Sustainability: an opportunity for the insurance industry

This article was first published in Portuguese in the ECO Seguros 2023 Yearbook.

According to the AXA Future Risks Report 2022¹, climate change has been voted the number one future risk based on the potential impact on society over the next five to ten years by many experts and the general population in Europe. Many of us are experiencing first-hand some of the consequences of climate change such as floods, storms, heatwaves, and wildfires. Lisbon was hit by flooding from 7th to 16th of December 2022 for which APS estimates the insured losses to be €47 million².  For wildfires having occurred during July and August 2022 the insured losses are estimated at €11 million³.

A severe Nat Cat Peril for Portugal is earthquake. The frequency of significant earthquakes is low, but the severity is high. It is estimated that an earthquake as the one from 1755 which had a magnitude in the range of 8.5 to 9.0 could produce an economic loss of up to 20% of GDP⁴. The society is facing a significant protection gap (the difference between economic and insured loss) as earthquake insurance is not mandatory and only 15% of households currently have insurance protection⁵. This means in case of a destructive earthquake 85% of people will be dependent on their own financial means and potential government support for recovery. This will make timely reconstruction very challenging. A potential solution could be an earthquake pool for residential properties making it obligatory to have earthquake insurance. For this to happen the government and the insurers would need to collaborate to design and set up a pooling mechanism. Reinsurers can provide risk knowledge and capacity so that the financial burden is better distributed.

The concept of sustainability is far wider than the challenges presented by climate change. To integrate sustainability considerations, we have been introducing environmental, social and governance criteria across our underwriting, investments, and our own operations. We use the United Nations Sustainability Development Goals to better understand how our underwriting activities can contribute to achieving the goals or potentially harm them. The goals can also guide us in finding new sustainable business opportunities.

We aim to integrate sustainability considerations on portfolio and deal level by mitigating the downside risks and by embracing new opportunities which are addressing sustainability challenges. To become aware and to understand potential problems we have developed an environmental, social and governance risk framework which we apply to our transactions where information granularity is available and allows for a meaningful assessment. On the opportunity side we embrace efforts to e.g., help decarbonize society and the economy by underwriting renewable energy covers, supporting sustainable energy supply. We are continuously searching for opportunities to narrow the Nat Cat protection gap and are looking for ways to provide cover for nature-based solutions.

When starting your sustainability journey there are many questions to answer. Which part of my business is sustainable? In which areas can I make a difference? How is climate change affecting my business short, mid-, and long-term? How big is my carbon footprint and how does the transition to a low carbon economy affect my business?

We have developed a set of solutions which can help insurers to understand their status quo, benchmark against the market, provide insights as a basis for them to set targets and to assess different ways to fulfil their sustainability ambitions.

Collaboration will be key on our journey towards a more sustainable future! Everyone can play a role and make a difference!