Underwriting Earth: Nature-positive insurance

Climate change and property insurance

Around the world, there is nearly unanimous concern among insurers about the implications of climate risk on their business. Increasingly, they have begun to act on those concerns through innovation and investment. However, the industry overall has done little to acknowledge, quantify, and help mitigate losses tied to nature risk. The fact is, the natural systems on which our society relies are being challenged, marked by the precipitous decline of terrestrial and aquatic biodiversity.

At stake for the insurance industry is the potential loss of what is called “natural capital”—the natural resources that are grown, harvested, or extracted that enable economic growth. Such losses can not only exacerbate global warming and intensify the impacts of climate change but also can generate financial losses from economic activities that depend on nature for their operations.

This makes nature risk the other side of the environmental risk coin, posing a significant challenge to insurers through their investments and liabilities. As underwriters, insurers will likely be affected by changes in climate and biodiversity and also by transition risks affecting the risks they insure. 

A more proactive stance

The costs of these risks can quickly add up through increased claims, higher premiums, less profitability, lower demand for insurance products, and negative returns from investments. But while more than half of global insurers and re-insurers believe that nature-related risk is material to their underwriting business, nature risk is not yet being widely assessed by underwriters.  

The industry should adopt a more proactive stance—one that positions insurers as enablers rather than dissuaders. The insurance industry has already laid some of the groundwork for addressing nature risk, through many of the very same investments it has made in teams, frameworks, and processes to deal with climate risk. 

Figure 1: Insurance impacts from biodiversity loss

A natural path forward

Insurers will likely need to work through some major challenges as they seek to adjust for nature risk in their underwriting and client relationships. Biodiversity-related risks are often systemic risks that are difficult to measure and come saddled with potential knock-on effects that can vastly increase financial losses—and may render standard insurance practices ineffective. 

Despite these obstacles, the industry likely has the capacity to innovate and evolve—much in the same way that it appears to be transforming to help address climate risks. Most insurers have built teams, risk-identification processes, and other frameworks and processes focused on climate risk. 

These resources and approaches can be extended to nature risk with the appropriate guidance—which now exists due to the Taskforce on Nature-related Financial Disclosures (TNFD) and others. Informed by this work, there are five important ways that insurers can promote investment in biodiversity: natural capital valuation, asset protection, liability reduction, facilitating capital flows from financial markets, and policy advocacy.

Climate insurance as a catalyst for change

Erosion of natural capital presents a challenge: Unlike climate risk, these challenges are systemic and long term, with potentially significant cascading effects that tend to be difficult to quantify and price effectively. 

The insurance industry, however, appears positioned to play a pivotal part in unearthing the complexities of nature risk. Time and again it has been involved in fostering financial resilience and aiding communities to recover, adapt, and evolve from catastrophic events. Leveraging its deep-rooted expertise in the agriculture sector, and by honing its risk assessment and pricing responsibilities, the insurance industry can become a forerunner and ambassador for sustainability.