The need to mitigate climate risk has spurred innovation in just about every sector of the economy, from manufacturing and energy to retail, construction, banking, agriculture, and technology. Now the insurance industry is adopting a similar mindset – and with good reason. As the Financial Times reported last year, climate risks are projected to add more than $180 billion to yearly property insurance premiums by 2040.
Swiss Re Institute predicted that climate-related risks would account for just more than one-fifth of the overall rise in property premiums over the next couple of decades. The combination of severe wildfires, winter storms, and floods made 2021 one of the costliest years ever for natural catastrophe insurance. Things haven’t improved much in 2022, as Europe’s worst heat wave since the Renaissance wreaked havoc on much of the economy.
These kinds of events have forced insurance companies to rethink how they do business. One of them, Rhode Island-based business insurer FM Global, recently announced that it will establish about $300 million in “resilience credits” to help policyholders finance climate resilience solutions that can better protect their property against wildfire, floods, hurricanes, and similar catastrophes.
In a press release, FM Global said the “first-of-its-kind” credit has the potential to help policyholders reduce total loss expectancies related to wind, flood, and wildfire exposure by more than $120 billion. The credit will be applied as a 5% premium offset against FM Global insurance policies with renewals or anniversaries between Oct. 1, 2022, and Sept. 30, 2023.
“With rising business disruption due to climate risk and companies increasingly focused on ESG strategies, the resilience credit is a potential game-changer for our clients, many of which are key contributors to the economy and society,” FM Global President and CEO Malcolm Roberts said in a statement.
“This credit is made possible through our mutual ownership structure and risk engineering focus to support their business continuity and climate risk mitigation efforts.”
Credit is considered a big and innovative step in the industry because it goes against the grain of how insurers typically operate. As the Wall Street Journal reported, one reason FM Global can provide this kind of credit is that it is owned by its policyholders, which gives the firm more latitude than publicly traded insurers to sacrifice upfront revenue with the expectation that it will save on lower claims costs over the long term.
FM Global is not the only insurer to bolster its loss-prevention services, or even to use the promise of lower premiums to encourage policyholders to adopt better climate strategies. Zurich Insurance Group has expanded its North American Resilience Solutions unit by more than 10% over the past couple of years. And insurers have long provided discounts to policyholders that install equipment and other solutions to protect their facilities and property.
FM Global’s main innovation is that the credit it offers lets policyholders finance unspecified improvements. Robert Hartwig, a professor of risk management at the University of South Carolina business school, told the WSJ that he expects other insurers to “quickly emulate” FM Global’s program if it proves to be successful.
Meanwhile, climate advocates and government entities also are pursuing strategies to help the insurance industry do more to reduce carbon emissions.
In early September, New York Gov. Kathy Hochul announced $6.5 million in public funding to support insurance innovation for climate-technology solutions, with a focus on developing new insurance policies and products to promote the adoption of clean technologies. The program will be overseen by the New York State Energy Research and Development Authority and provide funding for products that manage the financial risk associated with climate change.
“By promoting innovative policies that will create more sustainable climate technology, we are taking bold action to meet the challenges of climate change,” Hochul said in a press release.