Climate Week NYC: Climate Risk and Carbon Market Implications for the Insurance Industry

We attended two panels hosted by Aon at #ClimateWeek2023, which included leaders from NOAA: National Oceanic & Atmospheric Administration , Brookfield Insurance, Milken Institute , Sylvera , and others diving deep into two important topics within the insurance industry: climate risk and carbon markets . Here are some key takeaways from the panels:

Unlocking Capital with Physical Risk Analytics

Climate models are much improved from where they were ten years ago, but there is still a great deal of uncertainty with climate risk analysis. Ensuring proper use of climate data and tools is crucial, along with communicating underlying assumptions and areas of uncertainty to clients and other stakeholders. Some other discussion on this topic centered around:

• Looking at climate trends and data over the long term is extremely important to account for climate variability. 
• Companies may miss key risks from natural variability when they only assess data collected over short periods of time (i.e., reviewing just a few years).
• Interesting questions from the audience sparked discussion on the role of insurance in pricing the value of nature and tying physical risk to corporate bonds/stocks as opposed to real assets.

Building A Deep, Vibrant, and Reliable Carbon Market Ecosystem

Insurance products relevant to the Voluntary Carbon Market (VCM) include natural disaster insurance, environmental liability insurance, and political risk insurance. Other highlights include:

• Insurance products can signal the quality of carbon projects, as well as unlock early funding.
• For providers of political risk insurance, the quality of the carbon credit is less of a concern; they’re more concerned by if/when poor quality credits result in the collapse of the project (thus requiring a bailout).
• On the buyer side, diversifying credit portfolios is a way to mitigate risk.
• A big question was how investors should approach legacy credits that no longer meet today's quality standards. Panelist Jennifer Jenkins , Chief Science Officer at Rubicon Carbon , said that investment decisions are difficult, since quality is a moving target as the market and standards improve, and made more difficult by negative criticisms of the VCM in recent years.

We all left the event with some food for thought in that providing insurance in high risk areas could be enabling more climate destruction by polluters and carbon emitters. Alternatively though, this has the potential to be solved by state and federal governments developing a strategy for managing future risks by not providing insurance in these areas.

Want to talk more about assessing climate risk or other topics we’ve covered in our Climate Week recaps? Our team at 3Degrees would love to connect with you .