Don Forgeron, president of the Global Federation of Insurance Associations, and president and CEO of the Insurance Bureau of Canada, discusses what role the insurance sector can play in global efforts to mitigate and adapt to climate change
What are the main ways that insurers are helping fight climate change?
As underwriters of natural catastrophe risks, those of us in the insurance sector are especially aware of – and sensitive to – the escalating risks posed by climate change. We are at the forefront of modelling and predicting climate risk, and in advocating for mitigation and adaptation.
A warming atmosphere and ocean are leading to unprecedented severe weather events worldwide. Given the current trajectory, such increases in temperature could make it increasingly difficult for insurers to offer the affordable financial protection that people deserve and modern society requires.
GFIA is therefore calling on policymakers to continue to do their utmost to limit the future risk posed by climate change by curtailing emissions. Climate change is not, however, just a future threat but rather a present and growing danger. Governments must therefore also prioritise adaptation – what I call playing defence – to the events we are now experiencing.
Cooperation with public authorities at national, regional and local levels is therefore important. For instance, public authorities have a responsibility to ensure that no construction takes place in risky areas, and to make sure that building codes are duly enforced.
We encourage governments to set targets for adaptation — i.e. goals and performance measures — in much the same way they do for mitigation. In the words of Peter Drucker: "What gets measured, gets managed."
While it didn't receive the same level of attention, the countries involved in the Paris Agreement also established a global goal on adaptation for enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change. The agreement set out a process to establish, submit and periodically update national adaptation plans in the same way that countries periodically update and submit their emissions reduction plans.
"It is vital that any discussions aimed at addressing climate change recognise that financial industry regulation is not the only — and often not the most appropriate — response to the issue"
The insurance industry can contribute to the fight against climate change in several ways. Insurers can contribute to a more holistic understanding of risk through their modelling capabilities. They can also assist policymakers in guiding society toward better adaptation practices with tools such as risk zoning and mapping, and land-use planning.
As one of the world's largest institutional investors, the global insurance industry can help finance the transition toward carbon neutral, climate-resilient and more sustainable economies. And as underwriters, insurers can contribute to a transition toward cleaner forms of energy.
Fighting climate change does, however, mean the economy as a whole must shift toward a sustainable approach. It is therefore the responsibility of policymakers to deliver appropriate policy and legislative initiatives to achieve such a transition as quickly and smoothly as possible. Insurers are keen to do their best to facilitate this transition.
We are seeing regulators and supervisors globally step up their demands on insurers regarding climate. What kinds of interventions would the insurance industry like to see – and not like to see?
Policymakers at various levels have a crucial role to play in boosting climate resilience by enhancing both climate adaptation and mitigation efforts.
It is vital that any discussions aimed at addressing climate change recognise that financial industry regulation is not the only — and often not the most appropriate — response to the issue. All elements of our economies and societies will play a crucial role in enhancing resilience and adaptation measures.
Policymakers should also ensure that any new regulatory or prudential proposals related to climate risk are proportionate and do not overlap with existing measures that already meet climate risk policy objectives.
"Many insurance companies have reviewed their underwriting and investment activities in an effort to contribute toward the fight against climate change"
In relation to climate-related disclosures applicable to insurers, for example, an incremental and phased approach is essential, whether supervisors want to foster greater voluntary disclosure or to make climate risk reporting mandatory.
Life and property and casualty insurers have very different risk profiles and business models. Standardised reporting applicable to all insurers could limit the adequacy of the analyses and the robustness of the material disclosures by these distinct types of insurers.
In terms of strengthening the capacity to assess climate risks, insurers are in a unique and strong position to identify, analyse and assess their risks.
The processes and format recommended by the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) are an appropriate discussion point between supervisors and insurers, providing examples of other analytical risk frameworks.
An entity should, however, be free to decide whether to implement a voluntary standard, since it depends on whether the TCFD recommendations can be usefully and meaningfully applied to a specific business activity.
What are the biggest challenges facing the insurance sector as it transitions to being "net zero" in terms of greenhouse gas emissions?
Insurers face several challenges, but I will focus on two: a lack of sustainable assets in which to invest and the lack of ESG (environmental, social and governance) data on assets.
Urgent policy action is necessary to stimulate the supply of suitable sustainable and long-term assets for investment, such as infrastructure and climate-transition projects. Indeed, insurers are ready to invest more in sustainable and long-term assets to facilitate a more resilient economy.
Comparable, robust and public ESG data on assets is currently not available. Such data is vital for investment decisions, beyond their importance to comply with new disclosure obligations.
Overcoming these two challenges would go a long way in helping insurers to reduce the carbon footprint of their investment portfolios.
How and when should insurers be ending their support for fossil fuel industries, as regards their investments and underwriting?
Many insurance companies have reviewed their underwriting and investment activities in an effort to contribute toward the fight against climate change. This trend has accelerated in recent years and we expect it to accelerate further in the years to come.
Some insurance companies have decided not to underwrite risks related to new projects involving certain types of fossil fuels. In the investment area, many insurers have been building sustainable investment portfolios for years, and many more are doing so now. Insurers are also reviewing the investment options they make available to customers to take into account sustainability and other factors.
The move toward a net-zero society and economy is a complex process, one that will take time, and insurers' underwriting and investments are a part of that transition. Insurers' ability to move away from certain types of activities is, however, to some extent dependent on a broader transition, involving everyone, toward a less carbon-based society and economy.