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Insurance, pandemics and climate change

In 2013, 3,000 insurance executives were polled to identify the most serious extreme risks facing the industry. By a large margin, they identified the world’s greatest threat as “a new, highly infectious and fatal” pandemic. In case you were wondering, an “invasion of non-peace-seeking aliens” was ranked lowest among 57 different risk factors.

In 2008 Lloyd’s of London, the traditional insurance market place, also warned  that “pandemics are inevitable and have happened regularly in the past … Economic impacts are likely to occur and a pandemic as severe as 1918 may lead to a global recession with reductions of between 1% and 10% of GDP.”

Pandemics have clearly been on the mind of insurance executives for a long time. But if the world’s professional risk managers tried to convince governments, businesses and other actors to better prepare for such an event, their efforts didn’t match the severity of the threat. Meanwhile many of them excluded pandemics from the risks covered by their business interruption policies, as businesses are now discovering.

The failure to adequately prepare for a pandemic which insurers recognized as a serious threat has so far cost more than 100,000 lives, millions of jobs and trillions of dollars in expected economic losses. We need to learn from this experience before the next global crisis comes around.

Last year Willis Towers Watson, the insurance broker that conducted the 2013 survey, published a new report on extreme risks. Not surprisingly climate change, briefly described as the “Earth’s climate tip[ping] into a less-habitable state”, now appeared on top of the list. North American actuaries came to the same conclusion in another survey in the same year, while reinsurer Munich Re warned about climate risks as far back as 1974.

Although the professional risk managers of the insurance industry have once again identified the biggest threat facing the global community, they have so far not done enough to convince governments and businesses to urgently address the challenge.

On the positive side, insurers such as Swiss Re and AXA, Zurich and Allianz have repeatedly warned about climate risks in reports and public statements. As of now 19 leading insurance companies have stopped or limited insuring coal projects, and twice as many have divested from coal.

However the large national and international insurance associations have so far not been forceful advocates for climate action. Insurers have yet to use their influence as investors with $30 trillion under management to convince the businesses they invest in to rapidly align their activities with international climate goals. Some of the biggest insurance companies, including AIG, Lloyd’s and Tokio Marine, continue to cover the expansion of fossil fuel projects that undermine the Paris Agreement (while withdrawing from the regions most affected by climate risks such as hurricanes and wildfires).

The COVID-19 pandemic shows that although the professional risk managers of the insurance industry have long been aware of the serious threat posed by a global pandemic they failed to convince decision-makers to take sufficient precautions. Today it is not insurers who cover most of the costs of COVID-19 but families, businesses and the state.

Insurance companies must now support their customers in staying safe and dealing with the costs of COVID-19. But they also have a duty to step up and address what remains the world’s most serious extreme risk, the climate emergency. Here is what they need to do:

Insurance companies must forcefully speak up, in their own capacity and through their associations, for green bailout and recovery programs which kickstart the low-carbon transition rather than subsidizing fossil fuel industries which don’t have a future in a carbon-restrained world. Can the International Insurance Society, Geneva Association and other insurance bodies stand up and be counted?

Insurers’ $30 trillion of assets give them huge power to influence the global economy. They should divest from fossil fuel companies which are not engaged in a rapid low-carbon transition and vigorously press all other businesses they invest in to align their activities with the 1.5°C Paris climate target. Avoiding a climate catastrophe makes business as well as environmental sense.

Finally, all insurance companies need to stop insuring coal and other fossil fuel projects and the companies that are still developing them. With renewables the cheapest option and numerous fossil fuel projects cancelled, now is a good time for insurers to adopt strict policies to ensure that a low-carbon path can be locked in and climate-destroying industries don’t get revived once the global economy recovers.

This commentary first appeared in Environmental Finance

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