Last year, at COP26, insurers committed to integrating ESG into their operational and investment decisions in order to help deliver on the ambition of net zero. This year’s COP27 event will see growing pressure for them to shift their focus to underwritten emissions. The heavy lifting is just starting.
Insurers are under pressure to use their underwriting power to accelerate decarbonization of the global economy. Government leaders and regulators are looking to the financial sector to use their influence to encourage change. Making insurance more expensive or unavailable for those unable or unwilling to reduce their carbon footprint may also increase the real cost of carbon, but there are social considerations to take into account as well and so insurers will need to tread carefully.
The problem is that (as of the time of writing), there are no standard methodologies for measuring carbon emissions for underwriting. However, the Partnership for Carbon Accounting Financials (PCAF) is in the final stages of finalizing their standard for insurance-associated emissions following industry consultation over the summer, which will be formally released on November 16th during COP27 with finalized attribution factors for commercial lines and personal motor portfolios. Insurers, particularly those who have signed up to the UN’s Net Zero Insurance Alliance (NZIA), will need to move quickly to apply these new standards.
Capabilities that count
The good news is that recent history suggests the insurance industry is committed and capable of making the changes required. Most have done a good job at identifying and quantifying their operational and value chain emissions, although more work is needed in embedding these new processes within the finance function. That has led to a series of operational changes – from decarbonizing their data warehouses through to reducing paper in their marketing outreach – that are helping reduce emissions across the sector.
The more complicated part to date, due mainly to data issues, has been to identify and benchmark what’s known as financed emissions – basically any emissions associated with an insurer’s investments and loans. Here, the PCAF and others have moved comparatively quickly to publish standard methodologies for calculating financed emissions. This is all about following the money. And there is a lot of it. Financed emissions are typically the largest component of a life insurers’ emissions footprint.
From data to action
Given their experience in these two areas, most insurers should be able to ramp up their accounting of underwritten emissions fairly quickly. What will likely take more effort, however, is working out how that data might influence their underwriting decisions, their current books of business and their future product development processes.
Is the strategy simply to match premiums to risk? Or is there an ambition to go further – regulators and accountants are now looking for credible and comparable carbon transition plans and committing to transparent data reporting? Where are the red lines? And what can this mean for current products, services and intermediaries?
Insurers appear ready
However, with methodologies shortly being published, better data being collected and more pressure being added, insurers are expected to move very quickly to fully enshrine their net zero goals into their underwriting approach and strategy, and more broadly the collective part they will play in assisting the world decarbonize, as part of their transition plans. Indeed, by the time the next COP event rolls around, most insurers may see this as a key point of differentiation – for both clients and shareholders.
The insurance sector has a massive role to play in helping the world achieve its net zero goals. But it will likely take more heavy lifting. Thankfully, it appears insurers are ready.