Given the challenges the world is facing in reaching net zero, it’s great to see that many large insurance companies are showing leadership and setting strong examples by disclosing ambitious climate goals.
Forerunners will be in a unique position to meet the needs of stakeholders and attract new customers through public disclosure of emissions, progress toward climate targets, and demonstration of environmental stewardship.
So far, most of the insurance industry’s work around climate and greenhouse gas emissions has focused on direct operations and investment portfolios. Next, insurers should establish baselines for their underwriting portfolios and supply chains, in which claims settlement plays a crucial role.
The insured emissions and the claims carbon footprint complement each other fittingly. The insured emissions are relevant for commercial insurance and it’s mainly a question of disclosing which type of companies and industries “you are willing to do business with”. The claims carbon footprint, on the other hand, works across both retail and commercial insurance and only focuses on the actual footprint of the insurance product itself.
As the demands for climate action intensify, insurers are also stepping up their game and trying to find pathways towards net zero. When we talk to people at insurance companies, their concerns and hindrances on this topic largely stem from a sense of lack of alignment. In this article we will briefly discuss each alignment challenge and propose some solutions on how to handle them.
ESG and sustainability in general is a broad topic covering much more than just climate related questions. We would argue, however, that of all the potential sustainability related ambitions, combating climate change must be the most important one. Our vision is that the global insurance industry will reach net zero emissions in 2040. Therefore, while we think it’s important and commendable that insurers adopt the Principles for Sustainable Insurance, we also recommend that insurers seek out and implement additional frameworks that have a more climate specific agenda.
We fully agree with BCG’s assessment that insurers have a great opportunity to become leaders in the climate fight due to their expertise in assessing and taking risk. We were also happy to see that they had identified several impact opportunities for insurers, which largely overlapped with the opportunities we’ve described previously. To seize the opportunity, insurers must address a number of key questions and formulate a compelling climate strategy that cuts through and crystallizes – for all stakeholders – what the company aims to do.
The recent IPCC climate report is important because it is approved by 195 governments and based on more than 14,000 studies, representing the most comprehensive summary to date of the physical science of climate change. Furthermore, the report will be in the center when diplomats gather in November at a U.N. climate summit in Glasgow (COP26). Despite all the alarming facts, there are some optimistic tones in the report as well. If we can orchestrate a coordinated global effort to stop adding CO2 to the atmosphere by 2055, global warming would likely halt and level off at around 1.5°C. That would require moving away from fossil fuels starting immediately, as well as removing large amounts of carbon from the atmosphere. We believe that the financial services sector can play an important part in this endeavour.
Preparations for the the next UN Climate Change Conference (COP26) in Glasgow later this year are in full motion. The trend has been that investment portfolio managers are expected to not only report on the carbon footprint of their assets, but also set clear emission reduction targets. Similarly, the next trend could be that we see a surge for insurers to report on the emissions associated with the claims that are being handled and paid, and that relevant actions will be defined and followed-up on.
Most insurers know that utilizing the pricing mechanism is key to powerful and quick changes, and the use of carbon pricing in all its shapes and forms is the key lever being utilized across geographies and sectors to reach net zero. We are convinced that there are material and growing consumer segments who would embrace this net zero value proposition. Also, there is always the possibility that governments will impose carbon taxes on motor insurance.
There is an obvious opportunity in settling large claims in a carbon efficient manner, focusing on using low emission materials and technology. Reinsurers could play an effective role in motivating their customers, the insurers who actually settle these claims, to reduce carbon footprints.
Motor insurers, according to our estimates, contribute ~15% of the revenues of the global automotive industry, through repairs and cash settlements of insurance losses. Under the assumption of proportionality, this indicates that ~0.5% of all global carbon footprints stem from motor vehicle repairs and cash settlements from insurers.