Could climate change drive an insurance availability crisis?

Climate change risk cannot be underestimated, neither can the insurance industry’s need to address the challenges it brings. CRIF’s Sara Costantini explains how the strong correlation between the use of ESG key indicators and improved loss ratios highlights the compelling case for more relevant integrated data.

Climate change is one of the greatest, long-term risks facing the insurance sector.

The Climate Change Committee (CCC), the UK Government’s official climate advisor, has previously warned that the UK is set to see hotter, drier summers and warmer, wetter winters.  In fact, according to the Met Office, the 18 months leading up to April 2024 were the wettest on record.

Adverse weather conditions, which are becoming increasingly more common, can rapidly erode insurer profits.  According to data from the Association of British Insurers (ABI), claims for damage to homes from storms, heavy rain and frozen pipes reached £144m in Q2 of 2024, making it the fifth consecutive quarter that weather-related claims accounted for more than £100m.

Claims for weather-related damage from businesses also remained high, with £81m paid by insurers during the same timeframe. Representing a 5% increase on Q1, when payouts reached £1.3bn, Q2 2024 marked a quarterly high since the ABI began collecting data in 2017.

Pivotal role

Fortunately, insurers can help to address climate change risks by playing a pivotal role in the transition to a greener economy. They can help to facilitate change by focusing on sustainability throughout their operations and via responsible investment and asset allocation.

Insurers are also uniquely placed to support efforts to reduce climate change risk beyond their own operations.  As a sector that contributes £40bn to the UK economy each year and has multiple interactions and touchpoints with households and businesses across the UK, the insurance sector can incentivise and support change, facilitating sustainable decision making through education and innovative client offerings.

Focusing on the environment, climate change risks that have historically been very tangible to underwriters, such as the physical damage caused by weather related incidents, all featured highly in survey responses.

However, in parallel, it is important to recognise that there is growing concern related to the potential for climate change to drive an insurance availability crisis. This could arise where certain risks become deemed too high and therefore uneconomically viable to insure. Will some assets become uninsurable? 

The use of ESG data to better assess and competitively price risk is gradually being recognised by insurers as a valuable strategic tool, to protect bottom line, drive growth, support sustainability, boost reputation and improve compliance. Underwriters are evaluating the breadth of risks represented by climate change and consequent extreme weather conditions. 

These may include the physical damage caused by more prevalent, powerful storms or the wider disorder caused by transitioning to a greener economy. Property underwriters seek to accurately price risk and minimise exposure to the physical effects of climate change such as flooding and storm damage.

Embedded ESG data 

In June 2024, CRIF conducted a survey of insurers, in partnership with Insurance Post, to assess how they are using ESG data.  

There was broad agreement from 38.5% of survey respondents that ESG data embedded in internal systems and processes could help them better assess their clients’ risk and optimise pricing in the near future.

However, nearly a quarter of respondents (23.2%) were not yet using ESG indicators for risk assessment.  This was due to delayed Board focus or the fact that they were still designing or had not fully implemented their ESG plans.

Only 2.3% of respondents strongly agreed that ESG data was fully embedded in their internal processes to include underwriting, pricing, mid-term adjustments and renewals. These findings demonstrate significant opportunities to proactively manage climate change challenges, which are currently being missed by some insurers. 

ESG is a dynamic environment and the nature of associated risks are increasing in volume and type.  

Focusing on the environment, climate change risks that have historically been very tangible to underwriters, such as the physical damage caused by weather related incidents, all featured highly in survey responses as risks evaluated in pricing and underwriting; floods and storms coming top of list.

Informing decision making

The trends in weather related claims suggest that this focus will continue to remain high and access to accurate, granular data to inform decision making is key.  

Interestingly, disruption caused by transitioning to a greener economy was evaluated in pricing and underwriting by only 17.6% of respondents; a surprisingly low proportion considering the published regulatory goals in the UK.

Climate change risk in all its guises cannot be underestimated and the insurance industry is committed to equipping itself to help to address the challenges.  

Information and insight gained from newly available, enriched ESG data can be pivotal in the pursuit of risk solutions and help to support efforts to avoid any future insurance availability crisis.  Investing in ESG data can benefit an insurer’s business across all stages of the insurance cycle and proposition.

Data pilots are now available to help insurers exploit a proven, strong correlation between the use of ESG key indicators and improved loss ratios.  

This opportunity presents insurers with the means to generate business evidence and build a compelling case for the integration of ESG data within their systems and processes.  Early adopters will gain competitive advantage and be recognised for leading the way in the drive to contain and manage the impact of climate change.

Sara Costantini is CRIF’s regional director for the UK and Ireland

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