A stability report just out from the Bank of International Settlements has warned of “an increasing likelihood of widespread disruptions to the financial sector, economy, society and humanity at large”.

It also warns that as insurers continue to retreat from insuring high-risk climate change coverages, it will be the governments left to pay the bills.

Attributing this to accelerating climate change, the report warns that insurance regulators should be concerned about the impact on the insurance industry.

The report quotes the Intergovernmental Panel on Climate Change estimates that as many as 3.6 billion people are highly vulnerable to the altered environment, with impacts in all regions of the planet.

“Too hot to insure – avoiding the insurability tipping point” is this month pointing out the noticeable trend of increasing premiums and reduction of insurance coverage, which the report says might be because of the industry’s concern over climate change.

It says: “Climate change impacts are being felt in all regions, from extreme weather events such as heatwaves and heavy precipitation to food- and waterborne diseases.

“Increasingly, climate change is causing irreversible losses in the Earth’s ecosystems. These developments are causing widespread disruptions including in the insurance sector.”

The report is authored by members of the Financial Stability Institute of the BIS in collaboration with staff from supervisory agencies and central banks, and after a survey conducted among insurers.

It says the approach of insurers to underwriting and pricing climate-related risks may have negative implications for financial stability.

“Through their pricing and underwriting policies,” the authors say, “insurers play an important role in both supporting climate risk mitigation efforts to transition to net zero, as well as in incentivising risk adaptation measures.”

The concern is that given the relevance of insurers’ pricing and underwriting policies to their safety and soundness, the affordability and availability of insurance coverage and net zero transition goals, supervisors need to assess such policies.

"Although most of the surveyed insurers do not explicitly account for climate change impacts when pricing insurance policies, there is a noticeable trend of increasing premiums and reducing insurance coverage.“

“Insurance supervisors have a critical role to play in promoting adequate premium pricing and sound underwriting approaches.“

“Within existing supervisory mandates, supervisors can address climate-related risks arising from pricing and underwriting processes through climate-related risk management requirements.“

The report says that some action is definitely required, and in the face of an uncertain future, stakeholders cannot afford inaction.

It says: “Without further measures and concerted efforts by insurers, regulators, governments and the public at large, insurance against climate risks will become less affordable and available.

“Eventually, the insurability tipping point could be crossed in different regions and for various risks, which will no doubt result in a lose-lose situation for all stakeholders.”

• To read the Financial Stability Institute Insights on policy implementation No 54 Too hot to insure – avoiding the insurability tipping point, see Related Media

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