How to shop for the perfect climate insurance policy
In boardrooms across the globe, climate change has evolved from an environmental concern to a critical financial risk. As guardians of financial stability, CFOs are now at the forefront of managing these emerging threats. The increasing frequency and severity of climate-related events demand a strategic rethink of risk management and insurance strategies.
Today’s CFOs must grapple with a trio of climate-related risks: physical, transition, and liability. Physical risks, manifesting as extreme weather events, are already making their mark on balance sheets. In 2023 alone, global natural disasters inflicted a staggering $380 billion in economic losses, with a mere $118 billion covered by insurance. This protection gap is a stark reminder of the need for more comprehensive coverage.
Transition risks, born from the global shift towards a net-zero economy, present a different challenge. New regulations, technological disruptions, and shifting consumer preferences can transform thriving assets into stranded liabilities overnight. Meanwhile, the surge in climate litigation introduces a new dimension of liability risk, with companies increasingly vulnerable to legal challenges over their climate-related actions or inactions.
In this new risk landscape, traditional insurance approaches fall short. CFOs need to champion a more nuanced, forward-looking approach to climate insurance. This begins with a comprehensive risk assessment that goes beyond immediate threats to consider long-term vulnerabilities across the entire value chain.
Gap analysis becomes crucial in this context. Existing policies, when viewed through a climate lens, often reveal concerning blind spots. The goal isn’t just to plug these gaps but to craft a cohesive insurance strategy that aligns with the company’s broader climate resilience goals.
Customisation is key in this new era of climate insurance. Cookie-cutter policies are increasingly inadequate in the face of company-specific climate risk profiles. CFOs should be exploring innovative products like parametric insurance, which offers rapid payouts based on predefined triggers such as specific wind speeds or rainfall amounts. Such products can provide much-needed certainty and liquidity in the aftermath of climate events.
Business interruption coverage takes on new importance in a climate-changed world. The ripple effects of a climate event can disrupt operations far beyond the immediate physical damage, and insurance strategies need to reflect this reality. Similarly, supply chain resilience should be a top priority, with CFOs seeking out policies that offer protection against climate-related disruptions across the entire supply network.
In Europe, the regulatory landscape is evolving rapidly, with bodies like the European Insurance and Occupational Pensions Authority (EIOPA) taking proactive steps to address the climate insurance gap. Currently, only about a quarter of economic losses from extreme weather events in Europe are insured, a statistic that underscores the urgency of action.
EIOPA’s promotion of “impact underwriting” is particularly noteworthy. This approach encourages insurers to develop products that incentivise climate risk prevention, potentially aligning insurance costs with a company’s broader sustainability efforts. For CFOs operating in or expanding into European markets, staying abreast of these developments is crucial.
While the climate crisis presents formidable challenges, it also opens doors to new opportunities. Forward-thinking CFOs are recognizing that investments in climate resilience can do more than just reduce insurance costs – they can position the company favourably in an increasingly climate-conscious market.
This might involve allocating resources to develop climate-resilient infrastructure, innovating products and services that address climate challenges, or enhancing disclosure capabilities to meet evolving standards. By taking a proactive stance, CFOs can transform climate risk management from a defensive play into a strategic advantage.
Selecting the right insurance provider is as crucial as the policy itself. Look for insurers with a demonstrated commitment to understanding and addressing climate risks. The ideal partner should offer more than just coverage; they should provide valuable insights and support in managing climate-related risks. Seek out providers with robust climate modelling capabilities and a track record of innovation in climate-related products. Consider their financial strength and long-term viability in a changing risk landscape.
The best providers will offer tailored solutions and be willing to collaborate on developing new products that address your specific climate risk profile. They should also demonstrate a proactive approach to claims handling in the aftermath of climate events.
Additionally, look for insurers that offer risk engineering services to help identify and mitigate potential climate-related vulnerabilities in your operations. A provider that can offer a holistic approach – combining risk transfer, risk mitigation, and strategic advice – will be invaluable in navigating the complex terrain of climate risk management.