“We are fast approaching temperature levels where insurers will no longer be able to offer coverage for many risks. The math breaks down: the premiums required exceed what people or companies can pay.”
This is not just the claim of climate activists. It is the measured view of Günther Thallinger, a member of the board at Allianz, one of the world’s largest insurance groups, and until recently chair of the UN-convened Net Zero Asset Owner Alliance, which collectively represents US$9.4 trillion in assets.
Thallinger’s Linked In post caused a stir when it was published in March, more for the stark clarity of his message than its novelty. Although insurers are still attracting criticism for the slow pace of their withdrawal from fossil fuel underwriting, there is plenty of evidence the industry ‘gets’ climate risk.
With insured losses from extreme weather calculated by Swiss Re at US$135 billion in 2024 (the fifth consecutive year they exceeded US$100 billion), the sector is investing heavily in the resources needed to better understand, mitigate and adapt to the physical risks of climate change.
This includes exploring new ways of predicting where and how future climate-related risks will fall, such as using geospatial data to map coastal erosion or flood risks against the location of insured properties.
New research highlighting that impact of groundwater extraction on the weakening foundations of major cities suggests ongoing investigation and investment will be needed to help the insured and the insurers to come to terms with climate-related risks to physical assets.
Beyond climate
But while climate might be the biggest threat for many insurers, there is a similar story to be told across a wider range of environmental, social and governance (ESG) risks. And some of these may be even harder to measure and model, making their impacts tricker to predict, leaving insurers to search urgently for data on which to base their future premium calculations.
Recent attacks on Marks & Spencer (M&S) and other UK food retailers have put cybersecurity back in the headlines, for example. Cyber insurance has been a strong growth sector for the industry, with firms such as Beazley growing market share through specialism.
The Financial Times has reported M&S could claim as much £100 million under its cyber insurance policies, having lost £60 million in revenue after the attack left it unable to accept online customer orders for three weeks – not to mention the £1.3 billion hit to its market capitalisation.
The firm’s insurers are expected to pay out in full – even if the cause is traced to external vulnerabilities. But M&S’s premium could double from its current £5 million level depending on how its insurers view the robustness of its remediation measures.
Insurance group Hiscox revealed this month that 70% of UK businesses experienced more cyberattacks in the past 12 months compared to the previous year, partly driven by the increased vulnerabilities arising from hybrid working arrangements. Separately, fellow insurer Howden estimated £44 billion in revenue has been lost by UK businesses over the past five years from cybersecurity breaches.
Insurance firms have responded to the surge in cybersecurity threats – the frequency and sophistication of which has also been fuelled by geopolitical tensions – by offering both advice and policies.
The outcome of the M&S incident is likely to see a flurry of activity, but to attract market share on a long-term basis, insurance firms will need to obtain detailed and comprehensive information on the cybersecurity policies and procedures of prospective clients.
Increased regulatory attention to the operational resilience and cybersecurity risks of financial institutions has also led to a reappraisal of policies and processes in that particular sector. However, insurers will need to cast their information net much wider to protect their clients and their bottom lines.
Trouble at the top
While cyber insurance is a relatively new and fast-growing product line, directors’ and officers’ (D&O) insurance is a staple of the business insurance market, covering senior staff for costs and compensation when claims are made against them in the conduct of their duties.
As noted in WTW’s latest annual global D&O survey, “new threats are emerging, and insurance decisions are not always keeping pace with evolving exposures”. In particular, the insurance broker flagged social risks as increasing notably over the past five years, with 62% of respondents citing breaches of human rights within or by business operations as a very or extremely important concern, rising from 23% in 2021.
This sharp jump is ascribed partly to shifting regulation, but also to a growing acceptance that integration of social risk factors leaves firms “better positioned for sustainable growth and resilience in an evolving business landscape”.
Mishandling of relationships with investors, employees, customers, regulators and the wider community can carry an increasing risk of reputational and financial losses, especially when leading to claims against directors.
Other recent studies from Allianz and Gallagher Specialty also cite insolvency, civil litigation, regulatory compliance and artificial intelligence as prominent concerns, reflecting the evolving nature of risks to companies and their senior officials in an uncertain and fast-changing business environment.
On the supply side, insurers are taking an increasingly selective approach to the D&O market. In some respects, their approach bears comparison with home insurance in regions impacted by climate-related extreme weather, exiting at renewal if pricing fails to reach benchmarks.
But there are also opportunities for specialists to thrive if they are able to effectively model the risks that are driving claims against directors and officers.
Granularity that delivers insight will be mission critical. As a provider of ESG assessments covering 22 topics across more than 70 metrics (aligned with international standards), we at The Disruption House know from experience the depth of data required to benchmark firms across sectors to better understand and address their key business risks.
Reappraisals and innovations
As Allianz’s Thallinger noted, climate risk threatens at the “very foundation” of the financial sector. “If insurance is no longer available, other financial services become unavailable too. A house that cannot be insured cannot be mortgaged,” he noted.
But the insurance sector can leverage its understanding of climate risk and its pivotal, facilitating role in the finance industry to develop new product lines that protect clients, also supporting their future sustainability and resilience.
Recent examples include new products from Howden’s DUAL unit – Energy Efficiency Retrofit and Environmental Investment Protection insurance – which will help to secure the funding needed to improve the environmental performance and protect the value of property assets.
Of course, the climate is not the only thing that is changing insurers’ business models. Similar reappraisals and innovations are required across the product range. Some of the risks facing insurers and their clients are new, but the necessary response speaks to a timeless principle: the better you understand your customers’ business, the better placed you are to keep it.
Identifying the strengths and weaknesses of clients across their ESG performance is not just possible, it’s essential. Just as banks are now realising they can offer lower rates of interest to firms based on the quality of their sustainability governance and risk management, so insurers will be in a position to offer lower premiums to firms they know to represent lower risks.
Perhaps just as importantly, they’ll also be better placed to understand the business dynamics that clients are facing, and to develop new solutions to address evolving needs.
