To Understand Where Climate Priorities Are Headed Track The Insurance Industry And Government Announcements

The insurance industry is the canary in the coal mine when it comes to an early warning system for global warming, increasing extreme weather events, wildfires, and rising sea levels.

Governments Address Climate Change Insurance Risk

In the latest news, the government of Italy has made climate change insurance mandatory for any companies operating in the country beginning January 1, 2025. That includes foreign firms and branches with only agricultural businesses exempted.

Italy requires companies to purchase insurance to protect land, buildings, plants, machinery, and other equipment from climate change and natural disasters. The government mandates coverage for earthquake, landslide, and flood coverage risk with deductibles not to exceed 15% of the damage. The plan aims to reduce what it calls the current insurance protection gap in the country which stands at 80%. Italy has established a €5 billion reinsurance fund to underwrite policies issued and managed by a government-controlled financial institution.

Italy appears to be the first country to mandate insurance coverage requirements to specifically address climate change as well as non-climate natural disasters like earthquakes. France, Spain, and Switzerland are three other European countries with insurance programs to cover natural catastrophes that in some cases like flooding could be related to climate change.

• Hong Kong, Japan, South Korea and Taiwan require companies to disclose climate and natural disaster-related risks.
• China has established a regulatory commission to develop guidelines for companies related to climate and natural disaster insurance requirements.
• The United Kingdom has put in place a public-private partnership for company and homeowner flood risk coverage.
• Canada has a National Flood Insurance Program and is providing grants and low-interest loans for home and business retrofits to make them more climate resilient.

Two outliers are Germany and the United States. Rising flood damage in the former has been met by silence at the federal level with no national support program in place to provide climate-related insurance coverage. Meanwhile, in the United States, the National Flood Insurance Program, a more than 50-year-old federal legacy that is currently $20 billion in debt continues to offer homeowner coverage, while the Inflation Reduction Act offers programs to help businesses and homes adapt to climate change. The rest has been left to private insurance companies to sort out resulting in coverage limitations, rising premiums and deductibles, and policy cancellations.

The Insurance Industry Addresses Climate Change Risk

Reinsurers and the insurance companies we buy policies from recognize climate change as a global risk. Some insurance companies are reacting by ending flood insurance coverage and leaving the government to be the last resort as is seen in the United States. Other insurance companies, however, are seeing climate change as an opportunity to create new types of policies and coverage to promote risk prevention, mitigation and adaptation measures.

The investment portfolios of the insurance industry represent another area of concern with insurers looking at their exposure to carbon-intensive industries. The industry, as a result, is developing new analytical tools to measure investment by looking through a climate risk lens.

In her 2023 article, Petra Hielkema, Chairperson of the European Insurance and Occupational Pensions Authority writes in the Stockholm edition of EUROFI Magazine, about the material risk to global societies and in particular to European countries from climate change. She notes the increasing frequency and severity of natural disasters including floods, droughts, wildfires, heat domes and more and how European insurers’ payouts cover only 25% of the economic losses from extreme weather and other climate-related events from claims.

Hielkema notes rising annual climate losses growing from €16 billion between 2010 and 2019 to €50 billion between 2021 and 2023. In an April 2024 speech to the IIF 2024 ESG in Insurance Conference, she cites figures from Munich Re and Swiss Re. The former shows natural catastrophe numbers have more than tripled in the past 40 years while the latter provides economic loss data for 2023 amounting to almost US $300 billion with insurers covering barely a third.

The Public Response To A Stark Warning

Despite climate change deniers and populists denying climate change realities, the severity of global climate risks as understood by insurers who are seeing the financial fallout should be enough evidence to motivate governments, businesses and the public to address the growing threat.

So what can the public, businesses, government and the insurance industry do?

The public has a significant role to play in reducing greenhouse gas emissions through lifestyle changes. Homeowners can make energy-efficient retrofits encouraged by government programs and policies. Drivers can in their next car purchase or lease choose at the minimum a hybrid, and if warranted with an easily accessible charging network, switch to an electric vehicle. People can rely less on their cars and use public transportation whenever possible. Homeowners can put solar panels on roofs.

Businesses can do climate risk assessments for all aspects of their operations. They can replace emission-creating processes with climate-resilient infrastructure. They can encourage existing suppliers to be equally climate-conscious or switch to new ones who are.

Both the public and businesses can advocate for governments to regulate polluters, lobby to see the end of fossil fuel subsidies, advocate for policies and regulations that promote sustainability and reward low-carbon innovation and technologies. Both the public and businesses can support leaders and parties that are climate change aware rather than give climate change deniers the reins of government.

Governments like Italy are demonstrating that they understand the reality of climate change and the risks it represents to the future of the country and its fiscal and environmental well-being. That’s the reason why the government is mandating climate change insurance for all businesses operating within its borders. Governments have another role. They must advocate for the scientists who study climate change and educate the public to understand why climate change solutions and choices are necessary.

I’ve left the insurance companies last, not because they have the ultimate say, but because they can serve to educate businesses and homeowners about climate risk and become advocates for collective mitigation and adaptation strategies that can directly benefit customers and themselves. When policies and premium costs get driven too high for businesses and the public to afford, the insurance industry will be out of business. That’s why insurers need to reinvent themselves to become partners with their clients in implementing adaptation and mitigating services and strategies that end up lowering the cost of policies and premiums while providing reasonable deductibles and payouts that cover more than a pittance of the cost of damages caused by climate-related natural disasters.