As the economy transitions towards net zero and a more sustainable future, several opportunities will emerge for the (re)insurance sector that can only be met through a collaborative approach and innovative product structures.  

Enhancing the product suite to meet the net-zero transition challenge

As Conduit Re’s executive chairman Neil Eckert highlights in an interview in this month’s edition of The ESG Insurer, there is a clear need for the industry to enhance its product suite to provide cover for exposures where it is currently more challenging to obtain insurance, such as early-stage technology, as well as protecting the revenue streams of companies leading the drive towards a more sustainable future. 

The need to provide products that respond to the changing world is a core challenge for the insurance sector as it addresses environmental concerns. 

A report issued late last month by the industry-backed Climatewise initiative further explores the need for climate product innovation. 

The report suggests nine key areas of opportunity for insurance product innovation to support climate mitigation, which include supporting the scale-up of emerging and existing low-carbon and net-negative technologies and start-ups, as well as the sustainable decommissioning of carbon-intensive assets.  

If the industry gets it right, the transition represents an opportunity rather than a threat, as Lloyd’s CEO John Neal highlighted in June. 

Neal reiterated his belief that the transition to a low-carbon economy is the greatest single underwriting opportunity that many in the industry will see in their career. 

Swiss Re CEO Christian Mumenthaler, who previously outlined his views on the net-zero transition in the first edition of The ESG Insurer, told the group’s media day last month that the sustainability movement was now at a “tipping point” with the transformation set to be enormous. 

Mumenthaler expects this to mean huge investments and opportunities over the next decade.  

What is clear at this stage is that the pace of change within the insurance sector, while building, is falling short of that required to enable the development and scaling of new and existing low-carbon technologies. 

As Climatewise warns in its report, the industry needs to rapidly lean in, in order to meet the existing risk transfer and reduction needs of clients’ decarbonisation pathways, as well as to  anticipate evolving demand and to drive and incentivise the transition to net zero.  

A more collaborative approach will be needed as the industry accelerates its efforts around product innovation.  

Climatewise’s seven recommendations to drive climate product innovation

“We must avoid the creation of new ‘coverage gaps’ in the form of net zero technologies for which a lack of insurance coverage might hold back the development, adoption or scaling,” the report warns. 

The past month has seen the latest attempt by the industry to create a platform to drive collective action within the sector. 

The Sustainable Markets Initiative (SMI) Insurance Task Force, put together by Lloyd’s CEO Neal on the back of a request by the Prince of Wales, will aim to provide climate-positive financing and risk management solutions to support and encourage individuals and businesses around the world to accelerate their transition to a sustainable future. 

Insurance will have a critical role to play during this transition, providing confidence to capital providers by de-risking new technologies as they attempt to scale-up. 

There will also be an important role for the industry to play as old technologies are retired – in the context of fossil fuels, this will include underwriting the decommissioning of the infrastructure and the restoration of sites.  

There also remain unanswered questions as to how the industry will reassess its appetite for fossil fuel-related risks during the transition to net zero.  

Lloyd’s chairman Bruce Carnegie-Brown suggested one possible solution for the market following the announcement of the SMI Insurance Task Force.  

He suggested the market could consider moving towards a central risk appetite for its total fossil fuel exposures, to be allocated somehow among syndicates wishing to operate in that space.  

This central appetite would then over time tighten as appetite for renewables grows. As the recent flurry of appointments for renewable underwriters highlights, several carriers are already increasing their appetite in this space.  

The Climatewise report identifies several ways in which the industry can better align its product offering with clients’ climate priorities. At a time when the coverage gap is already wide for well-understood perils, effectively building relationships with clients and incentivising collaboration around innovative product structures can play a major role in ensuring the insurance sector is at the heart of the economic transition towards net zero. 

Nine key priority areas in insurance product innovation to support climate mitigation