Rethinking solutions: A comprehensive approach to fighting climate change

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20-11-2024

OPINION: Nicolas Jeanmart, Head of personal & general insurance, Insurance Europe

The UN's COP29 climate talks in Baku, Azerbaijan, are underway at a time when the impact of climate change is hitting communities with growing ferocity. Europe recently faced more unprecedented climate events: the catastrophic floods in Spain, that have tragically claimed the lives of over 220, came just a few weeks after devastating floods in Central and Eastern Europe. These events were preceded by others, such as the wildfires that scorched huge areas in Greece.

As all of this unfolds, global average temperatures continue to consistently exceed the critical 1.5 degrees Celsius threshold set by the Paris Agreement, and 2024 is expected to be the hottest year on record, one year after 2023 claimed that title. The statistics are alarming, as is the destruction happening across Europe and beyond, and this makes the urgency for action undeniable. To confront this crisis, ambitious action is required across three fronts: mitigation, adaption and protection, and in all three, insurers have a critical role to play.

Cutting greenhouse gases remains a priority

First, there is no doubt in my mind that mitigation - the reduction of greenhouse gas (GHG) emissions must remain top on the agenda. Failing to achieve this goal will inevitably make it increasingly complicated for humans - and many other species - to adapt to such changing conditions. Cutting emissions is, however, not an easy goal to reach, as shown by the fact that they keep increasing. 2023 was the record year for global emissions to date and, unfortunately, 2024 is on track to surpass it.

Making progress in this field requires the participation of everyone, meaning citizens, the private sector (including insurers), and governmental bodies alike. Indeed, the participation of all is critical to overcoming the "triangle of inaction", where each party blames the other two for not doing enough. Insurers recognise that they have a role to play, and they are increasingly doing so, notably through their capacity as investors. Specifically, with over EUR 10 trillion assets under management, the insurance industry stands as the largest institutional investor in Europe. Not all funds can be directed towards "green projects", like solar panels or wind farms, as this would not be in line with insurers' duty to diversify their investments in the best interest of their policyholders. Nevertheless, they can significantly contribute to driving the transition away from a fossil fuel-based economy.

Adaptation must happen at all levels

Greenhouse gases accumulate for long or very long periods (depending on the gas) in the atmosphere; therefore, there is also an urgent need to accelerate adaptation to our ever faster-changing climate. This is challenging because the task at hand is huge. Adaptation must happen at all levels (local, regional, national), and it moreover requires taking complex and difficult decisions, such as opting against construction projects in light of climate-related risks associated with these projects. What is clear, however, is that postponing certain decisions will make adaptation even more challenging further down the road.

While public authorities bear primary responsibility for adaptation measures, such as those involving land-use planning and building codes, property insurers also have a crucial role to play. This includes offering guidance to public bodies, for instance about strategic decisions regarding construction locations or in relation to nature-based solutions. In several markets, insurers have created maps indicating which properties are at risk in which regions due to a particular climate-related risk. Insurers also advise their policyholders in terms of possible risk reduction measures they could take to limit their risk exposure, thereby improving their insurability.

Urgency to ensure adequate insurance coverage

In addition to mitigation and adaptation, it is crucial to look at protection and increase the proportion of policyholders with adequate insurance coverage, so that people and businesses can recover as quickly and smoothly as possible after a dramatic event. Insurers' specific role as providers of protection often depends on the type of system, traditions, and practices in place in a given market, but also on the type of risk exposure. Different countries are exposed to different risks and, consequently, there are also different levels of insurance penetration, from very high to very low. And while insurance penetration varies substantially between European countries and regions, on average, insurance penetration remains far too low, be it in Europe or beyond. Indeed, globally, only 31% of total losses - $118bn - were covered by insurance in 2023. To address this gap, concrete actions must be implemented.

Firstly, there is a necessity to educate individuals and businesses on the benefits of purchasing insurance, and to incentivise them to do so. Governments play a pivotal role in fostering an environment conducive to insurance uptake, including by not making misleading promises of intervening in case of a dramatic event, or through tax incentives. On their side, insurers must enhance transparency by clearly outlining coverage terms to make their products more accessible and understandable, as it is key for policyholders to have clarity in terms of what is covered and what is not. However, given the scale of the challenge, this may not be sufficient, and establishing risk-sharing mechanisms between the private and public sectors, as already being done in several countries, may also be needed.

This collaborative approach, whereby risks, expertise, or data are shared, can help spread the burden and enhance resilience in the face of climate-related risks. Such efforts are increasingly paramount, notably because it is not possible to insure an event that is certainly going to happen or, at least, to do so at an affordable price. Indeed, the fact that climate change is turning the likelihood of certain climate-related risks into certainties is prompting important questions about what is required for the sector to continue offering affordable protection products.

Taking a holistic approach

Climate change has been described by the United Nations (UN) Secretary General Guterres as "the defining issue of our time", and, day after day, the facts are proving him right. It is therefore necessary and appropriate to speed up efforts to reduce emissions and adapt to climate change. An additional challenge, however, is that other environmental issues, such as biodiversity loss, water stress, or chemical and plastic pollution, also threaten many aspects of life on the planet. In practice, this means that there will be a need to do our very best to address all those issues "holistically". At the very least, there is a need to ensure that the fight against climate change is not conducted at the expense of other environmental challenges. Achieving this goal will require enhanced awareness of the challenges at stake, continuous dialogue, and the involvement of all parties. Europe's insurers are willing to play their part.

1. "2024 Climate and Catastrophe Insight report", AON, January 2024

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