Trillions of dollars will be spent and new concerns will arise as the world moves toward net-zero emissions. This is the part that insurance can play.
The endeavour to shift to a more sustainable environment has reached a turning point. The transformation, which will need an estimated yearly investment of more than $9.2 trillion in energy and land-use strategies, is poised to trigger the largest capital reallocation in a century as governments and businesses throughout the world commit to achieving net-zero greenhouse gas emissions.
With huge climate-related risks and opportunities on both sides of the balance sheet, this is a pivotal time for insurers. To spur development and maintain relevance in a net-zero world, insurance carriers will need to adopt an offensive strategy.
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What insurers should know about the net-zero transition
New types of volatility are developing as the net-zero transition takes place. Industries are being rapidly reshaped by the reallocation of capital to low-carbon technologies. Business cases for new technology have questionable economic feasibility and scalability. Regulations, investor and consumer lobbying, and a growing need for openness among businesses are driving up these demands. A significant legal risk is associated with inactivity on climate change. And against this setting, communities and businesses continue to be impacted by increasing physical risk.
Through the development of innovative products and services, insurers have a once-in-a-generation chance to address these new types of volatility and aid in the smooth transition to net-zero emissions. However, in our experience, commercial strategies and climate aspirations are frequently not aligned. This results in a lack of coherence in two areas: the identification and prioritisation of climate-focused commercial opportunities, as well as the adoption of a go-to-market strategy to better source, underwrite, and share new types of risks.
Through the development of innovative products and services, insurers have a once-in-a-generation chance to address these new types of volatility and aid in the smooth transition to net-zero emissions.
1. Spotting and ranking climate-related business prospects
In three key areas—net-zero transition insurance, developing fresh risk-transfer strategies for escalating physical threats, and offering services for adaptation and resilience—insurers have the chance to explore and develop climate-focused solutions. There is space within each sector to provide conventional property and casualty coverage as well as to create fresh, cutting-edge solutions to satisfy growing market demand.
Ensuring the switch to net-zero
Technology, together with demand reduction and business model modifications, is a critical decarbonization lever across high-emitting sectors. Our projections indicate that by 2030, annual worldwide capital expenditures in the leading climate technologies might reach more than $800 billion, translating to insurance premiums on capital expenditures alone of between $10 and $15 billion (exhibit).
Additionally, insurance companies might be crucial in launching unproven new industries. By offering security to both buyers and sellers (for instance, should an offset become invalid), insurers might, for instance, hasten the development of voluntary carbon markets, which may reach $30 billion by 20302.
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Developing novel risk transfer strategies to address escalating physical risks
There are well-established parametric solutions for adverse weather events. We predict higher demand as the frequency and severity of extreme weather rise, making indemnity coverage less accessible, and as numerous climate-related assets (such as solar and wind) are constructed in climate-exposed areas. Parametric policies can be used for income loss on renewable assets (for instance, cloud-cover protection for solar fields) as well as to address the effects of persistent weather changes on sectors that are vulnerable to climate change, in addition to providing coverage for natural disasters (such as heat stress on power grids and drought leading to crop loss in the energy and agriculture sectors).
Multiyear parametric plans may be a solution to give more dependable coverage at lower costs while also pricing in a way that takes increased physical risk into account. Creating straightforward, standardised parametric coverages, lowering base risk through enhanced risk modelling, and fostering enthusiasm among covered clients are all necessary for realising the parametric opportunity at scale.
Communities will continue to be impacted by rising physical danger, necessitating public and private sector innovation in collaboration to close protection gaps and ensure coverage is affordable. More than half of the world's population will be subject to climate hazards such heat stress, drought, riverine and coastal floods, and water stress in the next decades, even under mild warming scenarios. 4 Public-private collaborations are multiplying in order to save communities and ecosystems. However, given the speed and size of this issue, insurers must sharpen their focus if they are to be more effective in defending the groups most at danger from the effects of climate change.
