{"id":11456,"date":"2016-11-04T13:07:05","date_gmt":"2016-11-04T17:07:05","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/insurance-industry-vs-climate-change-early-adopters\/"},"modified":"2016-11-04T13:07:05","modified_gmt":"2016-11-04T17:07:05","slug":"insurance-industry-vs-climate-change-early-adopters","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/insurance-industry-vs-climate-change-early-adopters\/","title":{"rendered":"Insurance industry vs climate change: early adopters"},"content":{"rendered":"

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Munich Re is one of the world\u2019s largest reinsurers with revenue of EUR 50bn and total assets of EUR 277bn (2015 Annual Report). Reinsurers essentially act as insurers for insurance companies that insure businesses and individuals. If insurance industry sounds boring, then reinsurance is like boring squared, so why even discuss it? Well\u2026 what if I told you that Munich re has been one of the earlies believers in anthropogenic climate change and warned the world about its consequences as early as in 1973? Interested? Be my guest.<\/p>\n

First, why would insurers care at all about climate change? Let\u2019s examine the graph below[1]<\/a> (Swiss Re research) \u2013 seems like recently cost of insured weather catastrophes has been soaring. Just as a reminder, insurance companies make money on not spending their earned premiums on payouts against insured events, which directly hit their pockets.<\/p>\n

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Really? As Warren Buffet, whose Berkshire Hathaway derives a significant portion of its profits from insurance business, puts it in his letter to shareholders[2]<\/a>, as insurance costs increase, they are matched by rising premiums so \u201cthe likely \u2026 effect on Berkshire\u2019s insurance business would be to make it larger and more profitable\u201d. However, as more countries acknowledge negative impact of climate change and pledge their support (incl. 154 US corporations at the November 2015 conference in Paris[3]<\/a>), introduction of new energy and sustainability initiatives could result in decreasing premiums for some companies[4]<\/a>. Furthermore, changes in climate make it increasingly difficult to measure risk. As Andreas Schraft, managing director for catastrophic perils at Swiss Re (another major reinsurer) puts it, \u201cWhat we are concerned about is that if risks become too big, they may become unmeasurable\u201d[5]<\/a>. In addition, in its report \u201cClimate Change-Related Legal and Regulatory Threats Should Spur Financial Service Providers to Action\u201d Standard & Poor\u2019s suggests that the reputational, regulatory, fiscal and legal risks on the short-to-medium term time horizon may be greater threats to insurers than direct costs of covering catastrophes[6]<\/a>.<\/p>\n

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Alright, since it considers climate change such a threat, let\u2019s see what Munich Re have done to address these fears:<\/p>\n