- There is a link between biodiversity loss and higher underwriting risks. This relationship is especially clear for insurance covering floods, crops, life, health and environmental liabilities.
- Some property and casualty insurers already use geospatial analysis in their pricing, claims processing and risk management. Adding a layer of biodiversity data to this analysis may help incorporate biodiversity considerations in underwriting.
- We found that 37% of constituents of the MSCI ACWI Index had three or more known physical assets in biodiversity-sensitive areas. Of these, 13% lacked adequate policies and programs to address impacts and risks related to Biodiversity and Land Use.
How can biodiversity influence underwriting risks? Most insurers now acknowledge climate-change risks to their business,1 while biodiversity loss is emerging as a parallel challenge.2 Deforestation, land-use change, overfishing, pollution, climate change and the introduction of invasive alien species have resulted in biodiversity losses. One million known species could go extinct within decades.3 At the same time, more than half of the world’s economic output depends either highly or moderately on nature and its benefits, such as fertile soils, food supply, clean water, climate control, erosion prevention and flood control.4 As the exhibit below depicts, for insurance companies, the impacts of biodiversity loss could translate into growing underwriting risks, notably for insurance lines such as flood, crop, liability, life and health.
Examples of how biodiversity risks may impact underwriting activities
Data as of March 2023. Source: MSCI ESG Research
- Flood insurance: In 2021, floods caused an estimated USD 82 billion of economic losses globally, with only about a quarter of these losses covered by insurance.5 A global study found that with every 10% increase in deforestation, flood risks increase between 4% and 28%.6
- Crop insurance: Pollinator extinction, water scarcity and soil erosion threaten food production and expose insurers that underwrite the agriculture industry to higher claims due to potential crop losses.7
- Liability insurance: Insurers that underwrite environmental-liability insurance may be directly liable to pay for the necessary cleanup and restoration of biodiversity. Mispricing of this risk could impact insurers’ profitability.
- Life and health insurance: Nature is a key source for developing medicines. However, with ongoing biodiversity decline, humankind may lose at least one important medicine every two years.8 Reduced nature-based medicine sources could substantially increase health-care costs, which may, in turn, impact the life and health insurers.
How can insurers incorporate emerging biodiversity risks when underwriting?
Location matters when assessing biodiversity impacts and risks, as reflected in the upcoming reporting framework of the Taskforce on Nature-related Financial Disclosures (TNFD).9 These impacts and risks vary, depending on whether company operations are situated in an urban area, a coastal zone or a tropical rainforest, for example. Therefore, geospatial tools could help insurers identify and manage biodiversity-related risks. The integration of geospatial data into underwriting and investment practices — also referred to as spatial finance10 — is an established practice among leading property and casualty (re)insurers to support management and pricing.
Insurers may overlay a company’s data on asset location and ownership with biodiversity metrics. Using MSCI’s Biodiversity-Sensitive Areas Screening Metrics, we found that 37% of constituents of the MSCI ACWI Index had three or more known physical assets in biodiversity-sensitive areas, as of January 2023. Having operations in a biodiversity-sensitive area does not necessarily mean that a company is generating adverse impacts on the biodiversity of these geographies. Insurers with exposure to flagged companies could therefore combine the screening metrics with an in-depth review of a company’s practices for managing biodiversity risk or involvement in controversies.
Companies that operate in biodiversity-sensitive areas don’t always have strong environmental-management practices
Data as of Jan. 31, 2023. Weak risk management practices are defined by risk management scores below 3 (out of 10). Source: MSCI ESG Research
The MSCI ESG Ratings methodology covers biodiversity-related topics across multiple key issues. For example, among those companies assessed on the Key Issue of Biodiversity and Land Use, we found that 13% of the companies with physical assets in sensitive areas had weak risk management practices due to the lack of adequate policies and programs.
In addition, 35 companies faced severe or very severe Biodiversity and Land Use controversies. In case of the Key Issue of Toxic Emissions and Waste, every fifth company flagged for operations in sensitive areas showed weak risk-management while the share of companies with weak water-risk-management practices was two times higher (40%). A lack of programs to reduce water consumption or to avoid toxic emissions could pose serious threats to ecologically sensitive areas.
The success of insurance underwriting lies in the proper pricing of risk. The potential economic loss from the biodiversity crisis is driving a need for insurers to better assess related risks. By combining biodiversity-screening metrics with MSCI’s assessment of companies’ risk management practices and controversy data, insurers may be able to better identify biodiversity risks. The results of such an approach might be used to engage with high-risk companies, address regulatory and reporting pressure and apply exclusion-based underwriting.
1According to MSCI ESG Research, 93% of insurance companies within the MSCI ACWI Index recognize climate change as a business-risk factor as of December 2022.
2“Climate change and biodiversity: twin challenges for today’s business leaders.” Zurich Insurance, Nov. 16, 2021.
3“The Global Assessment Report on Biodiversity and Ecosystem Services.” Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), 2019.
4“Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy.” World Economic Forum and PwC, January 2020.
5“Extreme flood events once again drive high losses in 2021, yet 75% of flood risks remain uninsured.” Swiss Re, March 30, 2022.
6Corey Bradshaw, Navjot Sodhi, Kelvin Peh, and Barry Brook. 2007. “Global Evidence that Deforestation Amplifies Flood Risk and Severity in the Developing World.” Global Change Biology 13: 2379 - 2395./span>
7Agnieszka Kurdyś-Kujawska, Agnieszka Sompolska-Rzechuła, Joanna Pawłowska-Tyszko, and Michał Soliwoda. 2021. “Crop Insurance, Land Productivity and the Environment: A Way Forward to a Better Understanding.” Agriculture 11, no. 11: 1108.
8Vidushi Neergheen-Bhujun et al. “Biodiversity, drug discovery, and the future of global health: Introducing the biodiversity to biomedicine consortium, a call to action.” Journal of Global Health, December 2017.
9“The TNFD Nature-Related Risk & Opportunity Management and Disclosure Framework Beta v0.2.” TNFD, June 2022.
10“Spatial Finance: Challenges and Opportunities in a Changing World.” World Bank, WWF, Dec. 1, 2020.