Insuring the future - the insurance industry’s role in climate change mitigation

Evidence shows that climate change (CC) is increasing the frequency and intensity of natural catastrophes. However, progress in CC mitigation technologies lags the needed trajectories, largely due to capital constraints. This study presents a novel empirical investigation into the implications of CC-induced changes in hurricane damage for the U.S. Homeowners’ insurance sector. Originally tailored to the agricultural insurance market, we enhanced and adapted the model to encompass the broader domain of property insurance. The revised framework was applied to a unique dataset of insurance market activity. The research integrates end-of-century climate-informed hurricane damage forecasts with a catastrophic risk model of the insurance market. The findings reveal that escalating damages attributable to CC and socio-economic growth could diminish insurers’ expected utility (value) by a range of 11% to 100%, contingent upon damage volatility and risk aversion levels. Consequently, insurers are projected to elevate premiums and curtail coverage. The empirical estimation of CC effect on the insurance industry’s financial results contributes to quantifying the cost of CC, while the assignment of these costs to the insurance sector highlights its potential as a financial aggregator for CC-related expenditures. This study suggests translating the anticipated decline in insurance sector profitability into an equivalent offset in greenhouse gas emissions to underscore the insurance sector’s latent role in facilitating a transition to a sustainable economy. It illustrates that the projected emissions reduction proportion surpasses the insurance industry’s share in the U.S. economy.