The accelerating climate change can increase the likelihood of widespread disruptions to the financial sector, including the insurance sector according to a new report released by the Bank for International Settlements (BIS).
The new 50-page report Too hot to insure – avoiding the insurability tipping point released by the oldest international financial institution in November 2023 said while the global efforts to transition to net zero greenhouse gas emissions are commendable, their impact in slowing climate change is still uncertain.
The report said, “A major complicating factor is the uncertainty over future climate change impacts, which may unleash extreme events that have not occurred in the past for example due to climate tipping points.”
Moreover, insurers aren’t generally making climate considerations explicit in their pricing and underwriting policies. Also, a growing number of insurers is retreating from high-risk areas. The trend is likely to continue as insurers become better aware of climate related risks and incorporate these risks in their pricing and underwriting approaches.
The report said, “There is a chance that the global average temperature increase target under the Paris agreement could be breached, pushing the world, the global economy and financial systems into uncharted territory.
“Efforts to facilitate a swift transition to a sustainable economy, including adequate risk adaptation, mitigation and coverage by economic agents, are therefore vital. Through their pricing and underwriting policies, insurers play an important role in both supporting climate risk mitigation efforts to transition to net zero, as well as in incentivizing risk adaptation measures.” the report said.
It said an increasing number of insurers are publishing transition plans that set out how they intend to support climate risk mitigation, including adjustments to their underwriting policies.
Some insurers are also pulling out from insuring greenhouse gases intensive sectors, and they do so in a gradual manner, recognizing that some high emitters are taking steps to reduce their emissions. At the same time, insurers can incentivize climate risk adaptation efforts through their pricing and underwriting policies by recognizing risk reduction measures in terms of reduced premiums or more favourable policy terms.
Nevertheless, the insurance industry alone cannot mitigate climate-related risks – other actors such as governments, households and businesses need to play their part.
Source: asiainsurancereview.com
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