Despite the failure to achieve the commitment necessary to contain global warming within 1.5°C, COP26 was notable for its increased urgency and consensus regarding the scale of the task at hand.
Certainly it underlined the need for all actors to move, if not together, then in close sequence and coordination. For instance, leadership from the financial services sector can prompt further action by governments and regulators.
Insurers have begun to decarbonise their portfolios. But, following the launch of the UN-convened Net-Zero Insurance Alliance at COP26, there is a clearer view of how they must help unlock financing for the transition to a greener economy. The industry’s role in financing the transition has been underappreciated to date.
Insurers’ unique ability to model, underwrite and cover new risks is key to unlocking capital flows for a range of projects – from infrastructure to innovation, from weather-related performance to weather-related risk protection.
But only recently have insurers begun to recognise how to underwrite the transition. It’s not just a matter of addressing the increased risk and volatility from existing (and deteriorating) climate risks; insurers must also act boldly to mitigate certain immature risks to pave the way for traditional capital providers.
This is familiar ground – innovation is in the DNA of underwriters, and insurers often “front-run” debt financing and unlock broader investments by stepping in to take on risk.
For some capital providers, insurers can assume risks associated with the biggest bets on innovation – for example carbon capture technology and green energy sources.
There are lessons to apply from insurers’ past ventures into innovative financing, such as weather derivatives, catastrophe bonds and financial guarantees.
Today, the priority will be underwriting the performance of weather-related revenue streams, as well as protecting against the physical damage of weather-related events.
The bottom line is that the transition to a greener economy won’t happen without insurance playing a central and catalysing role. Indeed, the more engaged the industry is, the faster and smoother the transition will be.
For more on this topic, read EY’s latest thought leadership on how insurers can finance the transition to net zero.