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The worldwide insurance market will be worth an estimated $6 trillion in global premiums and $44 trillion in assets managed by 2022. 

Those are staggering numbers considering the modest beginnings of the industry, which started in London coffeehouses with merchants gathering to arrange insurance for ships and cargo headed overseas. 

Over the years, the sector has faced numerous significant obstacles, the most recent being addressing ESG- (environmental, social and governance) and climate-related risks. Insurance firms are more exposed than ever because of disasters like associated with climate change, such as flooding, hurricanes and wildfires. And the astonishing variety of such disasters that occurred in 2021 demonstrates both their increasing frequency and intensity. 

A recent report by the Intergovernmental Panel on Climate Change (IPCC) emphasizes the critical need for swift investment in climate adaptation and resilience to address the worst current and impending impacts of climate change. The good news is the insurance industry is ahead of the curve in integrating ESG measurement into their overall risk management practice. They focus on measuring business resilience to environmental and social risks as well as the sustainable impact of investments and business underwriting.  

Guiding these efforts, the Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information focusing on the four key financial sectors: asset management, asset owners, banks and insurance.  

Given that ESG and climate-related risks are increasingly material for insurers, the industry is uniquely positioned to influence their client organizations to consider adopting ESG measures. Typically, insurers and their clients face a range of climate-related risks and opportunities which fall into three categories:  

  • Physical risks are related to the increased frequency and intensity of extreme weather events.
  • Transition risks are driven by the move towards a decarbonized economy and related fundamental changes in the underlying economy.
  • Litigation risks pertaining to climate change and breach of underlying legal frameworks.

What actions can insurers take?

Critically examine underlying client exposures

Insurance companies are increasingly exposed to specific industries. It is in their interests to move away from industries that are driving and exacerbating climate change (GHG-sensitive sectors such as coal, oil and gas, and related industries) and, when possible, replace them with clients in lower-risk industries.  

 Providing coverage for clean-green energy sources naturally involves less risk for an insurance seller as there is no fear of massive oil spills, explosions and other inherent dangers.  

Understand the ESG or climate-related risks leveraging technology 

Risk quantification can help insurers make more informed decisions on protecting assets and making sound investment decisions. Undertaking an ESG Risk Assessment or Initial Evaluation often helps identify ESG or climate-related risks and opportunities. It can provide an organization with a roadmap for how to navigate the ESG or climate-related risk landscape. Technology solutions like advanced climate models with machine learning can provide data-driven insights into how different climate scenarios would impact a company.     

Pursue opportunities to enhance underwriting decisions

Insurers can gain a competitive advantage by ensuring their existing and prospective clients undertake such assessments or evaluations. This helps the underwriter make more informed and, therefore, better decisions. Concurrently, it provides the client or prospect organization with a roadmap for addressing the ESG or climate-related risk landscape.  

Adopting a robust ESG Risk Framework

In addition to considering implementing ESG Risk Assessments or Initial Evaluations, organizations can adopt prudent risk management processes that follow established guidelines. Whether such risk management processes include TCFD, Committee of Sponsoring Organizations (COSO) or any other risk framework, they will most likely result in improved risk governance and more finely tuned ESG strategies, leading to better underwriting outcomes and benefitting both the underwriter and the client.  

Application of the TCFD Framework in insurance

TCFD provides an established and well-considered approach across its key dimensions and has a tailored version of its technical manual specifically for private equity firms. For each portfolio company or significant holding, general partners (GP) considerations follow the four critical areas established by TCFD:  

Area

Things to Consider

Governance

Increase climate awareness and education throughout the organization (board, executive team, management team, customers).  

Ensure governance is in place to manage climate-related risks.  

Strategy

Develop a simplified roadmap that focuses only on the material issues impacting the portfolio company.   

 Describe the impact of climate-related risks and opportunities on the organization's businesses, strategy and financial planning.  

 Describe the resilience of the organization's strategy, considering different climate-related scenarios, including a 2°C or lower scenario.  

Risk Management

Ensure climate risk is integral to investment processes.  

For holdings, provide support structure:  

  • Consider climate risks that may affect valuations based on material climate indicators
  • If/when material risks are identified, define climate targets at a portfolio level.

 Describe the organization's processes for identifying and assessing climate-related risks.  

 Describe the organization's processes for managing climate-related risks.  

Metrics and Targets            Disclose the metrics used by the organization to assess climate-related risks and opportunities in line with its strategy and risk management process.

Final thoughts

Addressing the ESG and climate-related risks in your organization now puts you at a competitive advantage, freeing up time to focus on the day job of growing your business. Whether you pursue an initial ESG or climate risk assessment or evaluation or a more in-depth framework review, your business will reap the benefits and thrive. Follow the links below to learn more about how WWT can help your organization accelerate sustainability goals while mitigating risk.