The conclusion of the 26th Conference of Parties (COP26) last week in Glasgow ran the gamut of media mentions. There was the good, such as the unexpected pledge of climate cooperation between the United States and China; there was the bad, including Australia’s refusal to budge on coal and emissions goals; and there was the ugly, such as when President Joe Biden called out China’s Xi Jinping and Russia’s Vladimir Putin for failing to attend the conference in person.

But one area that went mostly unreported was the role of the insurance industry in the effort to stem climate change. Industry leaders discussed how insurers can play a central in combating this global challenge, not only because increased loss payments from climate impacts give them a vested interest to do so, but also because the insurance industry’s position in the marketplace is empowering, allowing the nudging of reluctant clients toward a net-zero future. While some industry leaders’ ideas were faulty, others deserve broad implementation by both policymakers and individual insurance companies.

One thing is certain: inaction has costs. Climate change results in more frequent, higher intensity natural disasters that hit the industry hard. According to a 2015 report, property damage from natural disasters increased from an average of $9 billion to $24 billion per year from 1993 to 2015. That’s an increase nearly three times over, and a look at the landscape in 2021 shows no improvement. Between wildfires out West, flooding in the mid-Atlantic, hurricanes from Louisiana to Rhode Island and a freak freeze in Texas, natural disasters are costing insurers billions of dollars in losses—and it’s only likely to worsen over the coming decade.

That’s not good news for insurers, and risks are only compounded by their exposure on a second front: their investments. According to one panelist, 35 percent of insurers’ assets are tied up in carbon-dependent industries, such as coal, oil and natural gas. S&P Global pegged the industry’s carbon-dependent investments at $582 billion in 2019, representing a $63 billion increase over 2018. If coal, oil and gas companies suffer—whether from changing consumer preferences, stricter government regulation, or otherwise—insurance companies’ assets will also suffer.

Thus, public officials who regulate the industry suggest beginning conversations with insurers not with whether climate change will impact their industry, but how—and how they are responding to the risks. In the end, belief in climate change and its human causes is inconsequential. What matters is rather what the industry—from regulators to insurers—is doing about climate impacts.

In dealing with this topic, two avenues emerged: one that encourages insurers to incentivize their customers towards mitigating carbon risk because it’s in the industry’s best interest; and another in which policymakers impose regulations to force insurers to combat climate change.

One commissioner outlined the latter approach. His state is part of a consortium requiring insurance companies to disclose their financial investments publicly, and these mandatory reports give activists the ability to mount public pressure campaigns demanding companies divest from carbon-dependent industries. It’s an uncommon tactic, with only a handful of states participating in the consortium. That’s not much of a surprise, considering companies find it arduous, complex and very expensive to produce reports that serve no meaningful or actionable outcome.

The second avenue is easier to implement and more effective. By offering lower premiums to clients for decarbonization activity, and vice versa, insurers can incentivize their clients to phase in habits that approach net-zero goals simply because it’s in their best interest. Insurers should also incentivize mitigation measures, for instance, by giving lower premiums to coastal clients for constructing a flood wall around their property, since mitigation efforts cost insurers far less than rebuilding following a natural disaster.

COP26 is not a perfect venue or institution; many conversations have focused on its shortcomings, especially its inability to hold leaders accountable to the pledges offered. But for the insurance industry, COP26 provided a platform to showcase how insurers can encourage more and more companies to move towards a net-zero future. By incentivizing carbon mitigation among their clients, insurers can play a central role in combating climate change—and protect their industry, too.

Image credit: MIKHAIL

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