Underwriting Climate Insurance

Damages paid by insurance companies to cover catastrophic damage amounted to $140 billion in 2024. The recent acceleration of climate change highlights the role of the insurance industry. Companies are revising their business models to integrate ESG criteria into their processes, products and services for consumers and businesses, with the aim of contributing to the transition to a more sustainable and resilient economy.

The challenge is to manage the risks associated with climate change, promote responsible behavior, create a positive impact on society and the environment, in an evolving regulatory framework that foresees stringent financial disclosure and reporting obligations.

As the industry waits for the Omnibus I package with new regulatory proposals from the European Commission aimed at simplifying legislation, insurance companies are operating as institutional investors with investment strategies that are more attentive to sustainability profiles, contributing to the transition to a low-carbon economy. Research by the Bocconi Baffi Research Center’s INSURET Observatory shows a 20% reduction in premium collection for insurance companies that invest in the coal sector.

At the same time, firms are integrating ESG criteria into their insurance product portfolios with the creation of new life insurance solutions, with a financial component that focuses on investments with sustainability characteristics to meet the interests of “impact-first” investors, who are ready to accept lower returns if the assets in question have a positive environmental or social impact.

More recent is the offer of services for the prevention of climate risks and insurance products that encourage a more careful use of resources, such as home insurance policies with efficient consumption — leading to lower premiums — or pay-as-you-pollute car insurance. The 16% increase in premium collection for these products reveals a target of "sustainable" customers and a role for the industry in "educating for sustainability". However, ANIA, the Italian insurance industry association, highlights so-called "greenhushing" going on in some companies, which would rather not communicate their sustainability initiatives for fear of being accused of greenwashing due to regulatory complexities involved.

The role of the insurance industry is not limited to the retail segment; in fact, from this year, companies are required by the legislator to submit offers to provide coverage for the assets of many Italian companies as well as those that have a permanent establishment in the country. The 2024 Budget Law (no. 213/2023) introduces the obligation for private companies to buy insurance against catastrophic risks, such as earthquakes, floods, inundations and landslides.

It is complex to structure offers that can suit the industry makeup of the Italian economy distributed across territories with dissimilar characteristics and equally peculiar activities. You need to have specialized skills, rely on technological innovation and build a distribution network that that can act as a risk manager for SMEs.

Public-private complementarity is the most suitable choice when it comes to the climate. In the case of micro and small enterprises, examples implemented in rural economies can be replicated, such as the “Global Index Insurance Facility” program, promoted by the World Bank for the development of index-based insurance selling in developing countries. This way, millions of farmers in Africa, Asia and Latin America have had access to insurance solutions that would have otherwise been inaccessible to them.

The solution proposed in the Observatory's research study is to evaluate the hypothesis of a public-private integration that provides traditional and indexed insurance coverage. Parametric insurance with low amounts favors quick payouts in the event of a calamity and prevents damage from interruption of activity and loss of economic assets.

Sustainability is not just an environmental issue, it is also a matter of social sensibility and corporate governance. Making firms more attentive to and covered by climate risk represents a commitment to productivity, employment and worker wellbeing. And it is equally important to make customers more aware of climate change and the insurance products they buy, so it is also a question of language and communication.