As COP26 draws to a close, negotiators are continuing to attempt to agree a deal on the next steps the world will take in addressing climate change.
Talks will likely continue for several more hours as governments attempt to thrash out an agreement. It appears likely that the outcome will be disappointing in terms of commitments on emissions reductions to meet COP26’s stated aim of limiting global temperature increases to 1.5 degrees this century.
But the news on adaptation finance is more positive with a pledge to double current commitments by 2025. In today’s final Daily COP26 bulletin, The Insurer examines some of the key takeaways from the last two weeks of talks from an insurance industry perspective.
The information gap must be closed before the protection gap can be addressed
The two central areas of focus at COP26 were reducing emissions to mitigate the impacts of climate change, and facilitating adaptation to help build societal resilience against those impacts.
While media attention typically focuses on the former, it is the latter goal which has provided the focus of much of the industry’s efforts around COP26.
The industry presence in Glasgow has been significantly higher than at previous COP gatherings with several initiatives unveiled to help bolster the resilience of the most vulnerable.
The work of the Insurance Development Forum (and its partners) deserves particular focus. Projects such as the Global Resilience Index Initiative and the Global Risk Modelling Alliance can play a critical role in helping meet the adaptation challenge.
The GRII, launched at the request of UN-envoy and former Bank of England governor Mark Carney, is aiming to level the playing field in terms of risk data and information which can then feed into the adaptation and resilience planning of vulnerable countries.
The open, collaborative platform will draw on the significant modelling expertise of the (re)insurance industry to provide an advanced, probabilistic view of risk.
The success of these initiatives could play a critical role to attract investment and broaden the use of insurance as part of disaster risk management frameworks deployed across the world.
It is only through closing the data and information gap that the protection gap can be addressed.
Recognition of the role of insurance as an adaptation tool is rising
Several positive signals emerged during COP26 recognising the important role insurance can play in helping address the climate resilience challenge.
As Eric Usher, who heads the UN Environment Programme Finance Initiative, acknowledged: “The insurance industry plays a three-part role as risk managers, insurers and investors which uniquely positions the industry to help support the building of climate-resilient economies.”
The role the industry can play in helping communities understand, prepare for and reduce climate risks has gained further traction at COP26.
Emma Karhan, part of the Aon team that was on the ground in Glasgow, believes the event has helped highlight the important role the insurance industry has to play in helping mobilise capital to address challenges posed by climate change.
The agreement expected to emerge from the two weeks of talks will place an increased emphasis on the importance of adaptation, which sits at the heart of the insurance industry’s expertise.
During a side event in Glasgow, Munich Re put forward the concept of creating governmental chief risk officers to provide central risk oversight at national levels.
Such a concept would introduce structured risk management at national levels and help countries better respond to natural catastrophes, the reinsurer argued.
As the focus on building climate resilience continues to escalate, the role of insurers as society’s risk manager will continue to grow.
The industry is moving towards better quantifying its net zero progress
The formal launch of the Net Zero Insurance Alliance (NZIA) was another milestone in Glasgow, at a time when the role of the industry in insuring and investing in fossil fuels continues to face scrutiny.
The latest Insure our Future scorecard on the industry’s response to climate change was released on the COP26 Finance Day, and was largely critical of the industry’s efforts towards decarbonisation.
One of the major challenges currently facing the sector is the lack of an industry standard towards measuring the carbon footprint of its underwriting portfolios – something the NZIA is working to address.
“We are working on a standard to disclose global emissions by the summer of next year, and our target setting protocol should be able to launch by January 2023,” explained Butch Bacani, head of the UN Environment’s Principles for Sustainable Insurance Initiative (PSI).
“Once that is out our members should be able to publish their first interim targets within six months,” Bacani revealed.
Providing quantitative measurements of the industry’s progress towards net zero will play an important role in helping drive forward efforts towards net zero.
Scrutiny typically focuses on decarbonisation efforts with little recognition of the steps the industry is taken to address climate resilience and adaptation.
While these qualitative efforts are difficult to measure, they should be factored into any analysis of the industry’s response to climate change.
Insuring the energy transition: the multi-trillion dollar opportunity
The transition towards net zero represents a huge opportunity for the sector, one which hasn’t escaped the attention of senior industry executives.
“You will see a massive transfer of investment and assets from the old economy into a new one. During that transition, you will see change occur on a scale probably not seen since the Industrial Revolution,” explained Neil Eckert, executive chairman of Conduit Re, in an interview with The Insurer.
“That will create vast amounts of new construction and huge amounts of decommissioning of old industrial sites which in itself, with the environmental liabilities involved, is a huge business. There are also opportunities presented by new technologies,” he said.
The industry will have a critical role to play in providing insurance for these new technologies, serving as an enabler for society’s shift from a fossil fuel-based economy towards a renewable one.
Several industry practitioners have said they will support rather than abandon their clients through the transition process, highlighting that abandonment will likely result in these assets moving into private hands where they will face little scrutiny.
However, it remains critical for the industry to ensure clients have credible transition plans in place before providing cover.
Getting the message across remains a challenge for the sector
One of the problems the industry faces is that much of the work it is doing in areas such as building societal resilience and serving as an enabler of technological development and innovation goes largely unnoticed by the wider world.
Public perception has long been a challenge for the sector and while COP26 has raised the industry’s profile compared with previous talks, outside the industry this has received little attention.
But work must continue to educate and inform society and governments about the risk. The industry is uniquely positioned to do so and has a responsibility to make its voice heard.
The message from Glasgow was that the public sector is listening and many governments recognise the value of insurance mechanisms to enable the decarbonisation transition and better protect the most vulnerable.
The initiatives being developed through mechanisms such as the IDF have potential to change the lives of millions of people.
From an industry perspective, the hope is that COP26 serves as a catalyst for even greater momentum towards meeting the climate challenge and enabling the world to transition towards a more sustainable future.