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The Crucial Role of Insurance in the Transition to a Low Carbon Economy

role of insurance in low carbon economy

The Crucial Role of Insurance in the Transition to a Low Carbon Economy managing climate change risks in Asia and the Pacific, safeguarding ecosystems, and encouraging the transition to a sustainable future, the insurance industry can have a significant impact.


Role of insurance

Role of insurance in the low carbon economy There is a sizable catastrophic protection gap in our area or a discrepancy between ideal and real insurance coverage. In comparison to the global average of 58%, it averages 92%, placing a strain on homes, companies, and government coffers.

There are two ways that climate danger shows up. First, physical hazards can harm buildings and disrupt supply networks, causing significant economic losses that are made worse by a lack of infrastructure for mitigating climate risk. Second, as a result of the need for the transition to a low-carbon economy, the general shift in policy, technology, and market attitude increases costs, decreases incomes, and stranded assets.


Risks associated with physical and transitional events reduce asset prices and the creditworthiness of loans and investments made by banks, financial institutions, insurers, and capital markets.

This can result in sizable implicit contingent liabilities for governments in the absence of proper countercyclical funding mechanisms, such as income-smoothing social safety nets and public insurance programs.

Governments have yet to fully incorporate climate risk and the threat it poses to financial systems into their plans and decision-making.

In the complicated web of climate change issues, insurers play a crucial role as society’s risk managers and contribute to financial stability. The market is uniquely suited to evaluate risk, establish premiums that are distinct from one another, and determine deductibles. Policyholders may be encouraged to decrease risk and mitigate the effects of severe weather via price signaling. Homeowners may, for instance, strengthen their roofs to withstand typhoons and so pay a lesser premium or have a reduced deductible.

Solar, wind, water, biomass, and other renewable energy sources will generate 49% of the world’s electricity by 2050, according to predictions by the International Energy Association. However, the hazards keep increasing. For the whole life cycle of renewable energy projects, insurance offers coverage options. Making renewable energy projects more bankable may need underperformance guarantee insurance coverage.

By offering cash compensation or shock-responsive social protection, inclusive insurance can speed up recovery and increase resilience. For instance, when temperatures reach a specific threshold for a specific amount of time, vulnerable women working in great heat may be eligible for compensation. For lost work resulting from those heat waves and warm periods, the insurance coverage may pay out many times.

The total cost-effectiveness of crop insurance programs against climate-related risks in the agricultural industry can be influenced by insuring against numerous hazards. Among these strategies include crop loss insurance, premium discounts for farmers who invest in climate-resilient practices, the establishment of pooled insurance funds, or government-backed insurance.

The insurance sector is also taking action to safeguard “blue” natural resources that are under threat. Mangroves and coral reefs along the shore help lessen floods affordably. To preserve and restore natural ecosystems, including the Hindukush Himalayas, the industry is beginning to adopt cutting-edge risk transfer strategies.

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