Marsh urges buyers to prepare for net-zero underwriting

Risk managers need to prepare for net-zero underwriting that is likely to influence pricing, terms and conditions in the next two to three years, according to Marsh.

Most large corporate (re)insurers have made sustainability pledges, and many have signed up to the UN’s Net-Zero Insurance Alliance (NZIA) that commits them to transition their underwriting and investment portfolios to net zero by 2050. The industry is now in the process of translating these commitments into underwriting operations, setting underwriting criteria and targets for insurance-associated greenhouse emissions.

However, insurers’ handling of the transition has come in for criticism. In a recent report, Ferma said insurers are not doing enough to help clients through the energy transition. In particular, Ferma called out a lack of adequate cover for emerging green technologies, as well as past activities, such as coal or mining.

Even some insurers have questioned the practicality of net-zero commitments. Last year, Chubb’s chief executive Evan Greenberg warned that companies that declare themselves to be net zero could face lawsuits if they overpromise. He claimed insurers are not yet able to accurately measure the carbon footprint of their investments and underwriting portfolios.

And, according to Amy Barnes, head of sustainability and climate change strategy at Marsh, some insurers have not managed client expectations as well as they could, as they translate net-zero commitments into underwriting. 

“The way some insurers have communicated and treated clients – clients that have been with them for many years – has not always been executed well,” she told Commercial Risk Europe.   

Customers disagree over how heavily insurers should be influencing the transition through underwriting, said Barnes. “There is not a consensus that insurers should be acting. There are a number of clients who believe this is an issue for governments, not insurers. However, there is a critical mass in net-zero alignment – there are now 29 members of the NZIA – and it may be hard for [buyers] to select against insurers that are aligned to net zero,” she added.  

Inevitable

While the role of insurers in carbon transition can be debated, net-zero underwriting is inevitable, according to Ryan Bond, head of climate and sustainability insurance innovation at Marsh. “There are different perspectives across a spectrum. However willingly, begrudgingly or kicking and screaming, insurers are working on the assumption that this is something that has to be considered,” he said.

“There are a range of opinions. But over 90% of global GDP has committed to net zero by the middle of the century, so the insurance industry is responding to that and recognising that its business models need to transform because the global economy has committed to that transformation,” said Barnes.

Climate change is also a threat to insurers’ business models. “In a worst-case climate scenario, the frequency and severity of insured losses is expected to rise, and we could see increased potential for war and conflict, as well as supply chain disruption, which will impact the insurance business. Insurers are also under pressure from stakeholder activism, as insurance is a lubricant to the economy,” noted Barnes. 

Net-zero underwriting, whereby insurers start to make underwriting decisions based on insurance-associated greenhouse gas emissions, is therefore coming and likely to be a feature of renewals within the next two to three years, she told risk managers. 

A significant number of commercial (re)insurers have withdrawn their support for thermal coal, Arctic oil and gas exploration, and oil sands. A smaller number are beginning to scale back their oil and gas underwriting. Some insurers have also made noises around moving away from the most carbon-intensive activities in sectors like shipping. 

“Although some insurers do ‘prohibit’ certain fossil fuel industries like coal, we do not yet see insurers using information on greenhouse gas emissions to set pricing or terms and conditions,” explained Barnes. “Beyond the prohibitions on certain industries, we see limited evidence of underwriting decisions – risk-quality decisions – being made using carbon data, because there is no intrinsic link with carbon intensity and hazards, or the likely frequency and severity of loss,” she said. 

Marsh has, however, established relationships between good ESG and risk quality in several lines of business, including D&O and workers compensation. 

“If ESG and sustainability mean organisations should be governed by a more balanced approach of priorities across profit, people and the planet, the reality is that the insurance industry and the wider corporate community have yet to fully readjust their goals,” said Bond. 

Supply and demand

However, as some insurers move to net-zero underwriting, corporate insurance buyers will likely start to see their organisations’ emissions and transition plans reflected in their insurance, Barnes explained. 

“As the NZIA is implemented, we can anticipate the supply-and-demand dynamics around carbon intensity of clients will start to inform pricing. Can we see carbon intensity being a feature of terms and conditions or pricing as net-zero-committed companies steer their portfolio? I think we will, although we do not yet know exactly how that will play out,” Barnes said.

Supply-and-demand dynamics could influence pricing for carbon-intensive companies, she continued. “Clearly, if there is a move away from [high carbon intensity risks], it may reduce competition and available capacity for certain risk, which in turn could affect pricing,” she added.

The NZIA and Partnership for Carbon Accounting Financials aim to launch a global standard to measure and disclose emissions attributable to insurance underwriting portfolios, also known as insurance-associated emissions, later this year. NZIA members will then be expected to publish their first interim science-based targets six months after the publication of a Target-Setting Protocol, which is scheduled to be released by January.

A significant proportion of the commercial insurance market are members of the NZIA and therefore committed to implementing the framework and publishing net-zero targets within the next year. Many other insurers will watch the progress of the NZIA as they develop their net-zero underwriting. 

So, buyers will likely start to see the emergence of net-zero underwriting in coming years as the NZIA accounting framework is implemented, according to Barnes and Bond. “In the next two to three years, we can expect insurers to figure out how they will [implement net-zero underwriting criteria]. It will be phased in, probably more prevalent in certain industries and regions,” said Bond. 

Even when insurers have net-zero underwriting criteria in place, underwriters will not automatically penalise carbon-intensive industries, hopes Barnes. She believes there will be a spectrum of response from insurers. 

“Some hard-to-abate industries, like construction and aviation, do not yet have [sustainable] alternatives at scale. Decarbonising some of the most carbon-intensive industries is non-trivial and not straightforward. Our expectation is that insurers will want to see that insureds are making efforts in the right direction,” she said. 

Having a single net-zero framework should be positive for insurance buyers, according to Barnes. “Customers are worried that each insurer will take a different approach and it becomes very difficult for them to navigate. Having alignment around a single framework, and we hope it is a good framework, will provide more certainty for clients, rather than 50-plus insurers doing their own thing,” she said.

Challenges

But insurers face significant challenges to incorporate information on emissions and transition plans into underwriting, according to Bond. “The absence of a clear understanding on how insurers may use this information across their portfolios or on individual risks creates uncertainty and concerns for risk managers and customers,” said Bond.

The framework will enable insurers to account for insurance-associated carbon intensity, but it will be up to each insurer to decide how they use this to steer their business, said Barnes. However, in order to take a more nuanced approach to underwriting carbon-intensive activities, insurers will need to understand an organisation’s transition plans, she added.

“Insurers, brokers and clients will all need to undergo training and education in order to understand the transition and incorporate it into insurance,” said Barnes.

“This is one of our biggest concerns. We have a population [of insurers, brokers and buyers] that does not have the vocabulary of climate change, or maybe even understand the definitions for Scope 1, 2 or 3 emissions. They are smart people but they have to learn something new. We all need to recognise that there will be a period of friction and turmoil, as the industry adjusts,” she said.

Corporate insurance buyers are concerned they will face a barrage of information requests from insurers. While the industry is likely to use third-party data, risk managers may want to supplement this with their own information, advised Barnes.

“Insurers are trying to make net-zero underwriting as simple as possible, and many are procuring third-party data to satisfy these additional information requirements. 

“For companies in more carbon-intensive industries, and therefore under more scrutiny, I would want to own my narrative, rather than have insurers rely on third-party data,” she said.