The Insurance Paradox: Victims or Beneficiaries of Climate Change?

As of January 1, 2024, the municipality of Les Sables d’Olonne (with a population of over 50,000) is no longer insured for “property damage and related risks.”^[1]. The main reason? Their request for proposals from insurers was unsuccessful due to rising claims costs related to natural disasters.

Meanwhile, 300 km south of Les Sables-d’Olonne, in La Teste-de-Buch, a project to expand drilling operations by the Canadian company Vermilion Energy has been approved. This project will allow for the drilling of eight additional oil wells in the heart of the forest. It is difficult to know which companies are behind this expansion. However, Insurers are needed to cover the construction, operation, and potential decommissioning phases of the site. This is a legal requirement^[2] to which these farms are subject.

The approval of this project comes one year after the massive wildfires that struck La Teste-de-Buch and more than 5,500 hectares in western France in the summer of 2022. These fires are exacerbated by global warming, disruptions to the water cycle, and more severe droughts, and are expected to occur more frequently.^[3].

On the one hand, there are municipalities that are unprotected from climate change. On the other hand, there are fossil fuel expansion projects—which are protected—that contribute to rising greenhouse gas emissions and the worsening of climate change.

The climate is changing—what are the implications for insurance?

Between the statement made by Henri de Castries (former CEO of AXA) in 2015 “A world with a four-degree temperature rise is no longer insurable”^[4] And with rising insurance premiums, the insurance model is bearing the full brunt of climate change, facing “incalculable risks,” “unbearable costs,” and “unmanageable claims.”^[5].

In a study on insurance looking ahead to 2050^[6], France Assureurs noted that the total cost of claims resulting from weather-related events could reach 143 billion euros cumulatively between 2020 and 2050, This represents a 93% increase compared to the period from 1989 to 2019. In 2022, the cost of climate-related damage reached a record high of 10.6 billion euros, of which 5 billion euros were due to hail.

In light of this increase in climate-related losses, the Cat-Nat sector^[7] has posted a loss for the ninth consecutive year, raising questions about its long-term viability^[8]. Insurance premiums are rising for various groups (individuals, businesses, and local governments). Some policyholders, such as the municipality of Les Sables d’Olonne, are no longer able to afford this comprehensive risk coverage. While the insurance system is based on risk pooling (and national solidarity in the case of the Cat-Nat program), the most vulnerable and impoverished—who are the first to be affected—are being left behind so that certain insurers can reduce the risk in their portfolios.

Conversely, what about the impact of the insurance industry on the climate?

Insurance companies are beginning to sound the alarm about the impact of climate change on their business and financial results. ButIt is still (too) rare to hear about the The Role of Insurance in Exacerbating Climate Change and Associated Risks. This dissonance is understood through the lens of “double materiality”: human activities impact the climate, and in turn, the climate impacts human activities and the conditions for human habitation on Earth.

As investors, insurers are required by European regulations to report the emissions associated with their investments. This reporting, along with the efforts of NGOs, has helped highlight the role investors play in contributing to climate change. Financial institutions are sometimes singled out for their financial support of projects seen as harmful to the climate.^[9], and sometimes even served with a formal notice^[10]. More and more stakeholders are opting for investment policies that exclude the expansion of fossil fuels.

What about the insurance industry? Insurance companies could be expected to apply the same standards to their insured portfolios as they do to their investments—such as refusing to insure fossil fuel expansion projects. The industry is still struggling to find its footing: the NZIA (“Net Zero Insurance Alliance”), which aimed to develop insurers’ potential contribution to carbon neutrality, has just been dissolved.^[11].
In future articles, we will discuss in detail the various options available depending on the type of contract.

For now, let's keep this point in mind: Legally speaking, many projects or items could not exist or be used without insurance coverage. The lack of methodology and reporting requirements appears to be a blind spot in the discussion about the environmental impact of insurance. In February 2024, the NGO Disclose revealed that Axa and Scor are supporting liquefied natural gas projects in the United States that rely on shale gas.^[12]. On a global scale, ShareAction and Reclaim Finance have published two analyses of the leading insurers and reinsurers^[13],^[14], concluding that:

• Most insurers continue to provide coverage for fossil fuel expansion projects;
• Even when exclusionary policies are in place, they are insufficient and allow for many exceptions (for example, by prohibiting coverage of a project but allowing coverage of the company behind the project).

Conclusion

Without concluding that insurance companies are coming out on top in the climate crisis, it seems essential to question their role in the ecological transition. For all insurers that have responded to the impact of climate change on their business by raising their premiums, reducing the risk in their portfolios, calling on the government to help them, and phasing out their unprofitable operations, Have they shown the same responsiveness in reducing their impact on the climate, by stopping the financing of fossil fuel expansion projects or projects that are incompatible with a low-carbon society?

A world that is 4°C warmer is uninsurable, but it must be acknowledged that, for the time being, the projects leading to such a world are insurable.

In upcoming articles, we will examine the challenges facing insurers—still through the lens of dual materiality—for the various economic actors that depend on them (individuals, businesses, and local governments).