The insurance industry and its customers are on a sustainability and ESG journey as the world looks to tackle huge systemic risks, with climate change top of the agenda. Insurers, particularly in Europe, are taking steps to help tackle the climate crisis and wider sustainability threats through investment, operational and underwriting decisions. There is also increasing recognition that the industry must help clients as they transition to more sustainable organisations and risk managers become increasingly involved in developing solutions. But what exactly does this all mean for insurers and the companies they serve?
One insurance company at the forefront of this movement is Zurich Insurance. The Swiss firm has already made some of the biggest commitments to help reduce its – and others’ – carbon emissions, as part of broader sustainability goals. It wants to become a “purpose”-led insurer and change the way it serves customers, employees, partners and society.
Zurich’s group head of sustainability Linda Freiner explained that when Zurich’s CEO Mario Greco took the reins in 2016, he wanted to transform the company because it was clear to him, and others, that the insurance industry would look very different in ten, 20 and 30 years’ time.
So, the insurer set four areas of focus – embracing digitalisation, becoming more customer-focused, investing in innovation and taking a more long-term view of the business – to guide its transformation.
“We saw it was clear that the insurance industry was going to have to change, including from an ESG perspective. We saw that responsible investor movements are getting stronger and stronger as they expect more from companies. We also saw that in all the climate talks, there was a lot of discussion about the role of insurance. So, the pressure was on. That has really given us a push on our journey,” said Ms Freiner.
In 2019, Zurich created a customer office to start looking at its customer value proposition and then, crucially, went a step further and asked: what is the insurer’s purpose? Whereas previously its role was simply to protect organisations and transfer risk, Zurich decided it should now be creating a better and brighter future with customers and other stakeholders. This mantra now sits at the centre of the business and guides decision-making, said Ms Freiner.
“This has become our North Star in everything we do, whether it is with our customers, our partners, our own employees or for the planet. Put simply, ESG is becoming an integrated part of how we do business,” she said.
This transformation is not unique to Zurich. A growing number of insurers are also taking ESG more seriously and, in particular, addressing climate change from an investment, operations and underwriting and services perspective.
However, some regions are further along this journey, and Ms Freiner explained that currently things are moving more quickly among European insurance firms when it comes to tackling climate risk.
“Looking across investment, underwriting and products and services in general, I think there is more understanding among the European insurers of the urgency to address the big issues than elsewhere. If we look west, I think the US insurance industry is starting to change because of influences from government and regulatory debates, but they are more looking at their products and services, and less so on how they manage ESG risks. The trend is somewhat similar when you look east,” explained Zurich’s group head of sustainability.
But while progress is taking place across investments, operations and underwriting, the latter poses more questions and problems for insurers.
Ms Freiner said it is clear to a growing number of insurers that managing their investment portfolio and sustainable finance is key to addressing climate change and other ESG responsibilities. Progress in this area has been swift. While insurers don’t have a big carbon footprint on the operations side, they are also working, relatively straightforwardly, to reduce in-house emissions. But the big challenge for all insurers comes on the underwriting side, said Ms Freiner.
“The questions we asked ourselves were: How do we really integrate ESG thinking into underwriting? How do we integrate it into our risk management processes? And how do we also start thinking about innovation in this area? How can we offer sustainable products and services? Because when I came into this role five years ago and started talking about what we are doing on the product and services side, I realised there was more work ahead of us. I thought if we are seeing revolutions happening in the retail space, consumer goods industry and even banking, it has to happen in the insurance industry as well. Today, I think we are seeing that trend already among customers – including big commercial buyers,” she said.
In June 2019, Zurich was the first insurer to sign the UN Business Ambition Pledge for 1.5˚C, effectively a Paris Agreement for the business sector, aiming to limit average global temperature increases to 1.5°C above pre-industrial levels.
