Insurance Landscape addressing Climate Change, and Fossil Fuels: An Indian Perspective

Introduction

India, as one of the world's fastest-growing economies, stands at the crossroads of economic development, environmental sustainability, and risk management. The interlinking of climate change, fossil fuels, and insurance forms a critical part of India's path forward, as these factors will shape the country's future economic stability and environmental resilience.

The Climate Change Challenge in India

India is one of the most vulnerable countries to climate change, facing significant threats from extreme weather events such as floods, droughts, cyclones, and heatwaves. The Himalayan region, for example, is already experiencing glacial retreat, which threatens water availability for millions. Meanwhile, coastal regions are exposed to rising sea levels and increasingly intense storms, putting populations and infrastructure at risk.

According to the Global Climate Risk Index, India consistently ranks among the top nations most affected by extreme weather events. In 2023, devastating floods in the northern state of Himachal Pradesh caused widespread damage, impacting infrastructure, agriculture, and local livelihoods. This scenario highlights the urgency of building resilience to climate impacts.

As one of the world's fastest-growing economies, India finds itself at the intersection of three critical imperatives: economic growth, environmental sustainability, and risk management. The complex interplay between climate change, fossil fuel dependency, and insurance is set to define India’s future trajectory, shaping both its economic resilience and environmental stewardship. A nuanced examination of this nexus reveals the profound implications for India's financial stability and long-term sustainability.

Insurance plays a crucial role in mitigating the financial risks posed by climate change and fossil fuel dependency. As climate-induced disasters become more frequent and severe, insurance companies are being forced to rethink their risk models and coverage policies.

Fossil Fuels and India's Energy Landscape

India is heavily reliant on fossil fuels for its energy needs. Coal, oil, and natural gas make up a substantial portion of the country’s energy mix; according to the Ministry Of Coal, coal accounts for nearly 55% of electricity generation. Fossil fuels have long been the backbone of India's energy-intensive industrial and economic growth.

However, this dependence on fossil fuels comes with significant environmental costs. India is the world's third-largest emitter of greenhouse gases, and the burning of coal and other fossil fuels is a primary driver of these emissions. This not only contributes to global warming but also leads to severe air pollution in cities like Delhi, which suffer from hazardous levels of smog, creating health risks for millions.

The push to reduce emissions and transition toward clean energy sources is gaining momentum. The Indian government has set ambitious targets for renewable energy, aiming to achieve 500 GW of renewable capacity by 2030. While this is a positive step, the transition away from fossil fuels will take time and must be balanced with the country's growing energy demands.

Climate Risk Insurance: India's insurance sector has seen increasing claims related to natural disasters. For instance, agricultural insurance schemes, such as the Pradhan Mantri Fasal Bima Yojana (PMFBY), aim to protect farmers from climate-related losses. However, the current structure of these schemes often falls short of fully addressing the growing risks posed by climate change. Insurers need to develop more sophisticated products that can respond to the rising threat of extreme weather, offering not just post-disaster coverage but also incentivizing climate-resilient practices.

Energy Sector and Transition Risks: Fossil fuels remain at the core of India’s energy mix, powering its industrial and economic growth. India generates a significant amount of energy, mostly from coal, oil, and natural gas. Of these, coal alone provides around 55% of the nation' electricity. Fossil fuel industries face twin risks: the physical risks from climate change and the transition risks posed by the global shift toward decarbonization. Insurers are increasingly scrutinizing the risks associated with underwriting coal, oil, and gas projects, as these assets are likely to become "stranded" in a low-carbon future. While several international insurers have already committed to phasing out coverage for coal projects, the pace of this shift in India has been slower, reflecting the country’s continued reliance on fossil fuels for economic growth.

Insurance For Infrastructure: India’s ambitious infrastructure projects, including those in renewable energy, require robust insurance solutions to hedge against climate risks. Hydropower projects in the Himalayas, for example, are vulnerable to glacial floods, while solar farms may be impacted by cyclones or extreme heat. Insurers need to provide innovative solutions that not only cover potential damage but also support long-term sustainable development.

