Climate change has been identified as one of the top risks that society will face over the coming years. The effects of climate change will be felt in just about every area of life, and many experts say that adopting a low-carbon economy is essential in mitigating the risks brought about by a warmer world.
Tim Grafton (pictured above), chief executive of the Insurance Council of New Zealand (ICNZ), joined the IB Talk podcast recently and talked about the vital role the insurance industry plays in the transition to a low-carbon economy.
“Insurers’ core capability is risk management skills – analytical tools and decades of experience in risk modelling,” Grafton said. “Insurance plays the role of sending risk-based price signals. If we are to transition smoothly into a low-carbon economy, it will be critical to provide very clear, transparent price signals about the risks that lie around climate change.”
These price signals will inform investment and provide an efficient way to allocate capital, Grafton said, adding that insurers are major investors globally, as well as major underwriters of risk.
According to Grafton, insurers have two types of risks on their balance sheets – the physical assets they underwrite and the transition risks that lie ahead, such as investing in assets that could be stranded in case of a haphazard transition to a low-carbon economy.
“Getting the critical price signals in place must be preserved by regulators and governments worldwide in order to underpin the transition,” Grafton said.
Grafton said that regulators must support long-term green investments. While ICNZ does not represent the life insurance sector, life insurers have a lot of long-term investments. As such, he said it is important that both life and general insurance sectors work closely with regulators, who should not penalise long-term investments in sustainable activities.
