Risk managers rely on insurers for help with climate risks

An exposure as complex as climate-related risks is not one that risk managers are eager to tackle alone. When looking for expertise to help manage the fast-evolving risk, they are finding insurers are well-placed to help build resilience and stay atop regulations aimed at holding businesses accountable for developing sustainable operations.

There are two types of business service providers that are doing much of the work to help organizations understand and address climate risk: technology companies and insurers. On the tech side, climate models are examining the potential for climate-related natural hazards that companies could face in the future.

But it is the insurer that is able to understand the potential impact of climate events in terms of potential losses for its customers and the claims that might be generated for the insurance company. With that knowledge, insurers become a trusted provider that can offer the expertise, products and services to help an organization strengthen protections against climate-related risks now and for years to come.

Because insurers have “skin in the game” when covering climate-related risks, it is important for them to help build climate resilience for customers because they are, at the same time, strengthening their own bulwark against losses that could arise from claims.

How insurers can help

Risk managers are unable to simply transfer climate-related risks to the insurance market. In fact, pure climate change insurance doesn’t exist. Coverage has to be written to cover losses that stem from the effects of climate change.

While insurers can provide such coverage, they are also the go-to provider of expertise in building resilience against climate-related risks. It is likely that climate-related insurance coverage will evolve to become more comprehensive, but that will not lessen the importance of focusing on identifying and quantifying climate risks, then developing adaptation measures to manage them.

Often, businesses do a good job of creating an overview of their physical climate risks but need assistance from insurers in developing adaptation measures. This is particularly true for larger companies with risk managers and sustainability offers who are involved in the work.

At smaller companies, the need for insurer expertise can be even broader, especially for those that face climate-related risks without the in-house expertise of a risk manager or sustainability department.

In any case, the insurer will make certain that the customer has identified and quantified the potential impact that climate risk could have on its operations. If there are risks that haven’t been addressed, insurers such as Zurich can dispatch engineers to help identify vulnerabilities and recommend measures that can address those weak spots.

Identifying risks, and beyond

The climate resilience journey is iterative. Once there is an understanding of the current risks, Zurich Resilience Solutions can provide assistance in defining and implementing adaptation measures to improve resilience. That is accomplished through a global exposure analysis to identify and quantify physical risk in the value chain and to prioritize next steps. And, site assessments are carried out to identify hazards, exposures and vulnerabilities, and to recommend actions to guard against losses.

Insurers are in a particularly good position to spot impending and emerging risk trends, serving almost as a kind of early warning system that businesses can rely on to identify potential problems they may have missed. Because they view different industries through a broad lens, insurance companies’ cross-industry perspective can help reveal how risks impact the entire value chain.

Insurers can also direct customers to the resources they need to begin building a climate risk strategy. The Task Force on Climate-Related Financial Disclosures (TCFD), for example, is a good place to learn about climate-related disclosures. It provides guidance on identifying and addressing the risks as part of a framework that establishes metrics and targets, integrating climate risk into an overall strategy and monitoring the risks.

Most companies are creating sustainability reporting functions to facilitate climate-change-related disclosure under the TCFD and similar frameworks. However, few companies have the expertise and capabilities inhouse to do this work, and many are uncertain even where to begin. Insurers are in a good position to offer guidance on managing these tasks.

Long-term, strategic relationships with customers are important if insurers are going to provide the comprehensive help risk managers need in addressing climate risk. A holistic approach will ensure an understanding and identification of the risks that could impact the business and how the business might, in turn, affect the environment.

The role of insurer data

Risk managers need to rely largely on external sources of climate-risk data. Finding it and understanding how to incorporate it into risk management scenarios are among their biggest challenges in combatting climate risks.

Insurers, with the wealth of the internal and external data they have at hand, can help shape an approach to strengthening the customer’s resilience against events that could disrupt their operations.

Insurers have information related to customer claims, underwriting and risks. Combining that with data from the business helps create an analysis that takes into account the company’s sustainability strategy and the objectives of internal stakeholders. That information, when used with climate data, can be integrated into the risk management methodology to help ensure sustainable operations.

Insurers also hold much of the data and tools for meeting disclosure requirements under the TCFD and other regulatory frameworks, such as natural catastrophe claims history, exposure data and how risks are expected to evolve under various climate scenarios.

Risk managers facing the daunting tasks related to building resilient, sustainable operations don’t have to face the challenges alone. Insurers are well-equipped to provide the help they need to ensure their companies are well-protected now and into the future.

Originally published in Commercial Risk on July 17, 2024.