The insurance industry and net zero: Great power, great responsibility

Picture a world that is uninsurable. As humanity lets Earth’s temperature climb ever higher and massive natural effects take place, one day we could find ourselves living in a world that is too steeped in risk to balance insurance premium costs with pay-outs. The claims are too many, and too large. By then, it’s not just the insurance system that has collapsed, but the economic system. For insurers imagining that kind of future, the word ‘sustainability’ takes on multiple meanings.

Insurance providers play a role as protectors – safety nets for society. Today, they are acutely aware that this role extends to responding to climate change. Like most of us, they are challenged – by clients, shareholders, competitors and society itself – to help secure all of our futures, in the Netherlands and around the world. They’re compelled to rise to the challenge, and starting to figure out how best to accelerate action and make a positive impact.

A firm start: Insurers on the net-zero journey

For most people, the role of insurance companies is not that visible, except when big storms like Dudley, Eunice and Franklin hit, or we have a motor-vehicle accident. But in the commercial, infrastructure and operations claims environment, insurers have it within their power to direct focus and funds to progress society’s decarbonisation, and they’ve taken good steps. One example is the UN-convened Net-Zero Insurance Alliance, formed to share knowledge and transition underwriting portfolios. But their influence can also manifest in smaller actions, such as choosing repairs over replacements, replacing damaged goods with refurbished items, or installing flood defences after a storm.

Insurers are reducing their own carbon footprint and gradually turning their investment portfolios toward net zero. But in terms of embedding climate action into their core business, generally speaking, the European insurance industry is still really at the starting point. This was evident in the findings of the 2021 EIOPA market and credit risk modelling study: Only one respondent indicated the use of a ‘green assets’ taxonomy in their company’s model.

Part of the difficulty lies in the socio-economic ecosystem insurance is embedded in, as primarily an indirect risk solutions provider. It’s not just about encouraging one sector or group to change their behaviours; there’s potential to influence, and be influenced by, vast swathes of society and industry – every last area that insurance extends to. Where to begin? Where can real impact be made? How to make change happen?

Upping the impact to arrest climate change

Insuring climate-beneficial infrastructure projects, and denying coverage for non-green projects, will go a long way. Of course, there are limits: Insurance companies don’t have free rein over policy-holders’ funds. At best, they can influence repair/replacement decisions when you have a car accident. But there’s an undeniable ability to make risk capital available to cover types of infrastructure, locations of assets or types of peril, such as fire, flood and storm.

We see this ability showing itself increasingly in exclusions – for example, limiting and refusing the provision of cover to thermal coal-based businesses and raising the policy premiums for storm-prone assets. But we also see it in actions that support climate risk adaptation through flood defences, and climate mitigation through facilitating properties’ conversion to renewable energy. The key is to harness this power of insurance for real, lasting change in a way that becomes part and parcel of ordinary, day-to-day business and life.

Transformation of the very core of the business can begin by enhancing collaboration with partners across the broader ecosystem, and focusing on integrating the sector’s knowledge with a firm focus on the mid-term future.

• Collaboration: Insurers and reinsurers are experts at pooling and redistributing risk. Cooperative schemes are the very essence of insurance and we have seen many successful examples in the past. In the Netherlands, pools for ‘uninsurable risks’, like terrorism, environmental claims and nuclear disasters, are operational; the next challenge will be the design of an effective system for flood risk – with an obvious growing importance for society.
  
  Working together to strengthen their societal safety net and risk governance role, insurers will write the script for a new future by guiding its protection mechanisms. They can use their existing ecosystem to collect insights and forecasts from scientists, innovation experts and other partners whose data projections can illuminate tomorrow’s viable, sustainable endeavours.
  
  
• Future focus: Insurers are often seen as driving forward by looking in the rear-view mirror. This is, of course, not a totally fair depiction but does contain a grain of truth: Mathematical loss modelling, such as accounting, is the study of history and thus enables learning from the past.
  
  By collaborating with others and combining insights, insurers can play a proactive future-risk manager role. For example, when considering the heat risk exposure of the current housing stock of a city, with other stakeholders, they can discover new ways to protect society against the rising risk of extreme heat.

The insurance industry can have a direct hand in facilitating Europe’s ‘turning point’. But providers must join hands with others and focus on climate action. Our collective journey to net zero is urgent, and requires that influential role players act now. 2030 – the year by which scientists expect us to have made a firm economic turn toward decarbonisation – is around the corner. The insurance sector is in agreement that a four-degrees warmer world is uninsurable; this means insurers have existential and societal motives to help ensure we achieve the Paris Agreement goals and make this turning point a reality.

Next steps for the insurance industry, here and now

What can insurers do right now?

1. Take a step back and reflect on your asset and underwriting portfolios as vectors for change, asking yourself: Are we doing enough to support the change? Do we have a baseline measure of our financed and underwritten emissions? Are our sustainable-labelled products having the promised impacts?
2. Consider whether you are effectively supporting existing and new customers to be part of the change, asking yourself: Are our products and solutions enabling new types of risk cover that enable the sustainability transition? Are we enabling or constraining societal innovation?
3. Critically evaluate your data, tooling, modelling, and operational capabilities, asking yourself: Are they future proof? Are we ready for extreme risk events? Are we comfortable with our climate-risk stress-test results? Are our models reliable?

To learn about the other economic and industrial impacts of climate change, read Deloitte’s report “Europe’s turning point”.

For help to answer these questions, please reach out to us.

¹European Insurance and Occupational Pensions Authority, “EIOPA publishes the results from its yearly study on the modelling of market and credit risk”, 9 April 2021, https://www.eiopa.europa.eu/media/news/eiopa-publishes-results-its-yearly-study-modelling-of-market-and-credit-risk_en, accessed on 4 March 2022.