Net-zero transition: COP27 highlights opportunities and challenges ahead for insurers

Isabelle Santenac, global insurance leader at EY, reflects on COP 27 and examines how insurers can begin to assume the mantle of leadership and help make the energy transition a reality.

I recently had the pleasure of moderating a panel discussion with the IIF and leaders from across the insurance industry.

The event was held just after the COP27 summit in Egypt, which stimulated many of the panellists’ ideas, particularly regarding the transition to net-zero carbon emissions. The insurance industry has an important role to play in that transition, and our conversation shed light on a number of the biggest opportunities – and roadblocks.

Fundamentally, insurers’ deep understanding of risk and the best ways to manage it give the industry credibility in devising transition strategies and leading their execution. But our leadership must go beyond risk transfer mechanisms to emphasise education, advocacy and – perhaps most importantly – risk prevention.

Where we are today

Since COP26, significant action has taken place in the industry. The Glasgow Financial Alliance for Net Zero now boasts 550 members and the Net-Zero Insurance Alliance has also been convened by the United Nations. Still, more action and collaboration are necessary for systemic, long-term change, as evidenced by insurers’ and reinsurers’ recent moves to limit their natural catastrophe exposure, a decision that will only increase the already large climate risk protection gap.

COP27 reassessed the absolute imperative to limit global warming by 1.5°C and recognised the need for net-zero transitions that are fair and just. This year’s summit also reached a landmark agreement to provide loss and damage funding for vulnerable areas impacted by climate disasters, which was a major step toward funding the climate finance gap. The financial services sector is under serious pressure to actively engage in the transition.

Where insurers can go from here

So how can insurers begin to assume the mantle of leadership? While acknowledging that this is an extremely complex topic, our panellists encouraged more creativity and collaboration, particularly with other sectors, government authorities and their peers in financial services, including large captive insurers.

Such efforts might restore urgency around climate risks, given that other nearer-term threats have risen to the top of the agenda. The World Economic Forum’s latest Executive Opinion Survey found that environmental issues have fallen as a risk for companies in G20 countries during the last year. COP27 stressed that the current economic and geopolitical situation should not be used as a pretext to lessen climate actions, a point insurers can reinforce with their investments and efforts.

Product innovation will be a focal point. Green products and ancillary services that promote carbon-reducing behaviours can assist society in the transition and benefit insurers as well. Risk modelling based on advanced analytics and external data sources – including real-time streams of sensor data – can support more sophisticated underwriting approaches necessary to cover extreme weather events. Insurers are also uniquely poised to form relationships between the public and private sectors to develop solutions (including community-based catastrophic coverage and policies for public infrastructure) around risks currently thought to be uninsurable. As my colleague Peter Manchester pointed out, the insurance sector holds incredibly rich stores of risk data that can be used to gain alignment among stakeholders and provide foresight in developing scalable solutions for the future.

Along with product innovation, insurers need to rethink incentives. One panel participant pointed to the difficulties of decarbonising the underwriting portfolio, while also recognising the benefits of engaging with traditional brown and carbon-intensive industries to help them on their journeys. Such a collaborative approach will make a much bigger difference than relying solely on exclusionary policies or refusing to provide coverage to entire sectors. Indeed, traditionally brown industries increasingly recognise the need to change. As one participant from the oil and gas industry put it, continued risk coverage for hydrocarbons is important for funding innovations in green energy that can achieve the end goal of net zero.

Lastly, insurers can leverage their considerable investment portfolios to drive change. Investments in green energy infrastructure, carbon-capture technologies, battery storage and other promising innovations are another way that insurers can provide purposeful leadership to accelerate the transition.

The net-zero transition was always going to be hugely difficult. Without the insurance industry’s leadership, it will be even more so. All of us within the industry must think bigger and bolder and work together if we hope to make the transition a reality.

Isabelle Santenac is global insurance leader at EY