insurance premiums to investors putting money into coal-fired power plants, financial risks related to climate change are growing, analysts say.

But working out how a switch to lower-carbon train travel could affect an airline, or what an insurance firm should do to weather more flood claims is neither clear nor simple, they say.

Help may be at hand, however, from guides published on Friday which assess financial risks from the physical threats of climate change, as well as the risks and opportunities of a global transition away from fossil fuels.

“What is the exposure financial institutions have to natural catastrophes? I don’t think that question traditionally has been asked,” said Greg Lowe, global head of resilience and sustainability for Aon, a London-based insurance and risk firm. For disasters, “there’s always been an assumption we have insurance for that”, said Lowe, whose firm contributed to the reports by ClimateWise, an initiative of the University of Cambridge Institute for Sustainability Leadership that aims to better disclose and respond to climate-related insurance risks.

With those risks growing – particularly as heat-trapping emissions continue to rise – traditional methods of dealing with them may not be enough as the world tracks toward 2 degrees Celsius or more of global warming, the twin reports warn.

“If indeed people think we’re headed on that path (past 2C), it’s going to be a hugely difficult task for the financial system to manage,” Lowe predicted.

Over the next 30 years, the risks from heatwaves, storm surges and floods will increase substantially because of warming already underway, the physical threats report noted.

In Britain, that could lead to higher flood insurance premiums and people more often made homeless by floods, as well as greater investment by cities and towns in flood defences.

That homeowners understand changing flood risks and will respond adequately to them “is probably a generous assumption”, Lowe said.

But even for those who do grasp the shift, simply boosting insurance coverage is unlikely to be an answer, he said.

“I don’t think buying more insurance is a politically or financially sustainable thing to do,” he said. “Even with insurance, this is still a tremendous hardship on people if they are out of their homes.”

Rather, there should be honest discussions about who foots the bill for the growing risk and damage, he said.

“Someone is going to pay for this. How that gets distributed through the financial system is the question,” he added.

The new reports aim to demonstrate that it is possible to start taking a more precise look at the risks and their financial impacts, and to give experts tools to do that, said Bronwyn Claire, senior programme manager for ClimateWise.

For instance, they could explore how changes in transport demand between trains and planes, or a carbon tax that is influencing fuel prices might affect an airport in Germany.

The guides could also help investors spot opportunities, she added. 

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