Insuring a Low-Carbon Future

A PRACTICAL GUIDE FOR INSURERS ON MANAGING CLIMATE-RELATED RISKS AND OPPORTUNITIES

This guide explores the landscape of leading practice by insurers, identifies common barriers, presents a framework of eight building blocks for all insurers, and offers wider recommendations for key industry stakeholders.

The key points

We covered the whole industry: Based on interviews with 14 insurers across general, life and reinsurance business lines, the findings and building blocks presented in this guide offer a unique industry-level perspective.

This is a practical tool: Based on the real experiences of proactive insurers, the framework of eight building blocks is designed to help other insurers navigate an increasingly complex environment in their climate strategy journeys.

Anyone can do it: This guide reveals how leadership on climate issues is possible for insurers of all sizes and business lines.

What we learned from surveying the leading practice landscape

Our interviews revealed a variety of creative measurers insurers are taking toward holistically integrating climate-related factors across their underwriting, investment, and group-wide risk management practices.

We identified eight common approaches undertaken by respondents:

Proactive insurers are taking steps toward:

Developing climate-supportive products and services
  • Many respondents are developing a new generation of climate-supportive products and services. Some are incorporating eco-labelling while others are developing products intended to create climate-aligned behavioural change from their customers.
  • Some are incorporating circularity into their claims processing by utilising repaired items and undertaking part repairs where possible.
Raising climate risk awareness among customers and communities
  • Insurers are educating customers and wider communities on how to prevent damage from climate-driven events and protect against life and health impacts.
Taking a holistic approach to climate risk management
  • Nearly all respondents have established some form of cross-functional initiative that focuses on climate issues, though many are at early stages.
  • Many respondents are already sharing climate risk knowledge across the balance sheet, most commonly using physical risk expertise from the underwriting side to better understand similar risks on the investment side.
  • The most advanced respondents are developing group-wide climate policies, fossil-fuel policies, and scenario analysis work.
Exploring climate risks facing life and health
  • While many proactive insurers with life and health businesses are already responding to climate-risks in their investment portfolios, only the most advanced are strategically focusing on better understanding these risks for their underwriting portfolios.
Integrating climate science into risk models
  • Proactive respondents are upgrading their internal models or challenging their service providers to integrate forward-looking climate science and scenarios.
Building climate into investment strategies
  • Advanced respondents are publicly committing to align their investments with the goals of the Paris Agreement and to setting Science Based Targets for investors.
  • Many respondents are escalating climate in their company engagement in a range of innovative ways across both listed equity and debt.
  • Larger insurers with asset management businesses are building a new generation of climate themed investment products open to outside investors.
  • Advanced respondents are starting to scale their low-carbon investments across asset classes, in some cases over six per cent of their general accounts.
  • Some respondents are innovating to better understand climate risk in sovereign fixed income and incorporating multiple 2-degree scenarios into their scenario analysis work.
Driving collaboration on key climate issues
  • Proactive respondents are collaborating with peers and wider stakeholders on a range of climate-relevant themes including public policy, green investment opportunities, developing new tools and methodologies, and education programmes on climate risks.
Using TCFD to their advantage
  • Many respondents have used the Taskforce for Climate-related Financial Disclosures (TCFD) Framework to develop their strategic climate responses, while more advanced insurers are already publishing TCFD-aligned reports and incorporating the Framework into their company engagement.

What common barriers proactive insurers shared with us

Our interviews revealed a range of barriers commonly faced by proactive insurers in their climate strategy journeys. This information will be useful for other insurers interested in managing climate-related risks and opportunities.

Issues around climate-related data
  • Climate-data generally suffers from quality, availability, and frequency issues.
  • There appears to be less climate-data for the underwriting side than for the investment side.
  • For underwriting, there appears to be less climate-data for life and health than for general portfolios.
  • Data for natural disasters and weather trends is largely based on observed data and does not yet fully capture forward-looking projections based on the latest climate science.
Weak demand for climate-friendly insurance products and services
  • Weak consumer demand for recently developed climate-supportive products and services have led some respondents to strengthen efforts in educating consumers on climate risks.
Capital requirements are yet to directly reflect climate risk
  • Some respondents subject to the capital requirements required under Solvency II in Europe noted the current configuration does not incentivise long-term investments aligned with a low-carbon transition.
Shortage of investable clean infrastructure opportunities
  • A perceived shortage of clean infrastructure investment opportunities, including in emerging markets, has prompted some respondents to respond by engaging with policymakers.
Inconsistent climate progress within and between regions
  • Inconsistent progress on climate issues both across and within global regions was noted by respondents active in multiple countries as a challenge.
Lack of pressure from insurers’ investors on climate issues
  • Some respondents noted a lack of pressure from their own investors on climate issues. They noted that stronger engagement from their investors would help drive internal progress.
Misaligned time horizons
  • Insurers tend to have risk assessments between 1-3 years while the full impacts of climate change are expected to unfold over longer time periods.

What proactive insurers recommend to their peers at earlier stages

To truly catalyse change in the insurance industry, supporting measures like the following are recommended for key stakeholders.

Start the journey now – don’t wait for the perfect tools
  • The urgency of the climate crises requires all insurers to start taking immediate action and to recognise that data, tools, and methodologies will evolve over time.
  • Insurers are encouraged to view their climate responses as a journey that is expected to intensify and become more sophisticated over time.
Consider climate change for a risk perspective
  • Insurers are encouraged to perceive and respond to climate change as any with other material risk, such as cyber risk, where the industry has already taken strong action.
Start using TCFD
  • The TCFD Framework helps stimulate internal dialogue and connected thinking on climate issues both within and across departments, while helping prepare for public reporting.
Gain support from senior decision-makers
  • Gaining support from senior decision-makers (including at senior management and board levels) is critical for making progress on managing climate issues.
  • Bringing in internal and external expertise on climate risks is helpful in gaining buy-in from senior decision-makers.
Build a cross-functional climate working group
  • Cross-functional climate oriented initiatives (including working groups, taskforces, and committees) help connect departments and key decision-makers on how best to respond to climate issues.
Join collaborative initiatives
  • Joining a climate-related collaborative initiative helps provide access to latest information while building a valuable network.
Start challenging risk model providers
  • Challenge third-party risk model providers to ensure they are adequately capturing forward-looking climate science and scenarios.
  • Annually back-test risk models to ensure climate risks are sufficiently integrated.

Wider recommendations for key industry stakeholders

To truly catalyse change in the insurance industry, supporting measures like the following are recommended for key stakeholders.

Insurers
  • Challenge policymakers on carbon pricing, fossil-fuel subsidies, and mandatory TCFD-aligned disclosure.
  • Invest more resources into understanding climate risks facing life and health.
  • Challenge third-party risk model providers on integration of forward-looking climate science and scenarios.
  • Consider impact, as well as risk.
Investors
  • Challenge insurers to develop more robust and holistic climate policies.
Policymakers
  • Review capital requirements to ensure insurers are incentivized to invest in the low-carbon transition.
  • Support the introduction of higher carbon prices and phase out fossil fuel subsidies.
  • Make TCFD-reporting mandatory for investors and corporates.
Customers
  • Challenge insurers on how climate awareness is integrated into products and services, claims processing, and climate risk education programs.