The insurance industry and its $4.6 trillion in revenues isn't going to be caught unaware by climate change.  They are all about risk.


Sometimes that can have unfortunate effects in the real world. In 2009, former Vice-President Al Gore talked at an AAAS conference and put up a slide showing climate change projections and no one could figure out where he got it.  It turned out the slide was from an insurer, not science data, and he removed the slide from later presentations.

Hurricane Sandy is the most recent cited U.S. example of the kinds of increasing liabilities posed by attributing weather events to a changing climate.

Managing a portfolio of $25 trillion in assets, the insurance industry has become a market force, investing $23 billion in securities and financing, plus $5 billion in funds with environmental screens, seeing risks to investments in polluting industries and opportunities in being part of the clean-tech revolution.


Three global initiatives - the UN Environment Program Finance Initiative of 1995, ClimateWise of 2007 and the Kyoto Statement of 2009 - compelled 129 insurance firms from 29 countries to to start calculating (and charging for) climate risks and also influencing public policy. The ultimate goal of these industry activities is reducing their own exposure to risk - or at least risk outside normal variation.  If there is no risk, no one buys insurance.

These insurers, together with reinsurance companies (the insurers of insurance companies) have been using analytical tools to quantify and diversify their exposure to climate change risk, price and communicate risk and get adaptation and loss-prevention efforts up and running.

According to a paper by Evan Mills of Lawrence Berkeley National Laboratory's Environmental Energy Technologies Division, 1,148 climate change adaptation and mitigation activities have emerged from 378 entities in 51 countries, representing $2 trillion (44 percent) of industry revenue. For example, insurers have brought at least 130 products and services to market encouraging the spread of more energy-efficient homes and commercial buildings by paying claims that encourage rebuilding to a higher level of energy efficiency after a loss. At least 65 other insurance industry products address the risks and opportunities of the renewable energy industry.

Pay-as-you-drive insurance policies, now numbering nearly 3 million, offer auto insurance based on number of miles driven rather than a fixed premium. GPS technologies verify driving distances, and policyholders benefit from a more accurate insurance premium. The price signal of lower premiums for miles actually driven could reduce U.S. driving by 8 percent, and oil use by 4 percent, reducing the cost of driving by $50 to $60 billion per year because of a lower chance of accidents and reduced traffic congestion.

Another class of insurance products insures financial shortfalls if projects under-perform at delivering energy savings or low-emissions power generation. Some insurance products manage the risks of carbon-trading transactions, such as wildfires releasing carbon sequestered in forests.

Some insurers also have programs to reduce their own greenhouse gas emissions and purchase offsets and 26 claim they have reached carbon-neutrality. A creative example is the mangrove restoration by Tokio Marine and Nichido Insurance Co. taking place in India and southeast Asian countries. Begun in 1999, this project is close to reaching its goal of restoring 8,200 hectares (more than 20,000 acres) of mangrove forests in coastal areas of seven countries. Mangrove reforestation reduces exposure of coasts to storm damage, and helps sequester carbon.

Insurance remains expensive and so the federal government is the insurer of last resort for floods and crops in the U.S., but actuarial climate risk techniques have not been applied to federal insurance programs. There's also not much loss modeling under future climates, or comparative risk assessments of climate change response options, which might help guide policymakers about how to adapt to changing climate.


Published in Science