What is the European Green Deal?
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In this article, we’ll dive into the European Green Deal, exploring its key objectives, strategies, and the political and social challenges it faces.
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How is Insurance Impacted by Climate Change?
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Climate change has been impacting the human population for quite some time now, but most notably over the past few years, people have been personally suffering from the consequences of climate change through natural disasters – and in turn, they've been struggling to find high coverage insurance that will be there when a devastating weather event strikes.
You may be wondering why the insurance industry would be impacted by climate change, but stop to think for a moment – who is responsible for paying for the expensive repairs after the damages from a natural disaster, like a hurricane or a tornado?
The insurance industry has clearly been affected by the increasing amount of natural disasters, but has it been a negative or positive change?
In this article, we'll explain what the insurance industry is, how it has been impacted by climate change, and how the insurance industry could actually help in the fight against climate change.
What is the insurance industry?
The insurance industry refers to the companies that handle insurance policies for clients: such as homeowners insurance, health insurance, and car insurance. Popular companies you’ve probably heard of include All State, Geico, AXA, Nationwide, and Progressive.
An insurance policy works when a contract is presented for the policyholder to sign in the event financial compensation is necessary in the event of a devastating event where it is impossible to recover destroyed items
For instance, if an apartment burns up in flames, and all of the renter’s belongings are destroyed in the fire – the insurance company is responsible for paying out a sum of money to help the policy holder replace all lost items: such as clothes, computers, and jewelry. The insurance company will also often be accountable for providing the policy holder with temporary housing while the repairs are done on the damaged property, if the property is able to be repaired.
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Now more than ever, people have to consider where they live as a potential liability. For instance, while California is known for being sustainable and has even passed new legislation that adheres to the stringent environmental measures necessary to prevent climate change from getting worse than it already is – people aspiring to move to the most populous state of the U.S. also recognize that forest fires and earthquakes are likely to be a part of their future.
The same goes for those who live in Florida dealing with hurricanes or those in the Midwest with tornadoes. Ironically, despite residents of these states being aware of their high-risks regarding the negative effects of a potential natural disaster – the population of these states, such as California and Texas, continue to rise at an unprecedented rate.
This has created newfound pressure on the insurance industry, as more and more people require policies that will take care of them in the event of a natural disaster – which is growing more likely by the day the more that climate change itself worsens.
How do insurance policies usually work?
Insurance policies are not one and the same, as companies usually offer several different types of insurance plans in order to draw in a wide-variety of customers and ultimately improve their business.
However, despite the differences in these insurance plans – the most common types of insurance plans are still health insurance, auto insurance, homeowner’s insurance, and life insurance.
Many people around the U.S. are policyholders of at least one of these types of insurances, and depending on the state they live in – maybe even more.
Insurance isn’t just for personal lives – but for businesses, as well. Many companies are required to obtain different types of business insurance in order to ensure a safe work environment for their employees. For example, if a worker for a textile company harms themselves whilst sewing something to be sold – the company may be required to provide the worker with a type of insurance that will pay for their medical costs and potential lost salary from missing work due to the injury.
The main benefit of using an insurance company is that it lets people go about both their personal or professional lives without risking harming themselves or the vitality of their company. This is done by an individual or company consulting an insurance company, and the insurance company then drawing up a policy for the individual or business to sign.
Basically, insurance acts as a precautionary measure in the event of something really bad happening. Instead of being hit by a hurricane, and your home being demolished to pieces leaving you with nowhere to live – subscribing to an insurance policy, while it may seem like a futile bill to pay at the moment, will protect you if something is to go awry.
How does climate change affect insurance?
Climate change has absolutely impacted the insurance industry – as it’s now more difficult to evade paying out these loss and damage reimbursements to clients, as climate change has made devastating events like these more frequent and likely to occur.
This is because climate change has affected the ability of many insurance companies to predict the potential damages or losses for a policyholder. These newfound, difficult-to-determine climate risks impact both the investment and liability side of the insurance industry.
In other words, these insurance companies are now plagued with the responsibility of understanding the effects of climate change, and its unpredictable nature, in order to process the thousands of new insurance claims related to homeowner disasters induced by global warming itself. They also have to be more cognizant of their investments, and be sure that the companies they invest into don’t contribute to climate change.
