Regulators told to get real over climate

Over thirty climate, environmental and consumer protection groups have urged the world’s insurance regulators to get tough on insurers who support fossil fuel projects.

The groups have written an open letter to the executive committee and secretariat of the International Association of Insurance Supervisors (IAIS) which calls for regulators to take action on the industry’s failure to address the climate crisis and its implications for the insurance sector.

The letter comes a week before the IAIS holds its annual meeting in Tokyo. The letter calls for regulators to take a precautionary approach to addressing environmental risk; support credible transition plans that put insurance corporations on pathways aligned with the 1.5°C global temperature rise limit;  steer the industry away from exacerbating climate risk; exclude insurers that still underwrite or invest in new fossil fuel projects from receiving public support; and ensure insurance supervisors mandate the use of climate science to assess its possible impacts rather than the flawed prevailing economic models.

The letter stated: “We write to you today from dozens of climate, environment, and consumer protection organisations, as you prepare for the IAIS annual meeting, to express our deep concern that the IAIS is taking insufficient action to address the risks of climate change and nature loss and their implications for the insurance sector.”

“August 2023 marked 50 years since the insurance industry first warned about the increasing risks of climate change,” it continued. “Meanwhile, the climate crisis has become a grim reality for billions of people – most seriously for poor and marginalised communities in parts of the global North and throughout the global South that have contributed the least to climate change. July 2023 was the hottest month in recorded history and unprecedented heatwaves, wildfires, and floods have ravaged countries around the world.”

“As California’s former insurance commissioner, Dave Jones, warned recently, ‘I do believe we’re steadily marching towards an uninsurable future, not only in California, but throughout the United States’. In Europe, the European insurance supervisor (EIOPA) estimates that only about a quarter of climate-related catastrophe losses are currently insured and this insurance protection gap could widen in the medium to long term as a result of climate change. Latin America and the Caribbean form one of the world’s most disaster-prone areas with damages exceeding 50% of GDP in the last few decades, yet has the lowest levels of insurance coverage, particularly among households. This march toward greater and greater regions without insurance coverage creates serious risks for the communities and businesses whose risks the industry is supposed to manage. It also creates serious risks to the insurance industry itself.”

The letter added meanwhile, climate change mitigation is falling behind: greenhouse gas emissions from the energy sector reached a record amount in 2022. “Yet in spite of its powerful role as a global risk manager, the insurance industry is not using its influence to accelerate the transition from fossil fuels to clean energy. Instead, it is adding fuel to the fire by underwriting the continued expansion of oil and gas extraction.”

The groups added insurance payouts due to natural catastrophes topped $120 billion in 2022, and many insurers are responding to the increased risks by pulling out of some climate-affected regions or significantly raising premiums to unaffordable levels.

The letter calls on the IAIS to scale up climate action and accelerate the shift away from fossil fuels to stop growing parts of the world being left without access to insurance.

Marika Kita, campaigner with Japan Centre for a Sustainable Environment and Society (JACSES) explained:  “The insurance industry first warned about the climate crisis 50 years ago but to this day – despite extreme weather events already causing hundreds of billions of losses a year – continues to support oil and gas expansion. The insurance sector should act as a firefighter to help and protect us from climate disasters, not add fuel to the fire.

“The IAIS are the international standard-setter for the insurance industry and have a responsibility to ensure that insurance underwriting aligns with climate science. They must steer the industry on a path that is in line with the 1.5°C temperature rise limit.”

The letter continued: “Meanwhile, actuaries – who provide crucial risk assessments for the insurance industry – are sounding the alarm about the extreme inadequacies of current risk modelling and management practices. Analysis published by the Institute and Faculty of Actuaries (the UK’s professional association for actuaries) found that:

  • The climate-scenario models commonly used in financial services are significantly underestimating climate risk, meaning assessments of likely damages are way off.
  • More realistic models show that carbon budgets may be smaller than anticipated and risks may develop more quickly.
  • Most current regulatory scenarios do not reflect experience or fully capture risk, are not realistic, and don’t account for tail events.

“The Financial Stability Board – the international body that monitors and makes recommendations about the global financial system – and the Network for Greening  the Financial System have also acknowledged the significant limitations of climate scenario analysis as it currently stands. These limitations have led to benign results of the climate scenario analyses conducted to date and, alarmingly, have served as one of the reasons for the lack of decisive actions to address climate-related risks. At the same time, supervisors also agree that a delayed and disorderly transition is itself a major risk for financial stability.”

In Europe, the European insurance supervisor (EIOPA) estimates that only about a quarter of climate-related catastrophe losses are currently insured and this insurance protection gap could widen in the medium to long term as a result of climate change.