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COVID-19 could focus insurers' minds on climate change risks

The coronavirus pandemic is teaching the insurance industry lessons about how to tackle another systemic risk it faces — climate change — according to specialists in the field.

As shown by the latest batch of quarterly earnings, the coronavirus pandemic is affecting both sides of insurers' and reinsurers' balance sheets, triggering large claims and squeezing investment returns. It has also put a greater emphasis on communicating with stakeholders beyond investors, such as dealing with policyholders on premium rebates and regulators on dividends.

Staying focused

It might be assumed that the all-encompassing pandemic could distract insurers from climate change-related risks, but some believe that it has done the opposite.

"I think COVID has sharpened everyone's focus on their risk exposure," said Bronwyn Claire, senior program manager at ClimateWise, a climate change initiative between the insurance industry and Cambridge University's Institute for Sustainability Leadership. She added in an interview that while there might be a "micro-pause" in climate change focus, "it will continue to be one of the higher-probability, high-impact risks going forward."

Kabari Bhattacharya, an associate partner at consulting firm EY, said in an interview that "climate change is one of the top priorities even within the context of COVID 19" because of regulatory mandates, board members' need for more information and stakeholders such as customers, non-governmental organizations and the press "requiring a shift as to how assets and liabilities are managed in relation to climate change."

Insurers are also under continued pressure from investors to manage their climate change exposures. Nigel Brook, a partner at law firm Clyde & Co, said in an interview that "one of the most striking developments" in the financial field generally in the past 12 months was "the concerted and growing pressure from mainstream institutional investors" for more reporting and action on climate change.

The worldwide disruption caused by the pandemic is "a small foretaste of what's to come," said Brook, who leads Clyde & Co's global campaign on resilience and climate change.

"Some time in this decade we are likely to get a carbon shock," he said, such as a sudden shift in the green transition and carbon pricing. For those who are unprepared, this "could cause enormous shock, sudden revaluing of assets, stranding of assets."

The pandemic has shown how insurance responds, or does not respond, to systemic events. The lack of business interruption cover, even where there are non-damage extensions, has surprised and disappointed policyholders and sparked lawsuits in several countries, including the U.S. and the U.K.

Claire said that although discussions about the extent and limitations of coverage were pandemic-related to a degree, "I think that conversation will flow into climate change." She added: "You are starting to see questions coming in from clients about: 'This is our business continuity policy, but will it cover us for other big step changes?'"

Lesson for the future

One of the key lessons for insurers from the pandemic, according to Bhattacharya, who leads sustainable finance for insurance across the EMEA region at EY, is that they need to consider all stakeholders when developing sustainable strategies. Recognizing the importance of such stakeholders in relation to material issues the business faces "became prevalent in COVID and it continues to be important in relation to climate risk and the other sustainable development goals."

Another lesson, Bhattacharya said, was the importance of disclosures showing how systemic events affect insurers' businesses. Insurers face having to provide an ever-greater level of detail about their climate change exposures, with initiatives such as the EU taxonomy for sustainable activities, the Task Force on Climate-related Financial Disclosures, or TCFD, and the inclusion of climate-change risks in regulators' stress tests for insurers.

"COVID has shown us that it has been important for us to understand how the balance sheet is stressed so we can understand the pattern of the risk, and the same is true for climate risk," Bhattacharya said.

Threats and opportunities

The pandemic could also accelerate the shift to a greener world, hastening the onset of climate change-related transition risks. In April, the United Nations urged governments to "build back better" by creating "more sustainable, resilient and inclusive societies." The €1.07 trillion long-term budget announced alongside the EU's coronavirus recovery package will "support investment in digital and green transitions" among other things, according to the Council of the European Union.

While acknowledging the pandemic could take away funding from green projects, Brook said that equally, "oil and gas could be starved of investment as well." He added that "the shock of COVID might actually make some companies think: 'Is it really a good idea to keep doing what we have been doing for the last few years, which is keep investing in new oil and gas projects, or is it better actually now to make the shift?'"

But the transition could also give scope for insurers to push into new areas. "There is a greater set of opportunities for insurers to start writing coverage for a greater proportion of sustainable products," Bhattacharya said.