Insurance holds the key to global agreement on climate change

If you thought this week’s UN talks in Cancun were all about climate change, you’re wrong - they are about how countries around the world will grow over the coming decades.

Developing countries are determined that action on climate change must not stifle their economies or deny their citizens a better standard of life. They need to identify affordable sources of energy to drive growth. They also need to protect that growth from future shocks like floods, hurricanes and drought. So they have to know and trust that growth is at the heart of the discussions.

Without funding and insurance for appropriate energy infrastructure, growth cannot take place. And without insurance to pool and manage risk from the impacts of climate change, growth is unlikely to be resilient. For these reasons, insurance must be central to the search for global solutions.

ClimateWise is taking the lead on this - a global collaboration of insurance companies committed to taking climate change into account throughout their operations. It commissioned Forum for the Future to outline the challenges facing the insurance industry in a paper released this week.

Responding to the challenge of climate change, released alongside the review of ClimateWise’s third year of activities, makes a number of recommendations for the industry. For the Cancun discussions, perhaps the most important focus is on the role for insurers in developing countries.

Developing countries are already feeling the impacts of climate change most heavily. Without action, there is a danger that these countries could become uninsurable, so we are calling for insurers to find new ways of pooling risk, perhaps acting in partnership with governments.

Insurers can provide more cover if governments put in place measures like building standards, planting of mangroves to protect coasts and retrofitting roof covers. And they can offer policies where the pay-out is linked to rainfall or other weather events.
Insurers can also help to support measures that may reduce carbon emissions and, therefore, the severity of climate change. For example, they can insure the smaller-scale, low-carbon technologies that are most appropriate in rural areas.

And they can help to insure forests. Investors are more likely to make long-term investment in sustainably managed or conservation forests if they can spread some of the risks through insurance.

This is not natural territory for most insurance companies - only 3% of individuals and businesses in developing countries are currently insured. But the future success of the insurance industry is tightly bound to its activities in this area. Developing countries provide an important area for future growth - but there’s also a bigger picture.

Success in climate change negotiations will depend on buy-in from developing countries. Without a global agreement providing price signals strong enough to drive the transformation to a low-carbon world economy, carbon emissions will continue to rise. That means the risks associated with climate change will continue to increase and more areas will become uninsurable - not a great outcome for the insurance industry.

ClimateWise and others have worked hard to draw the attention of governments to the role of the insurance industry. Some insurance and reinsurance companies – in particular, Swiss Re and Munich Re – are doing tremendous pioneering work in piloting solutions in developing countries.

If more insurance companies can put greater resource into this, recognising their own self-interest - and if governments can provide support alongside them - this could unlock important action towards a global solution on climate change.

For more on Forum for the Future's work with ClimateWise click here