Climate change and the insurance industry: What next?

Climate change remains a critical issue for the insurance industry in 2024. The increasing frequency and severity of climate-related natural disasters is having a significant impact on physical risk exposures and the increasing protection gap. Adding to the pressure, climate change litigation over the insurance of non-renewable energy is on the rise and insurers are becoming the focus of various environmental campaign groups’ protests too.

As a regulatory priority, it is well known that the insurance sector is very well positioned and highly incentivised in relation to climate change mitigation and adaption for two reasons.

1. The associated risk affects both the assets and liabilities of the insurance balance sheet
2. Insurers have decades of expertise in extreme risk pooling, which is critical in relation to the management and mitigation of the catastrophic effects that arise as a result of climate change. 

However, a response by the insurance industry alone is unlikely to be enough to mitigate the impacts of climate change on the global economy, with industry leaders advocating the need for public assistance, as systemic perils surpass the capacity of the insurance industry alone.

While there are many steps that insurers can take in relation to climate adaptation and mitigation, a collaborative effort between the private and public sector (including regulators, governments and policymakers) is fundamental to respond effectively to the increasing impacts of climate change and to prevent both systemic and isolated instances of market failures. This message was strongly emphasised at the UN Climate Change Conference COP 28 in 2023¹. We believe that the first step in achieving this lies in a comprehensive understanding of the most significant issues relating to climate change.