Why insurance companies in India need to start thinking about climate risk
Our co-founder and Chief Science Officer, Dr. Sidhant Pai, was recently interviewed by Rashmi George and Annapoorna Ramanath from the team at Vymo on why insurance companies in India should start thinking about Climate Risks. We’ve included a transcribed version of the interview below!
Interviewer: Why does it make business sense for insurers to go net zero?
Sidhant: While net zero can mean different things in different contexts, it typically refers to driving a company's baseline emissions down to zero (or close to it). This involves a detailed accounting of emissions hotspots within an organization. In the context of an insurance company, an outsized portion of its emissions will be categorized as Scope 3 emissions resulting from the companies and projects it insures.
As regulations tighten and insurers are held accountable for their IAEs (Insurance-Associated Emissions), there will be significant downsides to maintaining insurance portfolios with high emissions intensities.
Insured companies with high carbon-intensity legacy business models are at the risk of having stranded assets that are no longer productive in a low-carbon economy. These risks are called Transition Climate Risks, and they will be passed on to insurers that are not proactively managing their portfolios.
Secondly, climate change will drive sea level rise, droughts and other extreme weather conditions, which will result in unpredictable damage to infrastructure and business operations that are key to the insured business, resulting in more claims and higher costs for insurers. These risks are called Physical Climate Risks. Insurance companies that are looking to future-proof their business models, and stay competitive over the next decade, will need to ensure that they account for and mitigate both these types of risk.
Interviewer: Can you talk a little about the relevant regulatory trends?
Sidhant: We’re in a fast-changing regulatory landscape where regulators are increasingly requiring companies in different sectors to account for and report their CO2 emissions, with the goal of incentivizing them to reduce emissions significantly, if not to NetZero. Financial institutions are already taking major steps to account for their portfolio emissions. Insurance companies will be similarly impacted in the coming years.
Interviewer: Can you talk a little about the future scope for insurance companies in the climate space?
Sidhant: Insurance companies are not immune from the changing market landscape. For instance, consider an insurance company that offers residential homes flood insurance. The estimated premiums are directly related to the probability of a qualifying flood event over the insurance term. Such a company might not realize it, but it has de facto become a climate insurance company. This is because, if it’s insuring a residence over a 30-year period, climate change will undoubtedly impact the probability of a qualifying flood event, and should thus be factored in when estimating the premiums. Savvy insurers should immediately start thinking about these considerations and leverage models that incorporate such climate risks.
India is a large and climatically heterogeneous country with a dense population and thriving economy that is at meaningful risk from climate change over the coming decades. Any company or individual that wants to plan on a timescale longer than 5 years should start considering climate risk immediately. Similarly, instead of continuing to underwrite legacy business models that pollute our atmosphere, insurance companies can develop bespoke climate insurance offerings that future-proof their portfolios and facilitate our transition to a greener Indian economy. StepChange is a climate-tech startup that helps companies and brands accelerate their sustainability journey and transition to NetZero. Learn how we may be able to help your organisation through our website or simply follow us on LinkedIn to stay tuned!
To share this article, use the social icons below: