The insurance industry is making greater efforts to manage climate-change-related risks, a study published in the Dec. 14 issue of Science says.

“Weather- and climate-related insurance losses today average $50 billion a year,” the study’s author, Evan Mills, a scientist in Lawrence Berkeley National Laboratory’s Environmental Energy Technologies Division, says. “These losses have more than doubled each decade since the 1980s, adjusted for inflation. Insurers have become quite adept at quantifying and managing the risks of climate change and using their market presence to drive broader societal efforts at mitigation and adaptation.”

Hurricane Sandy is the latest U.S. example of the increasing liabilities posed by severe weather events in a changing climate.

Managing a portfolio of $25 trillion in assets, the insurance industry has become a significant voice in world policy forums addressing climate change, as well as a market force, investing at least $23 billion in emissions-reduction technologies, securities, and financing, plus $5 billion in funds with environmental screens, seeing risks in investments in polluting industries and opportunities in being part of the clean-technology revolution.

Risk and Opportunity

Responding to shareholder, regulatory, and market forces, 129 insurance firms from 29 countries are engaging in activities including supporting climate research, developing climate-responsive products and services, raising awareness, reducing in-house greenhouse-gas emissions, quantifying and disclosing climate risks, incorporating climate change into investment decisions, and influencing public policy. These insurers, together with reinsurance companies (the insurers of insurance companies), industry associations, brokers, catastrophe-loss modelers, and partners in the research community, have been using sophisticated analytical tools to quantify and diversify their exposure to climate-change risk, more accurately price and communicate risk, and get adaptation and loss-prevention efforts up and running.

New Insurance Products and Services

According to the study, 1,148 climate-change adaptation and mitigation activities have emerged from 378 entities in 51 countries, representing $2 trillion (44 percent) of industry revenue. For example, insurers have brought to market at least 130 products and services encouraging the spread of more energy-efficient homes and commercial buildings by paying claims that encourage rebuilding to a higher level of energy efficiency after a loss. At least 65 other insurance-industry products address the risks and opportunities of the renewable-energy industry.

Another innovative class of products insures financial shortfalls if projects fail to deliver energy savings or low emissions. Some insurance products manage the risks of carbon-trading transactions. By assuming these risks and engineering programs to minimize losses, insurance companies pursue a broader policy objective of verifiable, bankable, persistent emissions reductions.

Many insurers have programs to reduce their own greenhouse-gas emissions and purchase offsets. Twenty-six claim they have reached carbon neutrality.

To purchase the article, titled “The Greening of Insurance,” click here.