In September of that year, the company became a founding member of the UN Net-Zero Asset Owner Alliance, committing the insurer, and at the time a total of 12 signatories, to a net-zero-emission investment portfolio by 2050. The alliance of pension funds and insurers today controls investments worth more than $6.6trn. Initiated by Allianz, Caisse des Dépôts, La Caisse de dépôt et placement du Québec, Folksam Group, PensionDanmark and Swiss Re at the beginning of 2019, the alliance has recruited Alecta, AMF, CalPERS, Nordea Life and Pension, Storebrand and Zurich as founding members.
Then, in March 2021, Zurich announced further emission reduction targets. This latest move saw the insurer increase pressure on companies it invests in to set climate action targets in line with the Paris Agreement.
It has also engaged with commercial customers to discuss how they are planning to transition their business to reduce their own impact on climate change. This engagement has increased since 2019, when Zurich strengthened its previous thermal coal policy to include oil sands and oil shale.
On the investment side, during the next five years Zurich will engage with companies that produce 65% of its investment portfolio emissions and require them to set emissions reduction goals or face shareholder action. “Should engagement fail, and companies refuse to set targets after due dialogue, Zurich will vote against board members at shareholder meetings,” the insurer said.
It added that simply divesting from companies with carbon-intense footprints is “less effective than engaging with them to drive the shift to sustainable practices”.
The insurer has also set new targets to cut carbon intensity in its listed equity and corporate bond investments by 25% by 2025, and by 30% for direct real estate investments.
In addition, Zurich will cut emissions from its own operations by 50% by 2025 and 70% by 2029, to be in line with the Paris Agreement. Group CEO Mario Greco said Zurich’s operations have been carbon neutral since 2014, but it will achieve cuts in remaining emissions during the next few years by switching to renewable power, using electric vehicles and curbing business travel.
Zurich further announced that it wants to help develop industry-wide standards to measure emissions from insurance underwriting alongside industry bodies and policymakers.
“We have already communicated what things would look like on the investment side, we’ve looked at what it would look like on the operations side, but the big challenge is underwriting. The first big step we took was to try and understand the carbon footprint of our portfolio. That is easier from a commercial point of view because there we have more data available and industry-recommended methodology. On the retail side it is much more difficult, but discussions around how to do this are underway and we naturally have an idea of where our retail book is more carbon intense,” Ms Freiner told Commercial Risk Europe.
Zurich has committed to net-zero emissions by 2050 on the underwriting side, but how it and other insurers making the same commitment get there is a challenge.
The company is among several insurers, many in Europe, to commit to reduce or stop underwriting thermal coal, oil shales and oil sands. As it stands, Zurich generally won’t underwrite companies that produce 30% or more of their revenues from these fossil fuels.
In April, it announced it is in the process of establishing a pioneering Net-Zero Insurance Alliance (NZIA) along with other European (re)insurers working with the UN Environment Programme Finance Initiative. At the time of publishing, other companies involved are AXA as chair, Allianz, Aviva, Munich Re, SCOR and Swiss Re.
The companies are all signatories to the UN Principles for Sustainable Insurance (PSI) and are establishing the NZIA under the auspices of the UN Environment Programme’s PSI initiative, the largest collaboration between the UN and the global insurance industry.
The NZIA is expected to be launched at the 2021 UN Climate Change Conference, also known as COP26, in Glasgow this November.
“We have come together with six other insurance and reinsurance companies and started to work to create a realistic net-zero insurance framework. Our first priority will be to look at what is actually needed to decarbonise underwriting portfolios on the commercial side,” explained Ms Freiner.
She pointed out that activism to stop underwriting high-polluting energy sources is also putting pressure on the insurance industry to act. And this is an issue that Zurich and others think is important to look at from a larger net-zero perspective.
“When we first started making commitments, we looked at the energy mix in general and clearly saw that thermal coal should not be included, and is not needed, if we are going to meet the Paris Agreement. So, that was a decision we took because we wanted companies to be serious about their transition plans. Mostly, European companies are working hard to phase out coal from their portfolios in place of other energy sources. These companies are also well aware they won’t be in business in 20 years if they don’t diversify their portfolios and move into different energy sources. And the big European energy companies are already making very large commitments in this area. We need to work out what that means practically, and we can help them do that,” said Ms Freiner.
