UNEP and Insurers Develop Approach to Assess Impact of Climate Risks on Insurance Industry
The UN Environment Programme’s Principles for Sustainable Insurance Initiative (PSI), a group of 22 of the world’s leading insurers and reinsurers under the auspices of the UNEP, announced the release of a report examining the assessment of impacts of climate risks on the insurance business. The initiative was aimed at showing how climate change scenarios can be used to assess and disclose climate risks in line with TCFD recommendations.
The report classifies the climate change-related risks and opportunities that insurers could face into three categories. These included physical risks related to changes in weather patterns, temperature and hydrological conditions; transition risks towards a net-zero emissions economy and related fundamental changes in, for example, energy, food and transport systems, and; potential litigation risks pertaining to climate change and breach of underlying legal frameworks on both the business and corporate levels.
The PSI approach examines these risks using a scenario approach, based on three distinct climate change scenarios, including a rapid energy transition achieving a well-below 2°C target, which puts transition risks at the forefront; a 2°C target, analysing both physical and transition risk impacts, and; a “Business as usual” scenario, potentially leading to a 4°C increase relative to pre-industrial levels, with a focus on physical risks. The initiative considers several timeframes, with the analysis centered on transition risks in the shorter term and assuming that most of the physical risks will emerge afterwards.
In addition to assessing climate risk, the report also highlights new opportunities for the insurance industry, including the ability to develop new insurance products or expand existing ones within a changing risk landscape.
The report includes a forward by Mark Carney, UN Special Envoy on Climate Action & Finance and UK Prime Minister’s Finance Adviser for COP26. Carney wrote:
“In order to bring climate risks and resilience into the heart of financial decision-making, climate disclosure (reporting) must become comprehensive; climate risk management must be transformed, and sustainable investing (returns) must go mainstream. This is why this pioneering report by UN Environment Programme’s Principles for Sustainable Insurance Initiative is timely.”
The insurers participating in the pilot group included : Allianz (Germany), Aviva (UK), AXA (France), Desjardins (Canada), Generali (Italy), IAG (Australia), ICEA LION (Kenya), Intact (Canada), Länsförsäkringar Sak (Sweden), Lloyds Banking Group (UK), MAPFRE (Spain), MS&AD (Japan), Munich Re (Germany), NN (The Netherlands), QBE (Australia), Sompo Japan (Japan), Storebrand (Norway), Swiss Re (Switzerland), TD Insurance (Canada), The Co-operators (Canada), Tokio Marine (Japan), and Zurich (Switzerland).
Butch Bacani, Programme Leader for PSI at the UN Environment Programme, said:
“Looking at the bigger picture, based on the latest climate science, this decade leading to 2030 represents the most critical period for the world to bend the global emissions curve in order to achieve the aims of the Paris Agreement. At the same time, it is important to cope with adverse climate change impacts that are already being seen and felt worldwide in terms of human tragedy, food and water insecurity, major economic losses, biodiversity loss and ecosystem degradation. Using both hindsight and foresight, this report represents another concrete step and contribution by the insurance industry towards a risk-aware world and the urgent climate transition needed.”
Click here to view the full report.