How are insurers tackling greenhouse gas emissions?

Steven Morrison, senior director at Moody’s Analytics, examines progress in the development of metrics to measure greenhouse gas emissions from underwriting activities.

In the transition to net zero, many insurance companies have acknowledged an urgent need to account for their underwriting activities.

This has seen a growing number join the Net-Zero Insurance Alliance (NZIA), a group of insurers committed to transitioning underwriting portfolios to net-zero greenhouse gas emissions (GHG) by 2050. Formed in July 2021, the NZIA currently has 29 members, with increasing diversity in company location and size.

One of the NZIA recommendations is for members to “use a recognised and consistent insurance-associated emissions (IAEs) accounting approach, such as the Partnership for Carbon Accounting Financials (PCAF) standard for setting and tracking progress towards their targets”.

In November 2022, the PCAF launched the first global measurement standard for insurance-associated GHG emissions. IAEs are scope 3 type emissions associated with an insurer or reinsurer’s underwriting activities. For many insurers making the commitment to transition to net zero, IAEs can be a significant source of overall emissions.

The initial PCAF IAE standard covers two lines of business: personal motor lines and commercial lines. In each case, the IAEs for a specific insurance policy are calculated by taking the total emissions of the insured customer or asset and multiplying it by an attribution factor.

This attribution factor reflects the proportion of emissions associated with the insurance cover provided. The IAEs for an individual commercial insurance policy is calculated as shown below:

The attribution factor depends on two sources of data: the insured entity’s financial data (revenue) and the insurer’s internal data (premiums). This contrasts with an alternative method considered in the consultation progress report, where the attribution factor only depended on the insurer’s internal data. The final choice of attribution factor means that revenue data – in addition to emissions data, will either need to be sourced directly from the insured entity or via third-party data providers.

This data aims to provide insurers with an opportunity to understand their emissions exposures in detail, and to use this information to effectively engage with customers on their transition to net zero.

Insurers can also perform detailed attribution and what-if analyses. They can measure how emissions can be attributed to different sectors and sub-portfolios, how they have changed over time, and how those changes are attributed between changes in underlying emissions and changes in portfolio composition.

Insurers may also look to measure how their IAEs might change in the future under different assumptions; for example, the impact of potential reductions in their customers’ emissions based on the customers’ own targets.

While the PCAF standard is focused on GHG emissions, there are a host of other ESG considerations that are increasingly being factored into insurers’ strategies and underwriting workflows. However, the publication of the PCAF IAE standard does represent a key milestone for insurers looking to meet broader efforts to set emissions targets and transition their underwriting portfolios to net zero.

Steven Morrison is senior director at Moody’s Analytics