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It’s time to prepare for the climate of the future

Insurance played a more prominent role than ever at New York Climate Week, grappling with the urgency of both mitigating and adapting to climate change.
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By Amy Barnes , 

Head of Climate & Sustainability Strategy

09/10/2024 · 5 minute read

As New York Climate Week (NYCW) 2024 came to a close, Storm Helene caused devastation in the Southern US claiming more than 200 lives, while flooding in Nepal killed more than 240 people. These events, and many others, add to a sense that the urgency of adapting to climate change cannot be understated.

In the past, people hesitated even to talk about adaptation, fearing that it was tantamount to admitting failure on efforts to mitigate climate change. That has mostly changed. After a year in which the US saw 28 billion-dollar weather events, adaptation is rightly high on the agenda.

Of course, mitigation remains as important as ever. On both fronts, my discussions in New York during climate week centred on the critical role of insurance.

Both mitigation and adaptation are essential to building a resilient future. Furthermore, resilience should be framed in terms of asset level issues and system level issues. As the diagram shows, assets exist within these systems. Having a structured understanding of risk allows organisations to see how and where mitigation and adaptation efforts, including decarbonisation, new technologies, and innovations, can build resilience. 

We know that progress in mitigating climate change depends on certain technologies reaching scale, such as battery storage, small-scale nuclear reactors, and hydrogen. This, in turn, depends on the ability of banks to lend – and lenders generally need the risks of projects to be well understood and managed to do so. By supporting risk management and transfer, the insurance industry can be a vital lubricant of the financial services system.

In an ideal world, insurers would like a decade’s worth of data to price the risk of a technology. However, with new technologies, this is not always available. The need for adaptation means we cannot afford to wait for historical data to be generated, we need to be creative about data sources and pricing models. Insurers have found ways to proceed without historical data before – for example, when cars first started driving on motorways.

During New York Climate Week, Marsh McLennan hosted a roundtable event that brought together the insurance industry with banks, venture capitalists, and asset managers. The group discussed the opportunity insurers had to help derisk projects, to be more creative about finding and sharing data, and to find ways to innovate in the face of limited data.

However, it is important to note that the increased uncertainty associated with pricing risks arising from new technologies may sometimes prove costly in the short term will the risk understanding matures.

With adaptation, we need to improve our ability to demonstrate the return on investment of adaptation measures.  Even with this insight some businesses are struggling to fund resilience. At one event, I heard a real estate developer explain that their tenants are not (currently) willing to pay more for resilient buildings, and their insurance premiums are not going down sufficiently to justify the cost.

While understandable, this perspective ignores the fact that adaptation is a long-term investment that will improve future insurability of the asset and likely contain future premium increases.

A further advance that is needed to drive adaptation is a standardised way to measure resilience. With mitigation, it doesn’t matter where in the world you reduce carbon emissions – the impact is the same. But adaptation often involves hyper-local issues. This makes judging the effectiveness of adaptation efforts particularly challenging.

Marsh McLennan is supporting groups who are working on new approaches to this challenge.

We are using our risk pricing, risk engineering, and climate expertise to support organisations in making their case for investing in adaptation: In our recent survey of private-sector organisations, 83% of respondents said they had analysed their climate risk, but nearly half are assessing risks only qualitatively and not also quantitatively.

It was clear from discussions in New York that only the most sophisticated actors are thinking about resilience beyond their own assets when assessing the risks from the climate of the future. Many are still focused on the resilience to current conditions.  However, for the people at NYCW it is well understood that resilience against current conditions will not be enough.

For example, Sarah Kapnick, Chief Scientist at the National Oceanic and Atmospheric Administration (NOAA), shared impactful modelling about future risks to the 87 million people who live in coastal regions of the US. While NOAA invested $562 million in coastal resilience projects last year, this is dwarfed by the $15 billion of funding proposals they received.

Still, there was a sense of optimism that change is possible – for example, from a panel of venture capitalists discussing opportunities in adaptation technology.

Everywhere I went in New York, I sensed a growing recognition that the insurance industry needs to be at the table. The tagline of NYCW was “It’s time”, and our industry, needs to be ready to support the unlocking of investments required to mitigate and adapt to the changing climate.

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