How the insurance industry can help reverse nature loss

This interview was conducted by Katell le Goulven, head of the INSEAD Hoffmann Institute, on 10th December 2024. 

The business of insurance is based on understanding and managing risk. And so, the degradation of nature and climate change present risks to the insurance industry, but also opportunities. We believe that the global insurance industry has a triple role in addressing sustainability issues such as nature loss and climate change. 

First, insurers play the role of risk managers. Since the business of insurance is about risk, insurers need to understand risk to be able to quantify, model and price risk. Simply put, if they are able to understand risk better, they can prevent and reduce losses. And that role could be used collectively - to inform communities, land use planning, city planning and development - in order to prevent and reduce losses caused by the degradation of nature or climate change. 

Obviously, you cannot eliminate all risks. So insurers also play a role of risk carriers. When disasters or diseases happen, insurance absorbs the financial shock, mitigating the consequence of that residual risk. However, the role of insurers has also expanded, not only as financial shock absorbers, but also as enablers of economic activities. Many economic activities are insured - you need insurance for transportation, for construction projects, etc. And so, by enabling economic activities, insurers can enable sustainable or unsustainable activities. Because of that, we believe that insurance could be treated like other forms of finance, enabling activities that are leading to nature-positive outcomes.

And finally, insurance plays the role of an institutional investor. Globally, the insurance industry manages over $ 35 trillion in assets. The way the global insurance industry invests could have an impact on nature-positive outcomes and climate change.

Through these three roles - risk manager, risk carrier, and institutional investor - the insurance industry can prevent and reduce nature and climate related risks.

Climate change is saying that the past is not a reliable indicator of the future. However, not all of the nature and climate-related risks are new. Insurers have been addressing catastrophe risk for a long time. This is the reason why, when the insurance industry faced an existential crisis a few decades ago because of hurricanes happening in the US, the industry was able to design catastrophe models based on scientific data, engineering, and mathematics to understand hazard exposure and vulnerability. That made insurers more adept at understanding physical risk and what happens when floods or storms occur. And so, insurers now have to use that core skillset to better understand future scenarios, be it on climate or nature. 

This being said, a lot of the emerging nature-related risks and climate change-related risks have to be better integrated into the portfolio of insurers and into the governance of insurance companies. These risks have many compounding and cascading effects, which means they cannot be treated as a simple isolated discussion on a simple risk here or there. Nature loss is manifesting itself increasingly in different ecosystems across the globe. And there is a need for insurance companies to better understand the implications of these systemic changes, not only on their insurance portfolios, but also on their investment portfolios.

The UN Principles for Sustainable Insurance were launched in 2012. Before the principles were created, there was a sister set of principles called the Principles for Responsible Investment, which applied to insurers as institutional investors. But a sustainability framework was needed to capture the entirety of the insurance business, including but not limited to insurance underwriting - the way they manage claims all the way to the way they invest. The PSI are a framework for insurers to better understand and manage a wide range of sustainability risks, based on the spheres of influence of insurance companies, which ranges from nature loss, to climate, to social and financial exclusion, and to human rights.

The first principle is about setting your influence on your core business. How do you set your strategy that embeds sustainability? How do you underwrite risk? How do you invest? How do you manage the claim?

The second principle is about the industry value chain. How do you deal with your clients, with your suppliers, with your brokers, with your reinsurers (insurers who insure insurance companies)? So, just like the investment industry has its own value chain, the insurance industry has a whole value chain too. 

The third principle is about engaging with broader society, including policymakers, regulators, and civil society. The sustainability is not for the insurance industry alone. It has to involve a whole of society and this is the reason why principle three shows that insurers should also use that sphere of influence to engage with policymakers and regulators. 

And principle four is all about accountability and transparency. Insurers need to demonstrate how  they are implementing the principles to their stakeholders.

We now have close to 300 members from across the globe. So there is strength in numbers, and we believe that we have a critical mass to drive this agenda globally.

The Principles for Sustainable Insurance led to derivative sets of principles, such as Insurance for Nature Positive. It is about framing how insurers can better understand and manage nature-related dependencies, impacts, risk, and opportunities on their insurance business. The reason why we created it is because addressing sustainability issues demands us to be specific. And nature is a specific issue. Of course, it is related to climate change, to resilience and to human rights, but ultimately, you need to be granular in order to drive change in the way insurers set strategies and make decisions on insurance core business activities.

