The Changing Role of the Insurer and the Digital Market in the Face of Climate Change

Author: Maddie Webster-Harris

The Changing Role of the Insurer and the Digital Market in the Face of Climate Change:

With Lloyd’s chairman John Neal attending COP27 there is no denying that the warming climate brings with it new challenges for insurers to tackle. Insurers own nearly 10% of the world’s collective invested assets (1), 35% of which are in carbon-dependent industries such as coal and oil (2). Armed with such poignant influence insurers play a pivotal role in the flow of global capital (1). Consequently, insurers have a direct say in how global businesses use their money for the betterment or detriment to the planet.

So, what does a warming climate mean for the role of insurers and how can a new digital market facilitate a sustainable future?

1.0 Traditional Just Doesn’t Cut It:

The concept of insurance has existed since the Babylonian empire in 18 century B.C. (3). Since these humble beginnings the role of the insurer has been to safeguard the interest of their clients from loss and uncertainty (4). Traditionally, this has been done retrospectively; insurers examine statistics to predict the likelihood of a future risk occurring. Seems simple. Well, this seemingly simple process is quickly becoming obsolete in the face of climate change.

Many people consider climate risks to be incredibly difficult to insure. The climbing global temperature intensifies convective processes within the atmosphere generating more severe, destructive, and frequent natural disasters (5). So, recently insurers can no longer look to past events to predict future ones (6); the statistical models are no longer aligned. Suddenly the centuries old retrospective approach of insurance just doesn’t cut it.

To complicate matters further, natural disasters affect a range of insurance markets in a non-homogenous manner. This disrupts the process of adverse selection (5) because there are too many affected sectors for insurers to accurately identify and prioritise risks. In addition, the size of a climate risk is directly related to geographic location. First world countries concentrate wealth in at-risk areas, such as along coastal regions. Consequently, while being inherently complex, climate risks are also associated with an increased value-at-risk (5).

So, if insurers cannot underwrite by the traditional means, how does the role of the insurer need to change to keep up with the changing climate?

2.0 Preventive not Retrospective:

Kia Javanmardian (senior partner at McKinsey & Company) says that insurers now need to actively configure human behaviour to reduce the potential impact of climate risks. For example, preventing settlement in fire-prone areas in California (7). Alternatively, insurers could provide proactive cover by operating under the assumption that because of the changing climate, risks will become more frequent. UK company FloodRe – a flood re-insurance scheme – partner with home insurers to provide proactive flood protection regardless as to whether flooding was a pertinent risk in the past or not.

With this “preventive not retrospective” approach it could be argued that insurers should also be directly involved in the mitigation of climate risks – advising governments and local authorities on what developments should occur and to what standard from a climate-perspective. By encouraging authorities to consider climate risks, insurers improve the resilience of climate-vulnerable countries, minimising risks before they occur (7). A notion that John Neal echoed in his discussion at COP27.

The underlying theme for this changing role of insurers is enhanced personal responsibility. Insurance must evolve beyond simple financial compensation, to active, in-the-field, risk mitigation and capital management (7). To shift the current 35% of carbon-dependent assets to greener technology solutions, insurers could start providing incentives to clients to end their relationship with carbon-based technologies (1). One approach could be to offer lower premiums for decarbonised activity (2). One could also implement additional taxing on “non-green” risks to encourage companies to seek out sustainable business solutions while financially benefiting local governments. These benefits could then be transferred to a renewable fund for further sustainable development.

Although it may be difficult for the establishment in the industry to abandon the traditional retrospective approach, to not act could be short-sighted.

In short, in an aggressively changing climate, inaction generates more loss (2), thus a preventive approach permits more effective mitigation of climate risks and better safeguarding for clients. In the face of climate change the new role of insurers is to lead the fight from the front line.

3.0 A Sustainable Digital Market:

The largest change currently occurring in the commercial insurance market is the transformation to a digital, data-first market with the introduction of the CDR and Blueprint2. 64% of CEOs plan to significantly increase their investment in digital transformation by 2025 (8). But can a digital, data-first market be sustainable?

It is widely agreed that the digital supply chain allows risk management at every level, abolishing paper documents and unproductive back-and-forth between departments, minimising physical resources, and generating efficient time use. With an efficient digital ecosystem, the entire insurance process is streamlined; smart resource management promotes effective and positive social change.

In support of this, Stephanie Smith (chief operating officer at Allianz) argued that a digital market with a data-first approach allows employers and employees alike, to use their new-found free time to potentially develop ESG cantered initiatives within their workplace. Ultimately, generating a more efficient, cost-effective, and eco-friendly company (9). Furthermore, a digital market integrates seamlessly with this new age of remote working, reducing travel costs and subsequent pollution.

Additionally, a digital market will improve understanding of complex climate risks. Digital data confers digital analytics, and better analytics permits better comprehension of the pervasive impacts of climate change. Insurers can then utilise this gained knowledge to effect change in a positive way, informing underwriting decisions (9), designing policies, and implementing preventative measures against climate risks. For example, Winnow, a UK based food waste solutions provider, use AI and analytical technology to minimise food waste in commercial restaurants. Their use of digital data saves 60,000 tons of carbon emissions and $42 million of waste from landfills (10) and as a result reduces risks and premiums. Of course, a reduction in premiums may result in reduced profits for the insurer. However, the number of claims being paid out by insurers will also be significantly reduced as a direct result of use of digital data. This should mean that the ratio between claims and losses remains consistent preventing detrimental profit loss for the insurer. This emphasises the importance of an active collaboration between insurers and their clients when designing sustainable technology solutions for climate risks.

Overall, a digital, data-first market will allow insurers to do better business faster, with greater insight into the sustainability impacts of that business.

There is increasing pressure on insurers to adopt a preventive approach to effectively protect against climate risks, and a digital market is the perfect tool to support this fundamental industry-wide change.


1: Rohit, C., Chatterji, S., Insurers’ role in managing climate change | Thoughtworks

2: Well, S., The insurance industry’s role in combating the climate crisis can be a win-win | R Street

3: Beattie, A., Stapleton, C., The History of Insurance (

4: Chand, S., The Role and Importance of Insurance – Explained! (

5: Charpentier, A., (2007) [PDF] Insurability of Climate Risks | Semantic Scholar

6: Nagaichuk, N. et al (2020) Management of changes in the insurance industry in the conditions of climate crisis | E3S Web of Conferences (

7: Miettinen, D., The climate crisis is here. Are insurance companies ready? – Marketplace

8: PWC., How the UK insurance sector can create sustainable change and become a force for greater good – PwC UK

9: InsurancePOST., Spotlight: Why ESG and digital transformation are inextricably linked for the insurance industry – Insurance Post (

10: Gasc, J-F., Here’s how digital technology helps insurers hit sustainability targets | Insurance Blog | Accenture

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