Solving for climate change: it takes an ecosystem

By Seth Rachlin, Global Insurance industry leader, Capgemini.

Climate change is generally considered one of the biggest issues facing society, from causing huge spikes in insurance claims to challenging governments and businesses to navigate how to address this crisis. Just this year alone, the UK has witnessed floods, record breaking temperatures, droughts, and fires that have broken out in London.

Making the right investments to combat climate change are both enormous and expensive undertakings. UN Special Envoy Mark Carney has called the transition to net-zero “the greatest commercial opportunity of our time.” The OECD has estimated the global investment needed to build green infrastructure to be $2.5-3 trillion annually. Swiss Re puts that figure even higher, from $3.1 to $5.8 trillion and projected that up to 18% of global GDP could be impacted by 2050 if no bold actions are taken to mitigate the impact of climate change. 

No challenge of this scale or urgency can be handled by one industry alone, but the insurance industry is uniquely poised to lead the charge given the industry’s unparalleled risk expertise. For example, insured losses caused by natural catastrophes are up 3.6x in the last three decades. But the fact that uninsured losses are up 2x in that same time demonstrates that it’s not just a problem for insurers, but for all of society. 

Consider how the industry is uniquely positioned to lead, both as investors with huge amounts of capital and in terms of the industry’s unparalleled risk expertise. Who better than insurers to develop solutions to protect citizens, communities and businesses from the most ominous threats of climate change? Further, insurers can help facilitate the transition to a lower-carbon economy by offering incentives for businesses to adopt environmentally friendly practices.

To start, insurers must engage with regulators and governments locally, regionally and nationally, and globally. This is not just a matter of making sure that climate threats are accurately reflected in risk management models or ensuring accurate reporting on emerging ESG standards, though these are important steps. Insurers can convene the right parties at the same table to begin planning for actionable and sustainable solutions as the risk experts. 

As an example, insurers should help design public-private partnerships that protect businesses and citizens in the most vulnerable regions. Such programs are already taking shape in Florida to deal with hurricanes and California to help mitigate issues with wildfires. Similarly, insurers can work with banks, asset managers and ClimateTech firms to both invest in and underwrite risks associated with massive wind farms, solar power plants and other essential elements of green infrastructure.

Insurers should also work directly with their policyholders. That means developing data-driven and insight-led solutions for risk prevention and launching outreach and education programs that inform policyholders of the risks they face. These steps will help build trust with customers. Insurers can certainly incentivize greener behavior, by offering premium discounts for firms that convert their fleets to electric vehicles or install solar panels on warehouses. They could also work with industry trade groups on transition strategies.

Recent research from Capgemini and Efma demonstrates how insurers can begin leading the way forward. The research found that improved data analytics capabilities can enable insurers to more effectively model risk, price new solutions and enhance customer experiences.

Further, those insurers that put climate resiliency at the heart of their corporate, innovation and product strategies will be best positioned for growth. The payoff from all these efforts and investments can be amplified through collaborations with regulators and government authorities, banks and asset managers and other stakeholders in the fight against climate change. As climate change is such a pervasive global issue, everyone on earth is a stakeholder.

The purpose of the insurance industry is to protect people and organisations from the most serious threats they face. Climate change is a historical opportunity for the insurers to live their purpose and lead other industries in the battle for the planet.