Insurance is a multi-trillion dollar industry, and it's getting bigger. The size of the global insurance market has grown by an average of 3 per cent over the last ten years. It's no surprise that there are many companies trying to get into this field. However, one new trend in the insurance technology vertical is attracting more attention than others: the mitigation of climate risks.
According to BlackRock's latest edition of their Global Insurance Report, environmental, social, and governance (ESG) issues are becoming more critical in the insurance industry. Insurers have indicated that increased investment in technology will be used to support the transition to alternatives and "integrate climate risk into their portfolio management."
What is BlackRock? And how is it differentiating itself as a firm?
BlackRock is a global investment management corporation. It is the largest investor in insurance companies worldwide, with over $27 trillion (USD) of assets under its control. The company has continued to grow during the pandemic and more than doubled its market capitalisation from April 2020 to April 2021.
The firms' insurance report notes that "95% of respondents believe climate risk will have a significant or very significant impact on portfolio construction and strategic asset allocation over the next two years." The increasing frequency of natural disasters like hurricanes, earthquakes and tsunamis pose a significant problem for traditional insurers because they cannot price risk accurately or assess their potential losses.
To solve this problem, firms are using data science, technology, and partnerships with other industries such as the space sector to pinpoint areas where climate risks are growing the most, allowing them to mitigate risk in these regions by providing coverage or insurance at a lower cost than traditional insurers. This method is increasingly being termed climate-smart investing.
The climate emergency cannot be ignored
Another insurance report from 2021, this time by Geneva Association, notes, "Tragically, the effects of climate change are becoming more palpable and harder to ignore. Persistently warming temperatures and sea-level rise. Compromised ocean ecosystems. Gigantic wildfires in Australia and California and a record hurricane season in the Atlantic. The societal impacts are worldwide, and individuals and institutions must fully commit now to confronting the climate crisis."
The report also notes that insurers were among the first to recognise that climate change is set to "reshape" the entire world economy. As a result, insurers continue to invest in sustainable funds due to these factors mainly driven by insurtech developments. Over the next few years, insurers are planning to boost these allocations, even more, matching the global trend toward sustainable investments.
Investing in the mitigation of climate risks could be a win-win situation for insurers
Another factor is insurance companies using technology to reduce their own carbon footprints. This transition is all brand-new for legacy industries. Still, it has become critical to incorporate transition risk management across their strategic business plans and operations, particularly for insurers, given their significant position in the world economy.
Apparently, it's also a win-win from an investment perspective if research by MSCI is to go by, as the multinational finance company notes, "Investors are monitoring whether companies have credible plans to reduce their carbon footprint and tracking the alignment of their portfolios with the Paris Agreement, which aims to limit global temperature rise to well below 2 degrees Celsius (2°C) by the end of the century."
In summary, insurers, like other sectors, need to use technology to allow them to transition to net zero, both from an investment and policy offering perspective, while also integrating with their own companies existing structures and reducing their own CO2 emissions. Finally, it may not only be beneficial for the environment but also to their long-term financial well-being.