Insurance companies are playing an increasingly important role in preventing climate-related damages. Through a combination of incentives and requirements, they help reduce the risk of damage and loss. But how do they balance between carrots and sticks, and what can we expect in the future?

Eli Sandberg and Berit Time (SINTEF)

Soteria, a pioneering initiative funded by the European Union, is focusing on advancing insurance solutions for climate change adaptation and risk reduction.

Insurance companies have long been key players in loss prevention. With a changing climate, more precipitation, and more climate-related damages to buildings and property, their efforts are becoming increasingly important. They offer customized advice and reward preventive measures, both pre- and post-damages. This can include property inspections and alerting customers after risk assessments. Such measures are called carrots – motivating customers to take responsibility for their own property.

On the other hand, insurance companies also use the stick to ensure that risk-reducing measures are implemented. This can involve supervision of risk-reducing measures, price tiers based on the age of critical building components, and differentiation in solution and material choices. Insurance premiums and deductibles can be increased for repeated damages, and reductions can be given for lack of prevention.

A survey conducted by SINTEF and Finance Norway has mapped how Norwegian insurance companies relate to physical climate risks. Six companies out of 13 surveyed responded to the survey. Overall, the survey shows that sustainability and loss prevention are high on the agenda in Norway.

Drivers and Barriers

Legislation and political directives are the most important drivers for the insurance companies’ loss prevention efforts, followed by demands from customers and reinsurers, as well as extreme weather events. The largest barrier is the lack of data and measurement parameters that can be used to set conditions. Examples of this are the age of roofing and type of drainage.

There is a broad consensus that the financial sector should take joint responsibility for strengthening incentives for loss prevention. Such joint responsibility can make it easier to introduce sticks, as the competitive situation promotes carrots. Insurance companies also agree that a tougher line should be taken against municipalities in the future, and that we may see more recourse cases.

Nature-based solutions

Nature-based solutions involve solving societal challenges by taking advantage of natural processes and ecosystems. For a property, this can mean establishing a rain garden or a green retention roof. Only one insurance company currently rewards nature-based solutions, but four companies are considering introducing such measures within three years. This shows an increasing interest in sustainable solutions in the insurance industry. Not surprisingly, customized products and services are offered to business customers to a greater extent, but the responses indicate that differentiation is also increasing for private customers.

Collaboration with product and service providers is also on the rise. Four out of six companies already collaborate with providers of moisture sensors and other alert systems. In addition, several companies are considering collaboration with providers of service and maintenance, alert services, and property inspections.