Companies educating themselves on the impacts of climate change isn’t a bad thing by any means, and in fact – is something that all companies should be doing regardless of the sector they're in. More people are likely to sign up for an insurance policy of some kind, especially those residing in states with a high-risk of a sudden natural disaster striking – meaning the insurance industry has in turn has experienced more business than ever before.
However, that increase in business often comes hand in hand with an increase in expectations – something that has been made difficult for insurance companies to do in the midst of climate change.
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Climate change has made it difficult for insurance companies to keep up-to-date with the new regulations required for the sectors that are responsible for the most greenhouse gas emissions. While this may seem irrelevant, these other sectors impact the investments that these insurance companies have made themselves – meaning the insurance companies may not have the funding that they need in order to compensate for the new, more drastic demands of their clients who are suffering from the effects of climate change.
Long story short – climate change itself is raising the bar on what clients need to be paid in losses and damages, and climate change also simultaneously impacts the various investments that have already been made by insurance companies to have those funds available for the clients. Demand keeps increasing, and the availability of funds becomes more uncertain the worse global warming gets.
The result is that in order to keep up with the new reimbursements required of insurance policy holders, these insurance companies seek financial opportunities that don’t qualify as low-carbon investments – creating a larger carbon footprint.
How are companies in the insurance industry dealing with the impacts of climate change?
Recently, popular insurance companies have started releasing their sustainability reports in order to assure their policyholders that they are doing their best to cope with the changes that climate change has presented them with.
For instance, Nationwide has released a fifteen page CSR report delineating their partnerships with the American Red Cross and sustainable investments in housing, healthcare, clean water, education – and more. Allstate has claimed that they have the financial means to cope with the stress brought upon the insurance industry due to climate change.
Other insurance companies like USAA and Farmers haven’t expressed their action plans in the midst of climate change as clearly, with USAA almost greenwashing clients into reassuring them of their environmental awareness by promoting the importance of recycling and mindful use of finite resources such as electricity and water.
Farmers insurance has done something similar, sharing a page dedicated to their environmental efforts in employee fairness, the importance of mitigating the use of plastic, and planting trees.
The problem with all of these reports, is that none of them delineate what the insurance company in question will do if their financial resources are depleted entirely – or the small, measurable steps they are taking to invest in low-carbon areas.
Assurance to their clients isn’t what insurance companies need to be doing, but to develop tangible net-zero strategies or new business models that improve their sustainability. Climate change is impacting the insurance industry itself, meaning it’s ironically imperative that these companies make more concrete plans to keep climate change from impacting their business more than it already has.
Natural disasters are continuing to occur more often as the days go by, meaning that insurance companies need to put a halt on the assurance tactics – and get moving with serious action plans to reduce their own carbon footprints if they want to continue to have the funding to help their insurance policy holders in need of financial assistance.
Is the impact of climate change on the insurance industry ultimately good or bad?
On one hand, the impact of climate change on the insurance industry is bad. Natural disasters are happening left and right at a rate that insurance companies may not be able to keep up with – even if they strive for sustainability and prohibit themselves from anything but low-carbon investments.
The insurance industry should want to do more to take part in the fight against climate change, as many natural disasters that insurance policy holders file claims for are due to climate change itself.
Basically, insurance companies could find more financial success if they don’t have to make these reimbursements as often – so fighting against climate change will not only help the planet, but ultimately help their business revenue.
Insurance companies should seek to acquire new and improved knowledge of climate risks to better understand their future investments and reimbursements. Therefore, while climate change has presented the insurance industry with more work and required expertise to be successful – the consequences of climate change on the insurance industry could also prove beneficial, as those in the insurance industry will nearly be forced to have a better understanding on how to build a business in accordance to a world dealing with climate change.
Science is there, technology is there, and experts are here to help insurance companies make the sustainable transition required for the safety of their insurance policy holders – and the future state of the planet. The impact of climate change on the insurance industry doesn’t have to be a bad one, but it will be if insurance companies don’t turn it into necessary lessons learned.
What about Greenly?
If reading this article on how the insurance industry has been impacted by climate change has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. We offer a free demo for you to better understand our platform and all that it has to offer – including assistance with boosting supplier engagement, personalized assistance, and new ways to involve your employees.
Click here to learn more about Greenly and how we can help you reduce your carbon footprint.
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