“But if we see companies that are not moving, we have to have deeper conversations about their transition plans. It’s a conversation we have to prioritise with the carbon-intense sectors. And it is not just energy. Other industries are also starting to come under the scrutiny of regulators. It is definitely a different type of dialogue today with customers than it was in the past,” she added.
To ensure the world is able to transition to a low-carbon economy, renewable energy requires insurers to provide risk transfer solutions for these new, alternative green sources. This is not easy for an industry that relies on historical data to build and price products.
“It’s not as simple as it sounds to just start insuring all renewable energy. The challenge we have with alternative energy sources is they are very vulnerable to physical risk, including extreme weather events. Therefore, we have to get more knowledge and data. We are working internally and with a number of external parties to develop industry knowledge in this area. But we look at the growth curve of renewable energy and it is clear this is an industry with a high demand for both risk transfer and mitigation solutions,” said Ms Freiner.
However, insurance is in some ways the last piece of the puzzle. Particularly when it comes to sustainability risks, and climate change in particular, insurers can also help companies through risk prevention and management services. This is why Zurich is keen to point out that it is focusing efforts on services, as well as products.
“I talked about product and services but that is very generic. What is key for us is to help our customers on their own sustainability journey. If it is in regard to climate, we want to help them integrate climate risk as part of their ERM processes, providing data that they need and boosting our risk-engineering capabilities,” said Ms Freiner.
Zurich launched its Climate Change Resilience Services last September to aid this process. It provides services to help a range of corporates address current and future physical risks related to natural hazards and climate change. Climate Change Resilience Services builds on Zurich’s natural hazards risk engineering expertise to meet growing customer demand.
“This service is based on the idea that we were experts on natural hazard risks, so why couldn’t we expand this to future risks associated with climate change? It moved from looking at hazard and historical data to forward-looking climate data, so we have moved beyond just providing nat cat hazard services to these forward-looking issues, working closely with our customers to bring our expertise to their organisations. We can say to a client: ‘Ok, you are planning to open a new plant in a new location and we can help you to better understand the climate impact on that location in a 20- to 30-year horizon.’ This can then influence where and how things get built. We can be that partner and have that conversation. It helps with sustainability,” said Ms Freiner.
“More and more, I think insurance companies want to strengthen the risk partner relationship and help businesses prevent losses, because prevention is the best protection. We don’t want to only provide a risk transfer solution. We really want to provide the data, service and dialogue, and play an active role in supporting companies on this complex journey,” she added.
Zurich has also gone down the same route as some other insurance companies and increasingly provides customers with climate education through academies and training. It does this through its Customer Advisory Board.
But how do risk managers access these risk prevention services? Rather than attaching them to insurance products, more and more are available for a fee.
“Things are moving more to a fee-based structure than in the past. This allows customers to pick and choose services – it gives them clear, structured access to our expertise on a project basis. We wanted to separate this from our underwriting activities, to ensure we could provide action-based solutions, ringfenced from our underwriting operations. The customer is in control of what happens and the results of the assessments won’t automatically be shared with their underwriter,” said Ms Freiner.
It is clear that the insurance industry has one of the biggest roles to play in helping the world tackle climate change. It can influence decisions through underwriting, has access to a mass of data and expertise, and is a huge investor. It is potentially one the biggest tools and best chances the world has to limit the damage.
Ms Freiner agreed that the insurance can make a real difference, but stressed the solution requires a wider effort involving many stakeholders.
“We are also very dependent on others. We are the middle of the net. We are dependent on regulation actually taking this seriously so we don’t continue to build in areas where we should not and that certain activities are reduced. So, it is an ecosystem of stakeholders that need to work together, which makes things even more complex. But we are striving hard to play our part,” she said.