How climate change could destroy P&C industry’s house of cards

The insurance industry is in climate change debt, and clients are the ones paying the price. 

Just look south toward California, Florida, Louisiana and Texas, to see the toll severe natural catastrophes are taking on citizens. And P&C insurers in those States are rubbing salt in those wounds by withdrawing coverage for homeowners and certain lines of business. 

But a rising trend of pulling back on the very promise of insurance — i.e., that your clients’ risks will be covered in times of disaster — will only get worse. And it’s only a matter of time before Canadian insurers tread the same path as our neighbours to the south, experts warn. 

“We’re playing Jenga here with insurance coverage. It’s going to have very serious consequences,” says John Vaillant, speaker at IBAOCon’24 in Toronto.  

As he puts it, climate change is a debt the industry can’t ignore. 

“These floods, fires, heat waves and intensifying storms are the Bank of Nature’s repo men collecting on that debt, repossessing our homes, our cars, our coastlines, even our very lives,” says Vaillant, a journalist and the best-selling author of Fire Weather: A True Story from a Hotter World, which tells the story of Fort McMurray’s multi-billion-dollar wildfire in 2016. 

“One way to understand our current economic system is as a heavily leveraged business, built on debt powered by fossil fuels and leveraged against the future of almost all living things,” he says. “And if we understand CO2 [and fossil fuels] as debt, then heat is the interest on that debt.” 

And any inaction by the insurance industry means worsening financial consequences in the form of mounting claims, increased premiums and eventual loss of coverage options or outright withdrawal.  

In effect, he says, ignoring climate change could upend insurance — if the industry doesn’t realize it has a role to play in the climate crisis.  

Running up a debt 

Of course, it’s not just this industry that’s got a climate debt. Certain sectors in Canada, like oil and gas, are major contributors to CO2 levels.  

All industries, including insurance, are in the business of making money. But the insurance industry in particular faces an interesting conundrum: if it continues investing in, or providing coverage for, fossil fuel-driven sectors, it could jeopardize its own long-term financial stability. 

“There’s a troubling irony in the fact that many of our pensions, and the insurance industry’s own holdings, are invested in [the oil and gas] industry,” says Vaillant. 

Vaillant quoted writer and futurist Alex Steffen to paint the picture of the potential cost climate inaction will pay out to clients.  

“[Steffen] calls it ‘predatory delay:’ a deliberate slowing of change to prolong a profitable but unsustainable status quo, whose costs will be paid by others, including the people who are trying to buy insurance.” 

The crossroads 

It’s only a matter of time, he says, before the protection gap trend that’s plaguing our southern neighbours makes it to Canada. But there is a life-saving and money-saving strategy that aligns with the industry’s interests of protecting their clients.  

OSFI’s Guideline B-15: Climate Risk Management requires insurers to assess and disclose their climate-related risks, including the measurement of insurance-associated greenhouse gas emissions. 

But the industry also has obligations to its clients, and enhancing climate literacy is one place where they can step in.  

“When it comes to advising and serving Canadians seeking insurance coverage, you have a special role to play in these extraordinary times,” says Vaillant. 

Making insurance customers climate literate means providing them with the knowledge and tools to understand how climate risks impact their insurance coverages, premiums, and overall risk exposures. 

“It’s likely that many of your customers are not well informed on these matters, and that many more are being actively misinformed,” Vaillant says. “Climate literacy can save lives, and it can also save money. It seems to me that this should be a basic for the insurance industry and for all of us going forward.” 

Feature image by iStock.com/Bryngelzon