Insurers are no strangers to climate risk, given the billions of dollars carriers lay out annually to clean up property damage and prevent future losses from windstorms, flooding and wildfires. Yet as global temperatures continue to rise and weather patterns keep shifting, societal expectations about the role of insurance in controlling environmental exposures is rapidly evolving as well, putting the industry squarely on the hot seat.

The industry's call to action

Insurers are coming under increasing pressure from a wide range of stakeholders to shift their emphasis from traditional risk transfer, disaster recovery and pre-event adaptation efforts to more proactively address the problem of climate change at its most likely source — that is, by limiting carbon emissions. Consider the following developments cited by insurer chief sustainability officers or their equivalents in a recent series of interviews with the Deloitte Center for Financial Services:

• Regulators and legislators on the state, federal, and global levels are demanding additional data, greater disclosure, and more precise risk assessment on both the asset and liability side of insurer balance sheets.
• Rating agencies and independent sustainability assessment firms are raising the bar as well, seeking greater transparency on insurer climate risk exposure while scrutinizing their modeling tools, mitigation plans, and strategies to decarbonize underwriting and investment portfolios.
• Institutional investors are often performing their own assessments of individual company efforts to cut climate risk before committing capital to insurers.
• Advocacy groups are calling for greater insurer commitments and more tangible results in closing the insured protection gap for climate-related natural catastrophes, as well as adopting more environmentally-friendly policies internally and externally.
• Policyholders and employees are becoming increasingly aware and concerned about their insurance company's climate risk policies and activities.

To some extent, this heightened attention has been prompted by the change in administrations and control of the U.S. Senate, with climate risk being put on the front burner. But even before the leadership shift in Washington, state insurance departments had started raising red flags about the potential damage climate risk could cause to company balance sheets on both the business and asset side. A survey of state regulators two years ago by the Deloitte Center for Financial Services found that one-third of respondents could not say for sure whether insurer risk models were up to the challenge of capturing and testing climate-related risks, while few said they felt insurers were largely or fully prepared to deal with rising climate exposures.