Climate Risks and Insurance Sector: A Peek into Recent Trends

Insurance is a crucial battleground in managing climate risks. Besides their fundamental presence in catastrophic loss protection, their fingerprints are on all sections of the economy. Insurers’ exposures extend far into the future, giving the industry a particularly acute appreciation of long-term climate risks. But recently, several international insurers/reinsurers cut their exposure to natural disasters or sold their reinsurance business. Some insurance companies stopped underwriting for new homeowners policies in California and Florida, while some dramatically increased the premium. Meanwhile, business owners in the United States are looking to expand their insurance coverage amid risks related to climate change. Treasury Secretary Janet Yellen said the weather-related havoc playing out across the US is exposing a “protection gap”.

This seemingly increasing gap begs the questions: From a finance point of view, what drives the recent climate risk-related movements in the insurance sector, and what are some potential solutions to the problem?

This presentation aims to peek into the above questions by first synthesizing updated industry research on the current trends and dynamics related to climate risks in the insurance sector. Next, we will briefly discuss relevant investment and capital allocation considerations that may have influenced those changes. Finally, we will introduce emerging financial instruments such as Climate resilient development (CRD) bonds, and discuss their utilities.