NZIA weakened by exits but insurance industry will push on with net zero underwriting

The exit of three leading (re)insurers from the industry’s net zero standards body does not necessarily signal a sector-wide pull-back from its net-zero underwriting ambitions, but further withdrawals could slow progress, experts have told Commercial Risk.

In April, Munich Re, Zurich Insurance and Hannover Re announced their decisions to withdraw from the UN-convened Net Zero Insurance Alliance (NZIA), an industry body aimed at developing a framework to measure insurance-related greenhouse gas emissions and set targets. The exits raised questions about the future of the NZIA and insurers’ stated aim to introduce greenhouse gas emissions criteria to underwriting.

However, the situation with the NZIA appears to have stabilised and leading insurers say they are committed to their net-zero goals.

“Any individual company’s withdrawal from the Net Zero Alliance doesn’t necessarily indicate an industrywide shift or pullback in the overall ESG landscape,” said Sridhar Manyem, senior director of industry research and analytics at AM Best.

“Building consensus across companies in any industry can be challenging and requires additional time and considerations. The ESG landscape is constantly evolving, and globally there has been a greater desire from the market to provide new solutions. Challenging as it is, the insurance community has long found opportunity in climate risk,” Manyem added.

Insurance sustainability group Better Insurance Network said the departures were a “body blow” for the NZIA. However, it noted that the NZIA continues to serve a “valuable role”, providing a framework for companies to shape their transition plans, and share experiences and best practices.

“Munich Re, Zurich and Hannover Re leaving the NZIA does not mean they or the wider insurance industry are going to stop working towards net zero, but it is undoubtedly a blow to this specific initiative’s momentum, credibility and potential longevity,” Antony Ireland, founder of Better Insurance Network, told Commercial Risk.

“The NZIA has charted a course for the industry, attracting a relatively diverse group of signatories from around the world. With Munich Re, Zurich and Hannover Re on board, this meant most of the world’s leading players were united in their direction of travel, sending a clear message to the rest of the industry. That unity has now been undermined, which may give laggards and cynics a justification to delay implementing net zero targets, and may hinder industry standardisation efforts,” he warned.

The situation at NZIA appears to have stabilised for now. Aviva confirmed its commitment to the NZIA, while Canadian mutual Beneva has since joined. Swiss Re and Allianz told Commercial Risk that they are “monitoring” developments but remain committed to their net-zero goals.

The departure of Munich Re, Zurich and Hannover Re does not spell the end for the NZIA, according to Ireland. “Key founding player AXA reportedly remains steadfast, which is important, along with nearly 30 others. What had threatened to become a domino effect of departures appears, for now, to have taken a pause. In fact, since the departures, the NZIA has won an additional signatory in Canada’s Beneva,” he said.

Rating agency Moody’s said a weakening NZIA will result in a less consistent and transparent approach to decarbonising underwriting portfolios and hamper the ability of creditors and other stakeholders to understand the changes to risk appetite of individual insurers.

“The insurers that have departed the NZIA remain committed to achieving net-zero emissions from underwriting by 2050, and have indeed remained part of the Net Zero Asset Owner Alliance, where there is less antitrust risk, which demonstrates their commitment to this objective,” said Brandan Holmes, vice president and senior credit officer at Moody’s Investors Service in London.

“However, to the extent that more companies pursue decarbonisation of underwriting portfolios outside of the alliance, it will result in reduced transparency and consistency around their targets and progress,” he said.

Even with departures, the NZIA has not been a “fruitless exercise”, according to Ireland. “Having a ‘North Star’ to follow is important, and the NZIA has certainly laid a path,” he said.

Last year, NZIA and the Partnership for Carbon Accounting Financials (PCAF) issued an accounting and reporting standard for insurance-associated emissions. The NZIA also published a target-setting protocol earlier this year. Its signatories are committed to gradually setting greenhouse gas emissions reduction targets in their underwriting operations from July 2023, although any insurer can follow the PCAF accounting standard and NZIA protocol.

“The NZIA Target Setting Protocol is an important framework to help any insurer structure their own decarbonisation trajectory, whether they are signatories of the NZIA or not. The NZIA has also worked with PCAF to develop a baseline standard for calculating insurance-related greenhouse gas emissions, which again can be widely adopted across the industry by any company wishing to reduce its carbon footprint,” Ireland said.

Zurich and Hannover Re did not give detailed reasons for leaving the NZIA, although Munich Re cited anti-trust concerns as grounds to pull out of the agreement. Others appear sceptical over the antitrust justification and point to possible concerns about meeting greenhouse gas reduction targets, or a sense that sustainability may become a competitive advantage, explained Ireland.

Insurers do, however, appear to be caught in growing pushback against ESG in the US, where some politicians have raised antitrust concerns over industry climate groups like the NZIA. Several US states have proposed anti-ESG legislation.

According to law firm Morgan Lewis, state legislators have filed approximately 99 bills aimed at restricting the rise of ESG business practices, up from 39 in 2022. As of 3 April, seven of the bills had been enacted into law, 20 were effectively dead and 72 were still pending.

According to Moody’s, government support is needed to overcome net zero obstacles. The EU and UK have published draft guidelines to help companies cooperate within the law but have not yet released guidance specific to financial institutions and net-zero alliances.

“One of the challenges the large global insurers face is that their business is global but regulation is fairly local, therefore while there might be regulatory support in some regions in which they do business, this doesn’t necessarily offset the risk arising from regions where the regulatory environment is less supportive,” said Holmes.

Moody’s also noted that (re)insurers’ ability to meet their net-zero goals will depend, in part, on the actions of clients and policyholders. “Therefore, to the extent that weakening of the alliance reduces the momentum of decarbonisation across the broader insurance ecosystem, it will also impact the success of even the largest (re)insurers’ decarbonisation plans,” it said.

Given the threat posed by climate change to insurers’ balance sheets, and with growing regulatory pressures, Ireland believes that European carriers are committed to their net-zero ambitions.

“There is growing recognition, particularly among the major European players, that the cascading impacts of climate change are going to cost the industry a lot of money in the years ahead and threaten to create a less insurable world, so it is in the interests of (re)insurers to play their role in building a more resilient, sustainable, low-carbon economy,” he said.

“As a result, sustainability is increasingly being baked into the core business strategy of leading firms, including Munich, Zurich and Hannover Re, so I do believe the industry is slowly heading in the right direction. As a multi-trillion-dollar investor and underwriter of virtually all parts of the global economy, the insurance industry has a vital role to play in stewarding an orderly transition to a sustainable, low-carbon world. The question is whether it fulfils this role quickly and decisively enough. While not a deal-breaker, a weakening of the NZIA certainly doesn’t help,” he added.