McKinsey: Insurance could help fight climate change

Earlier this week, we explored Artemis’ research on the growing cat bond insurance market, which reached US$11bn as of last year.

Combined with Swiss Re’s study of natural catastrophe-related claims in December, a primary antagonist to insurance’s future potential has been defined: climate change.

In a timely new post, McKinsey & Co discussed this very topic, not only exploring the ramifications of its effects in the short- and medium-term but also the long-term changes that insurance itself could help bring about to reduce its impact.

Investing in the green economy

Dickon Pinner, Senior Partner and Global Leader of McKinsey’s Sustainability practice, stated that a “big switch” has occurred in those taking a leadership role in the debate. Whereas once it was the energy and automotive sectors, finance, particularly banking, has sparked the exploration of how severely climate change could affect economies.

“People are very interested in how to invest and put new money to work into the kind of new green economy. And then insurance within that plays a critical role in terms of transferring and mitigating risk.”

The environmental deterioration that has seen frequent and devastating wildfires in Australia and California, USA, could be the writing on the wall that historical models of predictive insight no longer hold true. Kia Javanmardian, Senior Partner, is ambivalent about how this will ultimately change contemporary attitudes:

“There’s a bit of difference in opinion on ‘Can I just price this in over time?’ versus ‘Do I need to make a more proactive stance?’ And I think the jury is a bit out in terms of where the industry is leaning on that dimension.”

Antonio Grimaldi, Partner, considers that insurers are, in general, beginning to move in the right direction to address the issue. However, he caveats, there is still much more to be done, from increasing resilience across the board to developing new underwriting solutions that cater to new market conditions.

Javanmardian adds that insurers becoming more conscious of their investment portfolios could also be a significant step: 

“We’re starting to see a bit of thinking in terms of what they’re willing to put money behind, partly reputationally, partly as an ESG measure. I think it is more pronounced in Europe than in the US, given the regulatory environment.”

Collaborating on responsibility

Furthermore, Grimaldi believes that European companies are more actively focused on becoming “responsible” investors and underwriters, “I think this is, in my mind, one of the very interesting angles that the industry could utilise in order to overcome some of the short term-ism that the industry might have, given the annual policy cycle.”

Finally, a key point raised by McKinsey as a whole is the necessity for strong collaboration between the public and private sectors to mitigate risk and benefit event preparedness. 

“Even days’ or weeks’ notice of an upcoming event, you can make a material difference if you can prepare for it, but that does require a public-private partnership. So a big role to play on such a complicated topic,” Pinner concludes.