Climate change impact greater than insurance industry’s capacity to offset financial risk

Climate change impact - World in water

The affects of a warming planet will prove to be too expensive for coverage alone to keep up, say analysts.

The financial risks associated with the climate change impact may become greater than what the insurance industry can cover, according to a new report. Analysts say that the financial risks are growing, from investing into coal-powered plants to the climbing premiums for flood insurance, the expenses are already rising and will continue to do so.

That said, the difference that firms can make to control both the risks and the costs may not be enough.

For instance, trying to use travel that produces a smaller carbon footprint, such as trains, will affect the airline industry. Similarly, the insurance industry must decide what to do with claims from climate change impact such as increased frequency and severity of flood damage. The answers are not simple ones, say analysts.

That said, earlier this month, industry guides were published for assessing financial risks from the impact of climate change. These include everything from the direct physical impact of rising global temperatures such as more frequent severe storms, droughts and wildfires, to both the risks and the opportunities available as the world converts to greener energy sources and away from fossil fuels.

Financial exposure to the climate change impact are beginning to be examined at a more substantial level.

“What is the exposure financial institutions have to natural catastrophes? I don’t think that question traditionally has been asked,” said risk and insurance company Aon’s global head of resilience and sustainability, Greg Lowe.

When it comes to more traditional forms of natural disasters, “there’s always been an assumption we have insurance for that,” Lowe explained. Aon contributed to the guidance report produced by ClimateWise to help industries – particularly financial firms – to better understand the financial risks of climate change. ClimateWise is a University of Cambridge Institute for Sustainability Leadership initiative working to create improved disclosure and response to insurance risks from climate change.

As the risks grow – especially as emissions that promote worldwide warming trends keep rising – traditional methods of handling disasters may be inadequate, said a Reuters report. This suggests that Climate change impact - World in waterif changes are not made to the way the climate change impact is managed, the insurance industry will be inadequate to protect the finance industry.

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