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Cambridge Institute for Sustainability Leadership

Insurers in Paris-aligned climate transition

13 December 2021 – New ClimateWise report outlines ways insurance underwriting mechanisms to support net zero can be improved to accelerate smooth transition to a low carbon economy

As global attention on COP26 reinforces the urgency of keeping global warming to 1.5C, a new paper from insurance leaders group ClimateWise maps out challenges and improvements to new independent underwriting tools to support the transition to a net zero economy. 

The report explores net zero for insurance underwriting and tests three currently available tools and frameworks designed to convert emissions reporting data into an intuitive degree Celsius metric, identify and support those insured organisations committed to executing robust transition plans, or enable a firm to build strategic, operational and underwriting practices to support net zero.  

‘It is clear that the insurance industry could support and steward the transition to a low-carbon, resilient society through incentivising stakeholders and taking practical actions on underwriting activity. The insurance industry needs to draw on their existing risk management knowledge and expertise, applying it to the problems posed by climate change’. 

Insurers in Paris-aligned climate transition: Practical actions towards new zero underwriting outlines the current definition of net zero, exploring its implications for the insurance industry and policy makers. It charts existing tools and practices developed for underwriters to identify, evaluate and measure net zero target robustness and alignment to 1.5C. It also identifies challenges faced by underwriters in the net zero transition and the potential for improvement and innovation. 

Dominic Christian, Global Chairman Reinsurance Solutions at Aon and ClimateWise Chair said: “As net zero commitments develop for the insurance industry from our operations, to investments and now underwriting, business policies and approaches needed will reply on collaboration across the insurance value-chain. ClimateWise has been at the forefront of the insurance industry’s climate change understanding and preparedness for society for near 15 years, and we will continue to.” 

To propel net zero underwriting practices, the report outlines key considerations, including:  

  • Setting emission scope boundaries for the insurance industry  
  • Measuring net zero alignment with carbon footprinting, transition pathway evaluation and temperature score  
  • Understanding net zero implications for each insurance underwriting line of business  
  • Reacting to different insured clients, assets and activities  

These considerations require a detailed view of the insurance value chain which can then enable understanding of what net zero means to each stakeholder associated with underwriting activity. There also needs to be clear emissions scope guidance and robust measurement methodology, to enable meaningful target-setting and the anchoring of practical actions.  

The report outlines the critical need to engage insured clients strategically on the basis that each insurance line of business will be faced with different opportunities and challenges in the net zero transition. 

Bronwyn Claire, Sr Programme Manager for insurance leaders group ClimateWise said:

“Our report provides insights on the knowledge, skills and tools needed for the insurance industry to support the net zero commitments made at COP26 by the industry, nations and economy. We aim to provide confidence to firms, policymakers and regulators to step forward with ambition to address climate change before the physical risks of 1.5 degrees or higher warming become more apparent.  

“While the data, tools and skills for measuring and evaluating underwritten emissions and client transition plans remain nascent, our case studies we show that steps are being taken by the insurance industry and guidance on building capacity and capability. Collaboration and backing by each element of the insurance supply chain from brokers to reinsurance and claims management is critical to success of finance and the economy’s transition to net zero – everyone has a role in our future.” 

Using illustrative case studies from ClimateWise members, the report provides a summary of benefits and limitations of current approaches and tools to measure underwriting portfolio alignment with net zero and the Paris agreement. It also asserts that tools and practices that are transparent and open-sourced can enable and facilitate insurers to drive more action towards delivery of net zero. The case studies outlined include: 

  • CISL’s Investment Leaders Group’s Temperature score methodology which converts emissions reporting data into an intuitive degree Celsius metric 
  • Climate Transition Pathways which creates a practical solution that insurers, as well as other financial institutions, can utilise to help them meet their net-zero commitments, enabling them to identify and support those insured organisations committed to executing robust transition plans. 
  • Milliman LLP and OneRisk Consulting Limited working in partnership to create an underwriting portfolio climate risk assessment tool.  

The report concludes that policy makers and regulators need to collaborate with the insurance industry to enable standardised assessment of climate risk and net zero alignment, as well as consistent boundaries of emissions reporting and understanding of transition pathways. In addition, further research and industry collaboration are needed to increase data availability and accuracy. 

Read the report here.

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