Insurers were put on the hot seat during an extraordinary United Nations summit on the industry's role in combatting climate change, where Secretary General Ban Ki-moon pleaded with carriers from around the world to leverage their vast resources and risk management expertise to bolster sustainable development and their bottom line.

The U.N. Insurance Sector Summit took place one day before Pope Francis released his historic call to action on climate change, which the secretary general characterized as "the defining issue of our time." During his keynote address, he noted that while insurers are concerned about being disrupted by emerging technologies and non-traditional competition, climate change is threatening to disrupt the entire planet's ecosystem and economy, and thereby should be one of the industry's prime strategic concerns.

Play a bigger role to promote 'climate smart development'

The U.N. Summit—which served as the concluding session of the 2015 Global Insurance Forum, held annually by the International Insurance Society—marked the first time the secretary general had addressed a major insurance gathering. He noted that this demonstrated how critical he believes insurers will be in the U.N.'s efforts to promote more weather-risk-savvy development.

Still, while emphasizing how it was "encouraging to see the commitment of the insurance industry to advance the global sustainability agenda," he suggested that insurers could and should play a much bigger role to promote "climate smart development."

"The insurance industry rose to the challenge in last year's U.N. Climate Summit by announcing a commitment to double its climate-smart investments by the end of 2015," he said. "We must ensure that commitments made at the Summit are now implemented."

Build a more resilient, climate-smart economy

Noting that insurers already make up the front-line of defense in recovery efforts for many weather-related catastrophes, he urged the industry to go beyond just insuring and repairing the damage from such events. Indeed, he said the industry "can be at the center of efforts to build a more resilient, climate-smart economy. You have seen the tragic human toll rise from extreme weather events. You know the staggering economic price tag. I call on you to show even stronger leadership."

He suggested that insurers speak out more forcefully with local governments about the risks climate change poses in a growing number of areas prone to flooding, drought, wildfires and windstorms, while offering innovative solutions to manage and insure these growing exposures.

Climate change marchers

Thousands marched through central Oslo, Norway on Sept. 21, 2014, to support action on global climate change. (Ryan Rodrick Beiler / Shutterstock.com)

Beyond the lofty rhetoric, what exactly were insurers asked to do, and how might they proceed?

On the investment side, a number of those at the Summit expressed skepticism about the practicality and wisdom of "decarbonizing"—that is, divesting their carbon-based energy stock holdings, given their responsibility to maximize returns.

Think strategically

"I know you have your own fiduciary duties and priorities," the secretary general acknowledged. "But I urge you to think more strategically about the impact climate risks have on your business and your profitability, how such risks can be reduced at the source, and to adjust your investment strategies accordingly." He concluded with a call to "please invest wisely in the long-term interests of the planet, and help supply the capital required to transition to a lower-carbon economy."

A number of speakers and attendees suggested that the industry could significantly increase its relatively small stake in the growing renewable energy sector (including solar, wind, and hydro-power infrastructure projects), as well as promote sustainable construction, retrofitting, and rebuilding practices by offering more "green" insurance policies incorporating risk management advice and premium incentives.

Insurers in attendance were also urged to support a number of global efforts to collaborate on climate change mitigation. The secretary general said 2015 is a critical year for such initiatives, culminating with a December conference in Paris to finalize a new international agreement on climate change containment. The pact was characterized as a "sustainable development business model for the next 15 years," of which insurers are expected to play a critical part as risk assessors, mitigators, underwriters, and investors.

Other efforts underway include the recent launch of the Insurance Development Forum, described as a "new institution to promote resilient growth," as well as the 1-in-100 Initiative, which seeks to bring advanced analytics and risk modeling tools employed by the industry to the much wider financial community, and thereby facilitate risk-sensitive investment and stress testing to brace for a potential "event of the century" loss.

Importance of public-private partnerships

The importance of public-private partnerships was also repeatedly cited during the Summit, as were efforts to engage wider participation by the broader capital markets to help cover climate-related risks—such as the rapid growth of insurance-linked securities in the form of catastrophe bonds.

Containing climate change and promoting sustainability will ultimately come down to proactive risk management, which is a core function for insurers. The industry has the expertise, analytical capabilities, and business model to be a game-changer in this global effort. It's also a bottom line issue for insurers—a chance not just to "do the right thing," but to improve profitability by limiting disaster losses and capitalizing on alternative energy investment opportunities.

European insurers have been outspoken leaders in addressing the climate change challenge for quite a few years. Will more U.S. carriers follow their lead, going beyond short-term mitigation and adaptation strategies to become advocates in tackling the root causes of climate change, before it's too late to head off a worst-case scenario?

Sam J. Friedman (samfriedman@deloitte.com) is insurance research leader with Deloitte's Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.

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U.N. urges insurers to raise their game on sustainability

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