Insurers’ support for developing countries crucial to global progress on climate change

Developing countries could become uninsurable unless insurers step up their action on climate change, according to a paper from Forum for the Future commissioned by the industry group ClimateWise - a global collaboration of more than 40 leading insurers focused on reducing the risks of climate change.

The sustainable development NGO says the industry has a vital role to play in limiting the impacts of climate change - not least in supporting developing countries and keeping them engaged in the effort to reach a global agreement.

Climate change threatens insurers with more frequent severe losses from storms, floods, heatwaves and other catastrophic weather events, and countries which are less affected may choose not to pool their risk with those which are more vulnerable, according to Responding to the Challenge of Climate Change.

It warns that developing countries are likely to be worst affected by climate change, and some may become uninsurable unless the industry finds innovative new ways to pool risk. Regions within countries could face a similar problem, for example some states in the US.

Alice Chapple, the Forum's Director of Sustainable Financial Markets, who wrote the paper, said: "Climate change is a global problem which requires global cooperation. We cannot expect developing countries to play their part if insurers refuse to support their economies by offering cover against the impacts of climate change".

Responding to the Challenge of Climate Change warns that climate change poses a real risk of causing massive and unmanageable shocks to the global economy and the insurance industry with it. It calls on insurers to step up their efforts to match the urgency of the threat.

It says: "Society will need insurance against the impacts of climate change. But the insurance industry also has a critical role to play in limiting those impacts, using its power to drive change through the economy and help create a low-carbon future."

The paper recommends incentives for low-carbon behaviour which will help reduce greenhouse gas emissions and limit climate risk. Current business models do not reward businesses for taking action on this and may even penalise it: clean energy providers using less proven technology face higher premiums than established fossil fuel energy providers, for example. One incentive might be to restrict directors' liability insurance for carbon-intensive companies where there is a possibility of future claims for damages against them.

It calls on insurers to rethink their investment strategies in the light of climate change. Current strategies can contribute to the problem rather than reduce it because companies focus on the short-term risk of investing in new low-carbon technologies ignoring the long-term risk from climate change. Few investment strategies take into account the physical, regulatory or market impacts of climate change.

It also says insurers should rate businesses on how they contribute to climate risk. This could inform a debate about levying a 'climate premium' to discourage high-carbon activity and fund action to limit and adapt to climate change. This will need cross-industry collaboration and support from government.