Providing services for adaptation and resilience
To manage and limit customers' exposure to climate risks and enable more efficient responses to climate-related losses, insurers and other industry participants may offer advising and risk-engineering services. Examples of these services include engineering and risk assessments for natural disasters, risk advising prior to construction, and post-loss incentives to rebuild more resiliently or in less risky areas. We think that the sector could do a lot more to lower risk and losses, and that climate-focused risk engineering offers an appealing entry point for insurers to boost their relevance and support ongoing accessibility and affordability. Partnerships with third-party data and analytics providers and providers of value-added services (such risk modelling for physical assets with an eye toward the future, for example) can enhance and distinguish carrier products.
Insurance companies must take action now if they want to make real progress, even if the effects of climate change and the net-zero transition will take decades to manifest. Clarity on the scope of the opportunity and what will be necessary to take advantage of it, such as the employment of new underwriting talent or the adoption of new go-to-market strategies, can be achieved by establishing a specific growth objective supported by a prioritised set of prospects.
2. Developing go-to-market strategies to source, finance, and diversify more effectively
Due to a lack of underwriting data, loss history, and pattern identification across underwriting teams, insurers may encounter difficulties entering the market despite the significant growth opportunity that the net-zero transition promises. Furthermore, established technology may have a mixed history. Although these obstacles seem reasonable, they are not insurmountable. We advise insurers to aggressively develop climate capabilities (such as forward-looking climate risk modelling) and to explore innovative strategies in order to gain a foothold in developing potential areas rather than taking a gradual, wait-and-see approach. Partnerships offer a promising way to tackle problems, hasten learning, and seize opportunities. Such alliances could take the following forms:
Collaborations with asset owners upstream.
collaborations with asset owners upstream. Partnerships with private equity, infrastructure, and other institutional investors can help insurers diversify their risks while giving them access to information and technical know-how. Investors and insurers should investigate diversification through the pooling of green assets with diverse risk profiles given that many emerging technologies have less loss history but still need for near-term investment and protection (such as different geographies, underlying technologies, or asset operators). By gaining access to asset owners' technology knowledge and data through these agreements, insurers may be better able to evaluate emerging technologies. Brokers can be crucial in forging alliances and bringing insurance providers to the table.
Partnerships on the market that permit portfolio underwriting.
The idiosyncratic nature of transferring individual risks may be lessened by portfolio underwriting, which also makes it possible to explore new prospects without investing heavily in infrastructure and capability development. This is made possible by managing general agents (MGAs) and managing general underwriters (MGUs). MGAs and MGUs are valuable potential partners because they enable insurance companies to expand into new markets without having to invest in new internal systems and resources. For new lines of climate-related business, MGAs and MGUs can offer underwriting sophistication and experience (for instance, in artificial intelligence and machine learning) and open doors to new clients and regions that an insurer might not otherwise be able to access. The success of this strategy depends on collaborating with MGAs and MGUs that have a unique capacity to evaluate and create insurance products related to the climate.
Creating syndicates with other insurers and utilising other sources of money (through capital markets) for reinsurance are two more partnership strategies to take into consideration. By cooperatively sourcing, underwriting, and insuring climate-related risks on more recent technologies with hazards that are challenging to diversify or efficiently price, the former enables insurers to reduce costs. The latter allows insurers to increase their options for capital optimization and risk sharing, although this strategy is probably only feasible for established green technologies and insurance products with short-tail or parametric (limit-defined) risks. In order to create creative solutions for new risks, insurers could also work to collaborate with builders, venture capital firms, and start-up businesses at the forefront of the climate shift.
There is demonstrable progress toward net-zero emissions. Value pools will change as a result, producing new winners and losers. For insurers that establish themselves in the ecosystem early, we think there is a huge first-mover advantage. While insurers should always exercise caution when dealing with uncharted markets and dangers, those that want to take the lead in the net-zero transition should take action right away to spur green development and create a portfolio that will be resilient in the long run.
