The insurance industry has an important role in steering the transition to a low carbon economy, according to UK risk management body Airmic.
Speaking to CRE shortly after the publication of the UK’s climate change risk assessment, Airmic chief executive Julia Graham said the insurance industry is well positioned to help businesses and wider society reduce greenhouse gas emissions and mitigate the effects of climate change. Insurers are able to offer products and services to businesses, as well as use investments and underwriting to encourage sustainable behaviour and activities, she said.
“There are challenging questions asked of the insurance industry, but it has a lot of power if it is courageous. The industry can make a meaningful contribution,” Ms Graham said.
“Some insurers now allow clients to choose where a portion of their premiums are channelled into investments that have additional social or environmental benefits, such as ‘Premiums4Good’ from QBE,” she said.
A growing number of insurers have set net zero targets for greenhouse gas emissions related to their investments, and increasingly for underwriting. For example, eight global insurers and reinsurers recently joined the UN-convened Net Zero Insurance Alliance (NZIA), committing to transition their insurance and reinsurance underwriting portfolios to net zero greenhouse gas emissions by 2050. In addition, insurers and reinsurers are increasingly subjected to Environmental Social and Governance (ESG) disclosure requirements, such as the EU’s Sustainable Finance Disclosure Regulation.
Such commitments will see insurers shy away from covering carbon intensive industries, like thermal coal, as well as new oil and gas, tar sands and shale gas projects. Controversial coal mines in Australia and tar sands projects in Canada are already finding it harder to buy insurance, as environmental groups pressure insurers and brokers to withdraw their support. If insurers are to meet their net zero commitments, similar decisions will likely need to be made on a range of carbon heavy industries like energy, mining, transport and manufacturing.
According to Ms Graham, who recently co-hosted a Lloyd’s event on the issue, insurers have been pragmatic in their approach to underwriting carbon related exposures in relation to net zero commitments. Rather than just refuse to underwrite carbon intensive risks, insurers like Lloyd’s are working with their clients as they transition to low carbon technologies, she explained.
“The insurance industry is doing extraordinary things that goes beyond risk transfer. There has been an enormous investment in risk analytics, modelling and climate scientists. The industry is grabbing this issue and looking at climate change through the lens of risk, helping businesses understand the risks and options for mitigation,” she said.
The UK’s Climate Change Committee report warned that the country is woefully unprepared for climate change. It said that expected changes to the UK’s climate in the next few decades – including increased risk of heatwaves, flooding and storms – are already baked in, due to greenhouse gas emissions in the atmosphere. It calls on the government to take urgent action to adapt to climate change, and not rely solely on efforts to cut greenhouse gas emissions.
“There is a wider perception that technology will bail us out in the end by reducing emissions, but there will also need to be risk mitigation,” agreed Alexander Frost, Airmic’s market development manager.
He said risk managers will need partners to help them assess and model climate change risks and mitigate them at source. Of most concern at present are growing regulatory and reporting requirements, which will require companies to create their own scenarios, model risks and map exposures against assets, he added.
“Insurance is a powerful lever to encourage corporates to do the right thing and help companies achieve their climate goals,” Mr Frost said.
Ms Graham agreed that technology alone will not solve climate change, and that businesses will need to adapt. However, while the recent climate report is critical of government preparedness for climate change risks, Ms Graham believes the UK has a good track record of adaption and risk mitigation.
“There are areas where more needs to be done, but the UK is streets ahead on building resilience. There are already considerable efforts underway to build resilience and the UK has a long history of dealing with climate risk,” she said.
Ms Graham recommends risk and insurance professionals take a look at the Climate Change Committee’s assessment of climate risk, which is produced by an independent panel of scientists and experts to advise government policy and decision making. The report, at over 1,500 pages, is an authoritative deep dive into UK climate risk, that can improve understanding, inform decisions and help prioritise actions, she said.
In particular, risk and insurance professionals will find the report’s Risks and Opportunities by Urgency Score section of particular relevance, and potentially useful when updating the board, according to Hoe-Yeong Loke, research manager at Airmic.
The chart neatly summarises the biggest threats related to climate change in the UK. Risks to habitat, agriculture, infrastructure, transport, water availability, flooding, human health, supply chain disruption, regulation, governance and political risks are all considered areas where more adaptation action is urgently required.