Nature-positive is a global goal, mapped by the Kunming-Montreal Global Biodiversity Framework. There is a global agenda to reverse nature loss by 2030, and then to fully regenerate nature by mid-century. So by putting an insurance lens to that, we are able to understand how insurers can support those global goals.

So, what we are aiming at is to use insurance and their roles as risk managers, risk carriers and investors to influence and support the economy transition to nature-positive and net-zero. But that entails challenges. 

First, we need leadership from public policy to show strong signals with ambitious nature action plans at the country level, equal to ambitious plans on climate at the national level, because national governance gives the direction of jurisdictions on nature and climate.

Secondly, we also need to better integrate science. Nature science and climate science are evolving. These evolutions need to be integrated into core insurance decision-making. 

There are other challenges, such as ensuring that insurers have engagement strategies with clients. Previously, most insurers were talking to many clients in the context of shock absorption, meaning how to become more resilient to the physical impacts of nature loss and climate change. Now there is also a need to engage with clients on how to reduce their impacts on nature and their warming gas emissions. 

These are new discussions, and it entails routine engagement to drive this down into core practices. This is why governance is important. You need to create a culture of sustainability. This is not an agenda for the sustainability department. It's core business: nothing is more core to insurance than risk.

Of course. Risk is a deviation from an outcome. Where there is risk, there is opportunity. Nature-based solutions form a good example. There is an increasingly growing attention on nature-based solutions to be a new asset that could be insured for all the ecosystem  and provisioning services it provides. When you talk about coral reefs, forests or mangroves, there are increasingly new types of insurance solutions being piloted in different jurisdictions. They are looking at ensuring nature, not only as an opportunity, but also as a healthy, intact ecosystem that can help buffer storm surge in coastal communities, absorb carbon, and  provide economic opportunities to communities. So, there is a very strong narrative that healthy ecosystems are also an opportunity for insurers.

It's increasingly multiple stakeholders.Take the Mesoamerican coral reef, for example. There, the insurance policy entailed involvement by the local government but also coastal businesses such as hotels and tourists who are benefiting from a healthy coral reef. So public-private partnership is increasingly important, particularly when you're talking about public goods.

I think some of the more progressive public-private partnerships that we have seen are the insurance facilities created in some of the most vulnerable communities across the globe. For example, you have the Caribbean Catastrophe Risk Insurance, you have the African Risk Capacity and you have an equivalent in Southeast Asia and the Pacific Islands. All these entailed governments, insurers and local communities coming together - public and private - to help build resilience to increasing climate-related and nature-related risks onto their communities. And the reason for that is simple. There has been a  recent study by the Vulnerable 20 Group ( V20: originally, 20 ministers of finance from developing countries in the global South, which have now expanded to 70 countries). They demonstrated that, in the last two decades, the combined GDP of the V20 countries has been wiped-out by 20% due climate-related losses. Not only do they have to rebuild every time there's a climate shock but it also perpetrates a debt crisis. And so, insurance has a role to play there in the form of resilience.

Ultimately, it's all about risk: if the underlying risk on the ground continues to be unmitigated because of rampant destruction of nature and a high carbon economy, that is the source of a risk. If we are unable to mitigate that risk, then insurance will become less affordable, less accessible and less available. Conversely, if we are able to reduce nature and climate risk, if we are able to make land use planning more resilient and sustainable, then we also can make insurance more affordable and accessible. You can insure anything that you can price. The question is whether that price is affordable or not.

That is a function of risk-based pricing. When the exposure is very high, then there is a price tag on that level of exposure. The answer is not simply to say we need to have more insurance. The answer is also about understanding the root causes of the issue. 

The call to action is to embrace nature: look at how we can support the global biodiversity framework, its mission and its targets. We have created the first ever guide for insurers on how to set priority actions for nature. This is no longer a fringe issue. Nature has to be addressed at the very core of the insurance business, because at the very core of insurance is about risk. Understanding and managing nature risk has to be central to the agenda, because ultimately, there's only two factors that make life on this planet possible: a rich biodiversity of life and a stable climate. 

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Butch Bacani is the UNEP's Head of Insurance. He leads the UN Principles for Sustainable Insurance (PSI), the largest initiative between the UN and insurance industry. Endorsed by the UN Secretary-General and CEOs, the PSI is a global framework for the insurance industry to address sustainability issues—as risk managers, insurers and investors—and to build resilient, inclusive and sustainable communities and economies on a healthy planet. He also chairs the UN Forum for Insurance Transition to Net Zero (FIT): a multi-stakeholder forum to advance the role of insurance in a just transition to a resilient net zero economy.