Page 25 - Insurance Times March 2023

Physical risk arises from physical impacts of climate-induced The Taskforces on Nature-related Climate Disclosures (TNFD)
extreme weather events, transition risk relates to changes and Climate Related Climate Disclosures (TCFD). The
in regulatory and market expectations arising from the Dasgupta Review strongly reinforces that the economy is a
transition to a low-carbon economy. Liability risk emanates wholly owned subsidiary of the environment.
from mismanagement of physical and transition risk. Also, a
new highly complex and destabilised domain of risk is South Asia's Hotspots: Impacts of Temperature and
emerging. It includes the risk of collapse of key social and Precipitation Changes, a report by the World Bank, highlights
economic systems at local and global levels. Not only are economic impact climate change will have in South Asia. It is
political boundaries being rendered irrelevant, but some of expected to reduce GDP by over 10 per cent. However, this
them have serious inter-generational implications. does not take into account the increasing severity of storms,
changes in water resources and sea level rise, climate-induced
Pricing externalities: Plastic may be a highly profitable
migration, biodiversity loss, pollution and the compounding
product for its manufacturers but the environmental havoc
impact multiple shocks can have. The report serves as a reality
it creates is before our eyes. Factoring costs of carbon
check for any South Asian insurer seeking mouth-watering
emissions would render many businesses unviable. As
growth.
underwriters and investors, insurers need to address this.
The likes of AXA, Allianz, Aviva and Swiss Re, have pledged to
India: With much of the developed world shutting out fossil
decarbonise their underwriting portfolio as members of the
fuel related insurance business, India would be vulnerable to
Net-Zero Insurance Alliance. High frequency and severity
inflow of 'dirty' reinsurance. As the third most polluting
losses have forced insurers to 'redline' losses due to forest
economy it would invite significant reputation risk. With some
fires in Australia and California.
of the most polluted cities in the world, health and life products
could become unaffordable or unavailable. Rapid
Modelling: It is also important that insurers proactively build
transformation to renewable energy - risk fossil fuel assets
climate capabilities with forward-looking climate risk
turning stranded.
modelling instead of historic data. Weather-related losses
are becoming a growing component of Nat Cat. With return
Opportunities: McKinsey expects voluntary carbon markets
periods shortening, the 100-200-year cycles are generally
(VCM) to reach up to US $30 billion by 2030. Needless to
redundant. Uttarakhand being a shining example.
mention, VCMs are currently mired in serious controversy
and trust deficit. Annual global investments in
decarbonisation technologies and renewables could account
for USD 800 bn by 2030 corresponding to USD 10 bn to 15 bn
in insurance premiums. Rise in extreme weather will render
indemnity coverage less affordable and lead to greater
demand for parametric offerings; income loss on renewable
assets as well as the impacts of chronic weather shifts on
climate-exposed sectors are expected to be the other growth
drivers. However, the highest potential near-term target
markets for insurers are likely in proven renewable-power
assets and established green technologies including solar, on-
and off-shore wind, electric-vehicle (EV) batteries, and EV
charging infrastructure (EVCI).

ESG: Together with environment and societal components, Courtesy: The Introduction in this writeup has been
governance is about diversity of stakeholders. IFRS is in the reproduced from the LinkedIn profile of Mr. Praveen Gupta.
process of embedding sustainability in its reporting protocol. Rest part has been reproduced from writeup contributed by
Thereby, not only will the harm to insurer balance sheets him for the newsletter of General Insurance Council: https:/
from climate change be accounted for, but so will the damage /www.gicouncil.in/news-media/gic-in-the-news/to-stay-
caused by insurer actions to environment (under the proviso sustainable-the-insurance-industry-needs-an-urgent-
of double materiality). Insurers will also be reporting under paradigm-shift/.

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