There is a direct link between biodiversity loss and higher underwriting risks. The relationship is especially evident for insurance services covering floods, crops, life, health and environmental liabilities, and mispricing these risks could impact a carrier's profitability. 

According to MSCI ESG Research, 93% of insurance companies within the MSCI ACWI Index recognize climate change as a business risk. While most insurers acknowledge climate-change risks to their business, biodiversity loss is emerging as a parallel challenge. Deforestation, land-use change, overfishing, pollution, climate change, and the introduction of invasive species have resulted in increasing biodiversity losses. 

More than half of the world's economic output depends highly or moderately on nature and its benefits, such as fertile soils, food supply, clean water, climate control, erosion prevention and flood control. 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.

Emerging underwriting threats:

• Flood: In 2021, floods caused an estimated $82 billion of economic losses globally, with only about a quarter of these losses covered by insurance, according to Swiss Re's Sigma Report. 
• Crop: 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.
• Liability: Insurers that underwrite environmental-liability insurance may be directly liable to pay for the necessary cleanup and restoration of biodiversity. 
• Life and health: Reduced nature-based medicine sources could substantially increase healthcare costs, which may, in turn, impact life and health insurers.

How can insurers incorporate emerging biodiversity risks when underwriting business insurance?

Location matters when assessing biodiversity impacts and risks, as reflected in the upcoming reporting framework of the Taskforce on Nature-related Financial Disclosures (TNFD). These impacts and risks vary, depending on whether company operations are situated in an urban area, a coastal zone, or a tropical rainforest. 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 finance — is an established practice among leading property and casualty (re)insurers to support management and pricing.

In addition to using geospatial analysis in pricing, claims processing and risk management, adding a layer of biodiversity data to the analysis may help incorporate biodiversity considerations in underwriting. Insurers may overlay a company's asset location and ownership data with biodiversity metrics to better assess risk. 

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. 
• Among those companies assessed using the MSCI ESG Rating methodology 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 the case of the key issue of toxic emissions and waste, every fifth company flagged for operations in sensitive areas showed weak risk management.
• The share of companies with weak water-risk-management practices was two times higher (40%) than those flagged for toxic emissions and waste. 

Operations in a biodiversity-sensitive area and lack of solid policies and programs could result in adverse impacts on nature. 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.
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 assess related risks better.