As the economy transforms towards a net-zero future, insurance can play a vital role in addressing climate- and nature-related issues through its offerings and business strategies. McKinsey recently spoke to Christie McNeill, a partner in the Boston office, about how insurance companies can adapt to rising climate risk and help achieve a more resilient future.
McKinsey: Climate change and sustainability have become top agenda items for insurers in the past several years. What do you see on the horizon for 2023 and beyond?
Christie McNeill: Insurers have been grappling with the impacts of climate change and rising physical risks for many years. It is clear that in this decade, decisive action is necessary to reverse warming trends and put us on a pathway to avoid a climate disaster. Many insurers are taking this seriously: they are helping to reduce their company’s direct carbon footprint and support the net-zero transition via their underwriting and investment portfolios. Leaders in the sector recognize this as not only a societal imperative but also a major business opportunity. They are building capabilities and offerings to help catalyze the flow of trillions in capital into decarbonization across sectors.
So far, attention has rightfully been on emissions and limiting warming to 1.5 degrees.1 In 2023, I hope that in addition to continued focus on net zero, we see more concrete action on adaptation, an area to which the insurance sector has unique capabilities to contribute and in doing so to improve business performance.
McKinsey: How can insurers act on adaptation?
Christie McNeill: First, it’s important to recognize that even with ambitious decarbonization, the impacts of climate change on lives and livelihoods around the world are expected to accelerate in the coming decades. Race to Resilience estimates that even on a 1.5-degree pathway, by 2050, half of the world’s population will be exposed to climate hazards, including severe hazards and water stress. Much more investment and focus are needed to increase resilience against these coming impacts.
Incentivizing long-term resilience has traditionally been challenging for the insurance sector. Policy contracts are typically one year whereas climate change plays out over decades. Action is often required at the community level whereas policies are held by individuals. While these and other obstacles will likely remain, insurers will need to invest in bolder innovation and solutions if they want to move the needle on adaptation and promote the resilience of populations as well as their own balance sheets.
This could include research to quantify the impacts of resilience measures on reductions in losses and policy design to incentivize these investments; using balance sheet capital to invest in resilience infrastructure; accelerating underwriting in fast growing adaptation technologies, such as microgrids, climate resilient agriculture, and supply chain analytics; and public-private partnerships to enable insurance purchasing at the community level, linked with community resilience measures. Insurers can also work to close the coverage gap in the global south, where impacts of physical risk are greatest, but insurance accessibility and affordability are lowest; and they can innovate to protect clients from the impacts of physical risks.
While the challenges to drive meaningful adaptation and risk reduction are non-trivial, insurers that bring together deep risk expertise, risk engineering capabilities, and a forward-looking view on climate risk can make a difference and improve their balance sheet in the process.
1For more, see “Climate math: What a 1.5-degree pathway would take,” McKinsey Quarterly, April 30, 2020.***
Christie McNeill is a partner in McKinsey’s Boston office.
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