The Big Question: Can the (re)insurance industry strike the right balance on the transition to net zero?

With Dave Matcham, CEO, International Underwriting Association.

This week’s Big Question is based on a challenging conundrum for the market. In the latest International Underwriting Association (IUA) annual report, there is acknowledgment, and rightly so, that the insurance market is key to helping drive the transition to net zero. As such, it is able to help firms better understand the risks and opportunities that arise from climate change, including better climate-related modelling, which itself involves a range of potential futures to better manage future risks and support the transition to a net-zero economy.

Indeed, as the IUA acknowledges, embedding climate-related financial risk into governance and risk management processes will help firms make informed business decisions and improve their resilience, while making climate- related financial disclosures to improve transparency regarding the impact of material financial risks from climate change will also be a key consideration. The IUA, as befits an organization at the heart of the London market, also expects to play a key role in climate-related innovation, developing products, services, policies and approaches to meet climate goals.

Yet, as well-intentioned and logical as such approaches undoubtedly are, there is still a degree of compromise to be reached for a market that has also historically been a significant insurer of the upstream and downstream energy markets, both on the property and casualty sides. Besides, even with the best intentions of governments and the commercial sector, fossil fuels are simply not going to disappear overnight and are likely to be with us in a significant way, whether the environmental lobby likes it or not, for the next 20-30 years.

What this means is that we are on a journey to net zero. This next generation will be one of climate transition, and it’s how the market most effectively manages that transition that will be one of its crucial tests in the years to come.

Kishore Krishnan, Head of AdvantageGo

Before delving into the specifics of the question, Can the (re)insurance industry strike the right balance on the transition to net zero? IUA CEO Dave Matcham is keen to spell out his association’s credentials here. As he points out, the IUA has a well-established Climate Change Committee, which helps companies consider the industry’s environmental impact and adapt to new regulations aimed at combating climate change. It has also recently broadened its scope here with the establishment of an Environmental, Social, and Governance (ESG) Committee. Among the issues discussed at the IUA committee’s first meeting this summer were efforts to end modern slavery and forced labour and initiatives to measure ESG commitments in the insurance sector.  The group, which is open to all IUA members, also agreed to research the activities of other bodies pursuing similar aims in order to maximise cooperation.

Its primary interest will be in helping to promote sustainability initiatives across the insurance industry and exploring the ‘soft power’ of insurers to influence the behaviours of clients. The committee is made up of representatives from 20 of the association’s member companies, and recently hosted its first meeting.

Yet as much as the IUA has been keen to grasp the climate change mettle, Matcham acknowledges that the scope and challenge of the problem necessitates that his organisation cannot work alone. “Insurance provides protection and advice on risk mitigation, but it’s important that we are inclusive and work with brokers and other financial services industries, alongside governments and clients, on this journey to net zero,” he says, adding that the IUA is also facilitating dialogue with the risk management community: “They are very keen to mitigate ESG risk and transition to net zero, and we have a very good relationship with Airmic.”

Committees and dialogue aside, he notes that on the regulatory side, “we monitor everything the PRA is pumping out – we have a climate change dashboard – and we have the opportunity to review regulations on behalf of our members”.

Lobbying for the wider market on the international stage is also a key component in effectively addressing climate change and helping to manage climate risks at the supra-national level. “We have always been keen to breakdown international barriers that prevent cross-border reinsurance,” he observes. “So if you aren’t reinsuring a nation’s economy against natural catastrophe effectively then you are going to struggle to develop an ESG strategy. And it’s a fact that effective global reinsurance solutions help economies get back on their feet more quickly in the event of a natural catastrophe.”

Still, as broad in their scope as such initiatives are, the IUA – in tandem with the rest of the London market – cannot ignore the fact that many of its members remain in the crosshairs of the climate change lobby, who see the continuing insurance of fossil fuel projects, including coal mines and offshore drilling sites, as evidence that for all its talk on the subject  the (re)insurance market is still keen to put commercial interests first and climate-related concerns second.

Matcham is alive to the criticism, and is keen that both sides of the debate are able to talk to each other despite some of the mud-slinging that has gone on. “We don’t have a direct dialogue with these environmental campaigning groups, but it’s important that both sides of the argument understand each other’s views, as we are all working towards the same end,” he says.

Besides, he points out, there aren’t always straightforward solutions to this issue as fossil fuels are still part of the picture and are likely to remain one for some time to come, whether we like it or not: “Look at wind farms, for example. I find it ironic that coal is often needed to make wind farms! And solar panels are often sadly produced in direct contravention of the ‘s’ element in ESG, given their reliance on mining of rare metals such as lithium and cobalt.” Can the insurance industry strike the right balance on the transition to net zero? Not always, if we are to take Matcham as our guide… but at least it is trying.

The Big Question is supported by AdvantageGo, which enables insurers to profit from the future through its intelligent and connected underwriting workbench