Supporting net zero – is it enough?

The transition to net zero is a difficult but ultimately achievable goal, though it requires cooperation and support, not least from the insurance sector. Some insurers have been particular focused on the issue, pulling out of underwriting new oil, gas and coal projects, but the sector as a whole has been criticised by risk and insurance managers for not doing enough to support net-zero transition, or renewables and green technology. Many European risk management associations have called for greater support as pressure grows on companies to do more to speed up the transition. Last September, the German risk and insurance management association (GVNW) said it would like to see insurers focus on delivering new coverages for innovations designed to reduce carbon emissions, such as green concrete, rather than only penalising firms for their supposed failings. Insurers argue that they are insuring companies that have a transition path that will ultimately see them achieve net zero, rather than simply ditching them wholesale. And on new green technology, the concern is over a lack of data and claims experience, which makes insurers uncomfortable. So are insurers doing enough to support commercial insureds in the transition to net zero? Alison Clarke, head of renewables for Aon’s global broking centre (GBC) and UK, says not quite: “For clients to meet their net-zero targets, some of which are only six years away, we need to see far more investment in the next 12-24 months. We understand that insurers want more data, technical knowledge and to see several years of trading first, but insureds are in need of risk transfer solutions today on a large scale. There is plenty of capacity out there, but it is very disjointed and very volatile.” As for a lack of support from insurers for green technology and the net-zero transition in general in terms of new products, she says: “As an industry, we are far too slow in developing new products, especially where data may not be available to the ‘normal’ actuarial levels. Clients are willing to open their doors to insurers to help them be accepting of the risks, but it is a slow process and time is not something we have a lot of for the transition.” Move to positive stance Alex Hindson, partner & head of sustainability, Crowe, says that insurers in many cases are still determining their own positioning around transition to net zero, and only a few have moved beyond high-level engagement on transition plans and gathering data from their insureds on their greenhouse gas emissions. He notes that many insurers have put in place ‘negative screening’ approaches – in other words, policies on business they will not support, which are typically linked to thermal coal and oil sands developments. “The challenge now is to adopt a more positive stance towards stewardship, engaging with clients with respect to their transition plans. This will start to become the norm as insurers are required to report on their ‘IAEs’ (Insurance Associated Emissions) because of standards such as IFRS S2 stimulating disclosure of financed emissions. Insurers are rapidly understanding that given the materiality of their insured emissions, the only way they will reach net-zero commitments is by enabling their insureds on their own transitions – collaboration will be key,” he says. In defence of insurers, Hindson says insurers “by their very nature are careful risk takers and should remain so for the sake of society. Underwriters operate within heavily regulated industries and so moving at speed in response to market demands can be challenging. However, having personally held roles within insurers, brokers and as a risk manager, I am uniquely placed to reflect on these challenges.” He adds: “Risk managers should be pushing for new solutions and insurers should be cautious in deploying their capital, but there is a well-proven path through this challenge. It is often the case that brokers bridge the gap between client needs and insurer capabilities by developing and piloting new coverage solutions.” The issue for insurers with new products is that insurers need a diversified book of business to ensure that a new solution has time to mature and grow profitably. But as Hindson explains, by its very nature, a new product attracts a limited number of early adopters. He says managing accumulation risk to natural catastrophes or systemic technology failures is key to allowing a new product to mature into a successful new income stream. Lack of data One of the issues that always comes up concerns data, or the lack of it on renewables and new technology/products around green transition. “As an ex-underwriter, I understand the need for data,” says Clarke, “but this industry is still growing, with some sectors very much in their infancy. The time for action is now, and I would hope that more insurers would see the transition as an opportunity to support clients, governments and the drive to net zero. Insurers have some of the brightest and most creative minds to make the transition happen, as without them it doesn’t look achievable.” Hindson believes that lack of historic data for underwriting new lines of business is not a problem and has not held back innovation previously. However, he says it requires underwriters to innovate and gain support from other sources such as data analytics and actuarial teams, as well as reach out to academia for the latest insights. “We have seen several successful research collaborations where underwriters work cross-functionally to recreate synthetic loss data, using models and AI, and seek to understand the key risk factors they need to incorporate into their risk selection and pricing. Often the challenge is providing sufficient capacity to offer meaningful coverage for clients, and this is where insurers need strong support from treaty reinsurance partners,” says Hindson. Parametric covers There is one solution that is often talked about: parametric covers. Hindson notes that it is often an approach to providing cover for novel or challenging exposures. “The issues that most organisations hit relate to cover being highly bespoke in nature, meaning considerable costs associated with negotiating coverage. This would therefore work best as a multi-year solution given the investment in design of the solution at the front end. It requires some test cases to drive deal flow, but inevitably it’s always going to be a niche solution for the more sophisticated end of the market, particularly associated with disaster adaptation,” he says. Clarke says it is certainly an option, allowing insurers to focus on a scenario that can be modelled and priced accurately, giving them certainty around exposures. There is some good news in all of this, despite gloomy predictions about meeting the 2050 target. For example, the world’s capacity to generate renewable electricity is expanding faster than at any time in the last three decades, and it is set to overtake coal to become the largest source of global electricity generation by early 2025. And the insurance sector is waking up to the opportunities offered by the transition to net zero. Recent examples include a planned new energy syndicate at Lloyd’s in 2024 from Axis Capital, which will provide fresh capacity for low-carbon energy projects that support the transition to net zero. “This will be the first syndicate to specifically focus on insuring organisations’ energy transition journeys, in line with their actions to achieve net zero by 2050, which is crucial for meeting the goals of the Paris Agreement,” Axis said. And an innovative insurance facility covering the leakage of carbon dioxide from commercial-scale carbon capture and storage facilities has been launched by Howden and led by SCOR’s syndicate at Lloyd’s. Rowan Douglas, CEO, Howden Climate Risk and Resilience said: “This breakthrough shows how insurance helps unlock vital finance to drive the net-zero transition at the scope and speed required.”

Supporting net zero – is it enough?

Is the insurance sector doing enough to support transition?

Want to read this article?

Read Next

CSDDD a ‘milestone for responsible business conduct’

Shifting climate litigation against corporates and D&Os ripe for growth

Risk managers urged to include climate change impact on workforce health

New Africa-focused syndicate launched at Lloyd’s

WTW and Riskonnect partner on risk diagnostic tool

CSDDD a ‘milestone for responsible business conduct’

Shifting climate litigation against corporates and D&Os ripe for growth

Risk managers urged to include climate change impact on workforce health

New Africa-focused syndicate launched at Lloyd’s

WTW and Riskonnect partner on risk diagnostic tool

Want to read this article?

Read Next

CSDDD a ‘milestone for responsible business conduct’

Shifting climate litigation against corporates and D&Os ripe for growth

Risk managers urged to include climate change impact on workforce health

New Africa-focused syndicate launched at Lloyd’s

WTW and Riskonnect partner on risk diagnostic tool

Related Articles