[Screenshot from report]

Abstract

The insurance industry's keen interest in climate change goes back decades. Evan Mills, a climate change researcher at the University of California who specializes in the financial services sector, explains that climate change is a “stress test” for the insurance industry because “insurers abhor unquantified and unpriced risks, as well as market distortions” introduced by public policy makers.

For many insurance products, including property and business continuity insurance, climate change upends the notion that experience is a good predictor of future losses. Climate change’s destabilizing effects are also likely to increase the political pressure on governments to intervene in insurance markets.

The insurance industry has accepted a leadership role that reaches beyond the world of insurance. Climate change experts and policy makers have long recognized that the insurance industry holds a significant reservoir of needed skills and knowledge. Not only does the industry possess in-depth knowledge of extreme weather and its associated risks, but it also advances expertise in risk modeling, scenario building, and the alignment of incentives with desired actions. The insurance industry is positioned to communicate climate change’s risks and promote adaptation to its unavoidable consequences. This includes developing new insurance products.

This review of the insurance industry and climate change examines why the real estate industry can be increasingly confident in the stability and resilience of the insurance industry. Indeed, the real estate industry may even learn from the insurance industry’s advances in developing risk standards and tools for modeling and scenario analysis. In a world shaped by climate change, however, maintaining the insurability of individual properties is not a given. Unless owners and societies take steps to reduce their exposure to the damages and losses associated with extreme weather, the overall affordability and availability of insurance will be affected.