Effect of climate change in Health Insurance

While the impact of climate change on sectors like agriculture and infrastructure is well-documented, its effects on health insurance have received comparatively less attention. Yet, climate change is poised to become a significant driver of health risks, necessitating a strategic reassessment by health insurers.

Climate change presents significant challenges for the health insurance industry, requiring a strategic reassessment of risk management, coverage policies, and business models. Respiratory issues arising from poor air quality, the spread of vector-borne diseases, and the mental health impacts of extreme weather events are among the many challenges that climate change introduces to the health sector.

To remain viable, health insurers must adapt their risk models, pricing strategies, and coverage policies, while investing in preventive measures and collaborating with public health entities to mitigate these emerging risks. Insurance carriers have not yet studied the impacts of climate change on health insurance with enough data to support it, given that the impact is often overlooked.

Current Happenings in India

The Reserve Bank of India (RBI) recently released a draft white paper on climate- related financial risks (CFR), aligning with international standards like the IFRS S2 (Sustainability Disclosure Standards), which focuses on climate-related disclosures. The paper highlights four key areas for reporting climate risks: governance, strategy, risk management, and metrics/targets, mirroring global frameworks.

RBI's push for climate risk reporting means that companies not only need to identify these risks but also explain their financial impact. Important terms such as CFR (Cost and freight), climate resilience, financed emissions, physical risk, and more are defined in the paper, and it references IFRS S2 and Basel Committee guidelines from 2021, indicating that RBI’s actions are somewhat delayed.

For listed companies, SEBI has already mandated ESG (Environment, Social, and Governance) reporting. They recently issued guidelines to regulate ESG ETFs (Exchange Traded Funds), ensuring that investors aren’t misled by false promises. Now, RBI wants financial institutions to step up and report on CFR as well.

This will apply to scheduled commercial banks (SCBs), tier-IV urban co-operative banks (UCBs), all-India financial institutions (AIFIs), and large NBFCs (non-banking financial companies), with phased implementation starting in FY 2025-26 for most institutions. Voluntary reporting by others is encouraged.

The CFR reporting requirements cover four main areas

• Governance: Companies must show how they're managing climate risks, the roles of key personnel, and their controls to keep climate considerations a priority.
• Strategy: This involves detailing how climate risks affect their business model, decision-making, product development, and strategic planning.
• Risk Management: Companies need to explain the types of climate risks they face, their impact, and how they’re being managed. This includes how climate risks influence credit and operational risk.
• Metrics and Targets: Reporting should include performance benchmarks like greenhouse gas (GHG) emissions targets, third-party validations, and the methods used to measure progress.

These disclosures will be included in annual reports, validated by company boards. Larger banks and financial institutions will start reporting on governance, strategy, and risk management from FY 2025-26, adding metrics and targets by FY 2027-28. Smaller UCBs will follow a year later. The insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI), must also take a step in the same direction and issue a directive in this matter governing climate- related risk.

Reinsurance: A Crucial Element

Reinsurance plays an essential role in India's risk landscape, especially as domestic insurers increasingly face large losses due to climate-related events. Indian insurers rely on global reinsurers to spread the risk of catastrophic events. However, as climate risks intensify, reinsurance premiums are likely to increase, creating additional pressure on the insurance market.

From a global perspective, reinsurers are already adjusting their models to account for the increasing frequency of extreme weather events. For India, securing adequate reinsurance capacity will be critical in maintaining stability in the insurance market and protecting vulnerable sectors like agriculture, real estate, and energy.

Conclusion

India's journey to balance economic development, climate change adaptation, and fossil fuel transition presents a complex set of challenges. The insurance sector is key to managing these risks, whether through covering natural disasters, supporting the energy transition, or protecting infrastructure from climate impacts. However, for insurance to play its full role, India must advance in areas such as product innovation, risk modeling, and regulatory reforms.

While climate change will continue to pose challenges, it also offers an opportunity for the Indian insurance sector to evolve, offering new products and solutions that can support the country’s transition to a sustainable and resilient future. The integration of climate risk into the financial system, coupled with a decisive shift toward renewable energy, is essential for securing India’s long-term economic and environmental stability.