The IPCC Climate Change Report and Implications for Insurers

October 11, 2018 by

A report out earlier this week from the Intergovernmental Panel on Climate Change doesn’t say a whole lot about insurance, but the implications for the industry are hard to ignore.

Chief among those implications is the possibility that society will take the stark warnings in the report to heart and demand abrupt changes that may leave behind those that continue to invest in fossil fuels and fail to embrace the opportunities presented by clean energy.

Institutional investors, such as insurers, could face transitional risks, where governments and citizens, fearing potential catastrophic impacts of climate change, respond aggressively to decarbonize the economy, and assets in fossil fuels become stranded investments as the sector plunges on the markets.

That’s the warning from one high profile regulator.

“The report is further confirmation of the potential risks that insurers and investors face in regard to their investments in the carbon economy,” California Insurance Commissioner Dave Jones, who has been looking for ways to nudge insurers out of fossil fuel investments for years, told Insurance Journal. “The risk to those investments is that markets and governments will move aggressively to decarbonize the economy, in which case the value of those assets could drop significantly.”

Reports from the IPCC, an international body that assesses climate change established by the United Nations Environment Programme and the World Meteorological Organization, carry a lot of weight.

The latest IPCC report examines the potential of limiting global warming to 1.5º Celsius, a half-degree less than the oft-cited 2º C target called for in the Paris Climate agreement.

The Special Report on Global Warming of 1.5ºC, which was approved by the IPCC on Saturday in Incheon, Republic of Korea, is expected to be a key part of the scientific input into the Katowice Climate Change Conference in Poland in December, when governments are expected to gather to review the Paris Agreement and tackle climate change.

The report highlights climate change impacts that could be avoided by limiting global warming to 1.5ºC compared with 2ºC.

By 2100, global sea level rise would be 3.9 in. lower with global warming of 1.5°C compared with 2°C, while the likelihood of an Arctic Ocean with no sea ice in summer would be once per century compared with at least once per decade, the report shows.

For those who believed limiting warming to 2°C was a bit ambitious, a 1.5°C target seems to be a tremendous stretch considering we’re nearly there.

According to the report, human-induced warming reached 1°C above pre-industrial levels in 2017. The report, which defines global warming as an increase in combined surface air and sea surface temperatures averaged over the globe, expresses warming relative to the 1850-1900 timeframe.

The report also lays out what must be done to get limit warming to only a half-degree more:

“If all anthropogenic emissions (including aerosol-related) were reduced to zero immediately, any further warming beyond the 1°C already experienced would likely be less than 0.5°C over the next two to three decades (high confidence), and likely less than 0.5°C on a century timescale (medium confidence), due to the opposing effects of different climate processes and drivers. A warming greater than 1.5°C is therefore not geophysically unavoidable: whether it will occur depends on future rates of emission reductions.”

That’s not lost on Jones.

“The recent IPCC report underscores the extraordinary changes that will have to occur in order to keep global temperature rise below 1.5ºC,” Jones said.

Jones last year established the Carbon Risk Initiative, a database that includes information on the amount of oil, gas, coal and utilities investments held by insurance companies, and whether the insurers have divested from thermal coal, the amount of thermal coal divested and any future commitments to divest. He’s also called on insurance companies to voluntarily divest from thermal coal investments and required insurers with more than $100 million in annual premium to disclose publicly their investments in fossil fuels.

Jones’ has continued to harp that insurers must act soon, despite indications in past reports that the real effects of climate change are a ways off.

The new IPCC report changes any perceptions that the impacts of climate change are not imminent.

Not only does the report state the effects of climate change are already being felt around the world, in the form of more severe storms and drought, but that more consequential effects may start being felt as soon as 2030.

The year 2030 is a short 11 years away. That was one takeaway for Alison Martin, group chief risk officer and a member of the executive committee at Zurich, which last month issued a report outlining how businesses should prepare for the physical consequences of a warming planet.

“Even if you don’t believe in climate change, enough people, enough policymakers, enough companies are going to be reading this report and saying, ‘We don’t want to be in this world,'” Martin said.

For a good recent example of society reacting quickly to a perceived threat or wrong, just look at the prevailing attitude toward plastic straws. When the amount of plastic straw usage was highlighted over the past year, with figures like those indicating that more than 500 million plastic straws were being used daily in the U.S., and those straws were polluting the ocean, local government after local government quickly moved to ban plastic straws.

“We’ve seen how quickly consumer opinion could shift,” Martin said. “As a responsible risk officer, board member, shareholder, you need to think about that.”

She said insurers should be thinking about not just their fossil fuel investments, but also be looking at where their liabilities are as well as the opportunities that the growing clean energy can provide.

“If an insurance company isn’t thinking about its business model in five, 10, 20 year’s time, then I think it’s taking a significant risk,” Martin said.

Sue Reid, vice president of climate and energy for Ceres, a sustainability leadership advocate that has for years hounded the industry to do more to battle climate change, called the new IPCC report a “striking wakeup call to action.”

The report finds that limiting global warming to 1.5°C would require “rapid and far-reaching” transitions in land, energy, industry, buildings, transport and cities, while global net human-caused emissions of carbon dioxide (CO2) would need to fall by 45 percent from 2010 levels by 2030, and reach “net zero” around 2050.

“We need to basically double our efforts and redouble our efforts,” Reid said. “It’s about speed and scale now.”

She added: “The insurance sector does have a keen interest in attaining 1.5°C and limiting temperature rise to no more than that given everything that is at risk on both the product side and the investment side.”

The report also takes into account the possibility of removing CO2 with technologies.

One of the report’s authors noted that limiting warming to 1.5ºC is possible within the laws of chemistry and physics, but that doing so “would require unprecedented changes.”

Jones believes it can it be done. And as an insurance regulator, that’s what he says concerns him.

“I think there’s no question that the breaks could be put on, and it’s the risk of that that has caused me to ask insurance companies to consider the potential impacts of that transition on thier investments,” Jones said.

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