Climate change and sustainability have risen to the top of board and C-suite agendas in the wake of the Covid-19 pandemic. Though previous discussions about sustainability were largely theoretical, leading insurers are now taking tangible steps to address the full range of issues and opportunities.
Certainly, COP26 refocused the minds of insurance leaders and emphasised necessary steps for the transition to a lower-carbon economy. Leading insurers and reinsurers announced at COP26 the formation of the Net-Zero Insurance Alliance, with the goal of transitioning their underwriting portfolios to net-zero emissions by 2050.
Beyond the massive societal threat posed by climate change, insurers have multiple reasons to act:
- New regulatory requirements
- Pressures from consumers and employees
- Negative impacts on their own bottom lines and stock prices
- Investor expectations and potential restrictions on future access to capital
- Reputation impact considering the risk of widening the protection gap
It’s also important to note that sustainability strategies can be as much about purpose (protecting society from the most severe risks) as profits (growing both the top and bottom lines).
Seeing the big picture of sustainability
Climate-related losses continue to mount for insurers. In fact, less than half of climate-related losses are typically insured. The problem will only get worse as the frequency and severity of floods, tropical storms, droughts and wildfires increase.
Some insurers have keyed their sustainability strategies on providing protections against the considerable physical risks of climate change. Proactive insurers are seeking more creative and innovative solutions, such as parametric policies and those featuring carbon offsets, to bridge the huge protection gap. Support for renewable and alternative energy has also matured rapidly. P&C insurers will focus on this area and will likely see greater industry collaboration and the development of improved risk management frameworks.
Other carriers are focused on the greening of the global economy, which represents a huge growth opportunity for the industry. Insurers, with their significant capital reserves and unsurpassed ability to assess and model risks, are central to designing a more sustainable economy and investing in the infrastructure to create it. The upside opportunities are particularly compelling for insurers that can demonstrate visionary thinking and strong leadership.
Looking beyond existing climate risks, some insurers and reinsurers are also acting to mitigate and underwrite certain immature risks in ways that will allow traditional capital providers to invest. Working with commercial customers to set realistic targets and identify necessary operational changes will also help insurers accurately scope the risks in their own portfolios and refine their investment plans. The bottom line is that sustainability is no longer a feel-good initiative or branding exercise but rather a market requirement and business imperative.
Taking the right actions
Insurers can take many meaningful steps in the near term to advance their sustainability strategies. Climate change is both a strategic and regulatory risk, but it cannot be managed solely by risk management or regulatory affairs teams. Given its breadth and potential impact across the business, the sustainability agenda must be owned and executed by leaders throughout the organisation, starting with clear guidance from the C-suite and board.
- Connect sustainability to overall purpose and business strategy, mapping action plans to specific targets and establishing quantifiable performance metrics.
- Define a roadmap with priority focus areas, short-term and medium-term milestones, resource allocation and targeted benefits.
- Engage to be part of the solution – the greater the collaboration across industries and between businesses and regulators, the faster and smoother the transition to a greener economy will be.
- Define the metrics, embrace transparency and benchmark continuously, all of which are key steps in tracking and reporting progress toward goals, especially to capital markets.
- Embed sustainability strategies within operations across the business, from the overall risk framework, to reducing “brown” exposures and betting on green innovations.
- Embrace product innovation to address the protection gap through the development of more affordable and accessible products for building relationships with a rising generation of consumers.
For more on this topic, read the 2022 edition of the annual EY Global Insurance Outlook.
The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organisation.