Insurers and Climate Change: Time to Remember the Basic Mission of Insurers

By Peter Skjoedt, Skytop Contributor / September 7th, 2021 

Peter’s educational background begins at Copenhagen University, where he earned his master’s degree in Economics, with an emphasis on International Economics Education. Peter worked as an Economist at both the Danish Manufacturer’s Association and Carlsberg International A/S before flourishing at the Danish Insurance Assocation (DIA). 

During his time with the DIA, Peter worked his way from principal, to Head of Department, then Executive Director and International Advisor. While Executive Director, he was responsible for the Economic Affairs Department, dealing with prudential regulation, accounting, taxation, solvency, and investments. 

Throughout his career, Peter still found time to participate in numerous working groups and committees, with both DIA and Insurance Europe. He has been a guest lecturer and an Associate Professor in International Finance and Pension Economics at Copenhagen Business School for over 20 years. Peter even spent a year as Acting Director of Economics and Finance at Insurance Europe (2006-2007), while maintaining his responsibilities as Executive Director at DIA. 

Most recently, Peter sat as Director of Financial Stability and Regulation at the Geneva Association, working in Zürich. 

On April 21 this year, Swiss Re, one of the largest reinsurers globally, published a report on the potential consequences of climate change: 

 “World economy set to lose up to 18% GDP from climate change if no action taken, reveals Swiss Re Institute’s stress-test analysis” (World economy set to lose up to 18% GDP from climate change if no action taken, reveals Swiss Re Institute’s stress-test analysis | Swiss Re).  

This discomforting statement comes at a time when it seems that mature economies are slowly seeing some light at the end of the tunnel after fighting the devastating corona crisis for more than a year. Unfortunately, the situation is less promising in a large number of less mature economies.  

Finally we had been given some hope of gradual relief from a worldwide pandemic that hit the world unprecedentedly hard and totally unexpected. We were gaining some optimism when the insurer reminded us about another looming catastrophe.  

Seen in this way, the timing of the report was somewhat unfortunate. However, nobody gains from ignoring potential risks and disasters. It is better to be aware of such risks and take action against them. And the insurer stands ready to help: 

“The public and private sectors can facilitate and accelerate the transition, particularly regarding sustainable infrastructure investments that are vital to remain below a 2°C temperature increase. Given the long-term horizon of their liabilities and long-term capital to commit, institutional investors such as pension funds or insurance companies are also ideally positioned to play a strong role” 

It is comforting that the report on climate change does present a way out of problems. And that insurers stand ideally positioned to play a strong role. Often, insurers claim that they want to do good for the world. 

But not everybody agrees about the impact of climate change and how the issue should be tackled: 

“Climate change is a real, man-made problem. But its impacts are much lower than breathless climate reporting would suggest. The IPCC has found that if we do nothing, the total impact of climate change in the 2070s will be equivalent to reducing incomes by 0.2-2 percent. Given that by then each person is expected to be 363 percent as rich as today, climate change means we will “only” be 356 percent as rich. A problem, yes, but hardly the end of the world.” (Bjorn Lomborg, Instead of panicking, fight climate change with innovation | Opinion | China Daily (chinadailyasia.com) 

I am not in a position to tell who is right about climate change and what should be done about it. I just find it striking that there seems to be no end to the proclamation of malicious events which could hit the world economy (and people). Also, as mentioned, the timing is interesting.  

Strikingly, when focusing on the economic aspects of the corona crisis, it is hard not to conclude that things could have been so much worse – again, this is a conclusion which is so much more true for the mature economies than for the less well off ones. Jobs and income losses, economic growth and wealth creation has, however, been less affected than many had foreseen when the realities of the corona crisis became clear in early 2020. 

Obviously, virologists, health personnel, scientists and many others have been at the forefront of the media during the pandemic. They have been raising concerns and giving advice, and helping us through troubled times. 

As these great people have taken over the scene in defining, analyzing and advising on the main issue to worry about, others influencers have lost ground and momentum. Before we met the pandemic, not least, the issue of climate change and all the terrible economic and social scenarios which were to occur, unless we “fight the climate war”, were on the front page of the news.  

More generally, climate change, sustainability, income inequality and many other issues, which used to be promoted at numerous high level political meetings, conferences and debates, were pushed into the background by the devastating (and real) threats of the corona pandemic. It meant that a lot of interest groups, including insurers, lost public attention and spotlight.  

Interestingly, insurers are – again – among the frontrunners of the climate change lobby, advocating, raising calls for action, warning against dire economic scenarios and gently mentioning all the “do-good-initiatives” insurers are undertaking themselves.  Insurers are positioning themselves as important institutions of risk transfer, and in that capacity, they promote their “green investments”, they abandon companies (who do completely legal, but in insurers view, “brown”, activities) from insurance cover, they warn against the consequences, if they themselves are not made a vital part of the “climate solution”, and they position themselves as an indispensable element in the “green transformation”. 

Insurers actually may be well positioned to fill this role. There is no dispute that insurers must play and do play important roles in relation to climate change. It is, however, important to consider the basic role and limitations of insurance when evaluating the strong push by insurers to be key players in the greening of economies. What is (also) the agenda of insurers? 

Insurers are put in place to monitor, limit, control, help prevent and handle administrative aspects of risk, when insured events materialize. This is the case in life as well as in non-life insurance. Insurers should serve their customers and do all they can to assist them. They should get up every morning with this one purpose in mind, to serve customers. In doing so, they would also carefully cater for their shareholders. Shareholders are, after all, the ones putting the capital at risk for insurers to perform their role. For mutual insurers, the agenda is somewhat different, as they are better equipped to take long term views and take into account societal interests. 

Insurers, however, are not put in place to live out their own aspirations of being profiled in the public. They are not there to fulfill political goals set by politicians and climate activists. They are not there to be the judge on commercial activities which are completely legal, but which the lobby of political correctness deem not worth supporting.  

Insurers are simply there to serve their clients.  

However, for many insurers, not least CEOs, this role is not enough. It is far more interesting to stand up and follow the mainstream green lobby groups. In the short run, this may actually benefit policyholders (for example by short term returns on “green” investments). But being climate friendly, however sympathetic as it may be, will eventually entail costs – which will fall relatively hard on lower incomes. And on policyholders. And throwing good money after green investments and abandoning brown investments is a risky task. There may be some easy wins, but they will not go on forever. Should insurers deny returns for being green? Are they allowed to? I think not, in most cases.  Which is as it should be. 

The real worrying aspect is that insurance CEOs may lose track of their basic mission, which is, again, to serve their customers. Coping with the “insurance” effects of the most severe risk that hit the world was achieved by public efforts and public money. During the corona pandemic, insurers revealed their limitations – which are real, since the pandemic was a systemic event.  

Now insurers (like many other industry bodies) want to enter the scene again. So they turn to issues where they can profile themselves. Not least on climate change. 

Watch out, dear policyholders, especially in the life insurance and pension sector. Your companies should have as their most fundamental obligation to secure your policies and seek the highest return for you. They should not follow up on ever changing political priorities. But that is what many insurers do, at the expense of your best interests. 

We can hope for insurance regulators to watch over the insurers and their proliferation on, especially, the climate issue. However, regulators are part of a political system. Will regulators be allowed to do their job? 

In the best case scenario, this is doubtful. I do worry about the worst case scenario.