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World Environment Day: The Role Of Insurers

In June 5, 2019, which is tomorrow, China will be hosting the World Environment Day 2019. Approximately, seven million people worldwide die prematurely each year from air pollution, with about four million of these deaths occurring in Asia-Pacific.

Climate change is set to impact both the life and non-life insurance industries through its direct and indirect effects on human health and the environment. Diseases, injuries and deaths are also set to increase due to increasingly frequent natural disasters. It is unlikely that one would have put climate change at the top of risk list ten years ago. But with recent natural disasters, there is no denying that climate trends of the past decade are a force to be reckoned with. Insurance claims have surged as more and more flash floods, rising rivers, hailstorms, and windstorms pummel the landscape.

Insurance and environmental risks

Risks are often intertwined with the consequences when one risk has a direct impact on others. Consider, for example, water damage and its impact on infrastructure like transportation, buildings, communications, water distribution or supply and storm sewers.

Insurance is a product sold by insurance companies to actors in the market, who then become insurance policy holders. Insurance is a means of protecting the insured against the financial costs of unwanted events, such as storms, floods or spills. In essence, insurance reimburses incurred losses in exchange for prepaid premiums. Notably, states are also involved in property insurance, where the rationale for involvement can be either a very large loss potential or a policy to ensure that property insurance is affordable for all homeowners.

Households, private companies and other organizations can use insurance to safeguard against both damage to property caused by the environment, and liability for damage caused to the environment. Insurance can also be taken to offer protection against long-term environmental damage and liabilities that may not be immediately visible.

UN and Climate Chanage

In 2015, United Nations Climate Change Conference, COP 21 or CMP 11 was held in Paris, France, from 30 November to 12 December 2015. It was the 21st yearly session of the Conference of the Parties (COP) to the 1992 United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Meeting of the Parties (CMP) to the 1997 Kyoto Protocol.

At the Paris Summit (COP 21), the 195 participating States committed themselves to the goal of limiting the rise in global temperature to 1.5 °C. To carry out this mission successfully, global coal production must be phased out by 59% by 2030 and totally abandoned by 2050. Insurers and reinsurers have the power to stop the unbridled evolution of this energy production mode. Currently, they are investing USD31 trillion in the fossil fuel sector. Their decision to withdraw from high-carbon industries could make a big difference.

This is the predominant trend today.

Insurers have faced growing calls from groups concerned about climate change to stop selling insurance to the coal industry. Unfriend Coal, a pressure group, has led these calls, which has been particularly critical of Allianz’s business insuring coal mines in Poland. Insurance companies should be willing to undertake the risk in exchange for an amount of money relatively close to its actual value (the premium), because the law of large numbers makes them able to manage such risks effectively, by making predictable, with reasonable accuracy, the claims they will pay from year to year.

Unfriend Coal's 2017 campaign on insurance, coal and climate change showed that the world's largest insurers and reinsurers had reduced their investment in this fuel.

State Involvements

Over 90% of all deaths from natural disasters are water related, and 99% of deaths from flood from 1975 to 2001 were from low-income groups. In richer countries, total disaster losses are generally less than 2% of GDP, while in poorer countries the figure is nearly 14%.

There are therefore clear, potential benefits for policy makers from taking into account the consequences of policy decisions on the terms and conditions as well as price and availability of insurance for environmental damage and liability. Whiles the overarching polluter pays principle is a fundamental part of environmental policy, few regulatory areas actually specify how to make sure sufficient funds are available in case of damage.

Japan Life Insurance Model

According to Moody, Japanese life insurers remain profitable despite the persistent decrease of interest rates over the last two decades. The efficient strategies for liability management and new product design stand among the solutions considered by local players.

Dai-ichi Life Insurance has decided not to finance coal-powered electric plants anymore. Nippon Life Insurance has also unveiled its decision not invest anymore in these polluting industrial sites.

In Japan, initiatives designed to protect the environment originate solely from insurers. Japanese banks continue to finance this kind of projects like Mitsubishi UFJ Financial Group, Mizuho FG and Mitsui Sumitomo which have respectively invested 4.4 billion USD, 3.3 billion USD and 900 million USD in coal-powered plants during the last three years.

US Environmental Law and Insurance

The United States of America underwent a period of rapid industrialisation and economic expansion. As the scale of the environmental problems grew, it was becoming clear that the common law was inadequate to deal with the size and scope of 20th century environmental problems. The US Congress gradually began to act. Among the many laws enacted is “The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund. The principal aims of CERCLA were the prompt clean-up of hazardous waste sites and the imposition of all clean-up costs on responsible parties.

As environmental awareness began to grow and eventually become a national issue in the US, few envisioned the eventual impact on the global insurance industry. The impact of the environmental and mass tort lawsuits that began in the early 1980s still reverberates throughout the insurance industry. To the extent possible the insurance industry reacted by the best means available to them – policy language.

The European Union

The environmental policy in the European Union (EU) is based on the “precautionary principle” focusing on the management and control of pollution at the source. Also, the “polluter pays principle” is a well-accepted concept and implemented across the EU. Companies have to pay for damage they cause through negligent management of environmental risks.

Parallel to the increasing public awareness and responsibility of the industrial operators regarding environmental contamination, including the obligation for comprehensive environmental risk management, and the liability for compensation of victims and prevention and remediation measures, the European insurance sector plays an important role in exploring solutions through risk dialogue, management (including prevention) and transfer solutions where appropriate. In Europe, the insurance industry has a long lasting and influential position in developing and implementing risk transfer approaches, including a variety of specific insurance solutions for environmental liability risks. The most important insurance solutions are General Third Party Liability Insurance and Environmental (impairment) Liability Insurance.

Nevertheless, at the international level, several insurance and reinsurance companies such as Allianz, Axa, SCOR and Zurich have decided not to propose covers for polluting sites anymore. Allianz’s rivals, including Axa and Zurich, have policies designed to make it harder for coal companies to buy insurance cover. SCOR has announced new initiatives in the field of environment protection. At the level of its investments, the French reinsurer has decided to sell all the shares it holds in the companies whose revenues derive more than 30% of thermal coal. This limit was previously set at 50%. In terms of underwriting, the group is intensifying its efforts to fill the protection gap of regions vulnerable to climate change. SCOR also ensures that it will no longer offer insurance and reinsurance policies to polluting industrial businesses. In this area, coverage will henceforth be limited to the only projects that would benefit local workers and communities. This initiative is to compel such industries to reduce pollution.


Environmental change brings uncertainty and ambiguity into historical pricing process because past events are no longer a reliable predictor of future events. Insurers can be important partners for cities in mitigating economic losses to communities, businesses and individuals. Insurance could also be a useful tool in adaptation process towards the global environmental change.


📷Author: Gideon Sarfo


Place of work: Tri-Star Insurance Services Gh. Ltd.

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