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Can insurers save the world?

Insights from our Wednesday Wisdom with ZSL (aka London Zoo).

The insurance industry is geared towards pricing risk and selling protection, which means it is uniquely placed to understand the true cost of biodiversity loss – and champion efforts to thwart it.

That’s why Quietroom was excited to host Fergus Campbell, Sustainable Business and Finance Advisor for ZSL (aka London Zoo), in a Wednesday Wisdom which explored nature-related risks and opportunities for insurers.


The scale of the problem 

Biodiversity, which underpins life on this planet, is declining at the fastest rate in human history. One million species are teetering on the brink of extinction, including 1 in 6 British species. NASA predicts that the world will be deemed uninsurable if temperatures keep rising. Pockets of it already are.

It’s easy to distance oneself from the effects of biodiversity loss. They can appear as divorced from our reality as a wildlife documentary featuring faraway lands and, increasingly, the pangolin – a poster child for vulnerable species. Fergus, representing a centuries-old institution that connects humans with the untamed world, made the problem feel much closer to home.

Fergus reiterated the lethal cocktail behind the horrifying facts. Change of land use is a key driver, with humans sweeping away forests to make way for agricultural land. Species exploitation is another culprit, with overfishing being a prime example. Global trade is increasingly spreading diseases and jumbling food chains by placing different species where they don’t belong. Pollution and climate change are conspiring to diminish the Earth’s habitable spaces.

Climate change and biodiversity are intrinsically linked. As biodiversity shrinks, there are fewer trees to mop up emissions. In turn, as the world warms up more greenery gets scotched from the planet.

3 ways insurers can help

1. Underwriting 

Insurers have the power to pull the rug from under industries that hurt our environment. By simply not underwriting harmful activities such as mining or logging, they can halt the infrastructure that threatens biodiversity.

2. Investments 

As of 2021, insurance manages $40.6 trillion in global assets. They’re likely to be putting some serious financial muscle behind industries that chip away at the Earth’s resources, including agriculture, mining and energy production. Starving these activities of funding would diminish their destructive power.

3. Operations

Any business generates carbon emissions through the way their buildings operate and their staff behave. However, the impact may feel like peanuts compared with underwriting and investments. CDPS estimates that for global financial institutions, portfolio emissions from underwriting and investing are 700 times larger than their direct emissions from operations. Still, the impact on the planet from not doing anything is likely to be worse.

The cost of doing nothing

Nature feeds our economy. Fergus translated the perils of biodiversity loss into economic risk. Essentially, letting the planet get hotter is akin to watching money burn. The World Economic forum estimates that $44 trillion of economic value generation is dependent on nature. Its devastation could cost the world $10 trillion of GDP by 2050.

The impact on insurers is likely to be felt in 3 ways:

1. Physical risks

Insurance claims will rise as natural disasters claim more assets. This is no longer theoretical. The cost of flood insurance has already doubled or tripled in Florida. In the Sunshine State, 15 insurers have halted any new policies for flood insurance. 7 insurers have been declared insolvent.

2. Transition risks

As we move towards a nature-positive future, changes to regulations, policies, economies and markets will make insurers think harder about the risks they can underwrite. New regulations could leave a number of agricultural assets stranded.

3. Liability risks

Businesses, including insurers and their clients, may be vulnerable to nature-related litigation. Palm oil and timber companies are already facing fines for their role in wildfires, polluting waterways and encroaching on the land rights of local people.

What are the barriers?

There are a number of ways insurers can help protect the planet. But they may hobbled by a dearth of knowledge, tools and talent.

Fergus cited a lack of awareness and understanding. A shortage of actionable data. Scant regulatory and supervisory guidance. A deficiency in technical capacity and skills. And insufficient buy in from executive management. There’s also a difficulty in measuring nature-related risks, which are very location specific and difficult to standardise.

So what can insurers do? Key takeaways

Understanding biodiversity risk
Insurance companies need to identify where they are exposed to risks related to biodiversity across their underwriting and investment portfolios. This understanding is crucial to address these risks effectively.

Tools for identifying risks
To identify these risks, insurers can use tools like Encore, which assess the impact of various sectors on nature. Geographic location is also important, as biodiversity loss and conservation value vary across regions.

Setting policies and guidelines
Once the key exposures are identified, insurers should establish sector-level policies and guidelines. They can consider exclusions or phase-out plans for high-impact sectors like fossil fuels and mining.

Incentivising nature-friendly practices
Insurers can encourage clients to adopt nature-positive activities by offering incentives. For instance, reduced deductibles can be offered to clients who conduct ecological assessments or engage in regenerative agriculture.

Supporting nature-based solutions
Insurers can allocate resources and expertise to support nature-based solutions, which enhance ecosystem resilience and reduce the risk of natural disasters. Examples include coral reef protection and mangrove restoration.

Engagement and collaboration
Insurers should actively engage with clients, policymakers, and industry initiatives to promote biodiversity conservation and sustainable practices.