What should the (re)insurance market realistically expect to achieve at COP28 this year?

With Rob Bailey, Climate & Sustainability specialist at Oliver Wyman.

COP28 starts this week and it’s fair to say that it hasn’t exactly dominated the media agenda in quite the same way as in more recent years. In many respects, given the wider geopolitical environment, this is understandable. With the conflict between Israel and Hamas ongoing, the war in Ukraine dragging on into another winter, and tensions between China and Taiwan once again resurfacing, it’s fair to say there are more urgent areas of attention.

Yet, as we all know- or should know by now – climate change really is the long-term issue that won’t go away, and will only become much worse if we don’t do all in our power to counter its worst effects. Sadly, the (re)insurance market knows this all too clearly in a year in which it has swerved a major land-forming hurricane in the United States, but is nonetheless still facing another nat cat loss bill in excess of $100 billion. Ouch. And, with increasing frequency and severity of tropical storm activity, a growing bill from secondary perils, and the looming spectre of rising sea water levels in urban areas, this is surely a bill which could start to become uninsurable for some geographies if we don’t properly engage with government and the private sector alike to address long-term climate change. With this in mind, we caught up with Rob Bailey, Climate & Sustainability specialist at Oliver Wyman, to ask what the industry can realistically hope to achieve from this year’s COP28.

Ian Summers, Global Business Development Leader, AdvantageGo

According to Bailey, since the Paris Agreement the process has been an architecture where every five years governments would get back round the table and agree how they were going to try and increase the ambition for their targets to get closer to a trajectory that’s aligned with that goal:

“The obvious example of that was Glasgow, where we had this kind of big crescendo of momentum. Everybody was announcing net new net zero targets in the run up to that… but it’s just not going to be like that every year. And so it’s easy to think: well, maybe things have gone off the boil a bit, but it is also sort of the nature of the beast. Now, that’s not to say that nothing’s happening in the intervening periods. What are the things that are on the agenda for this year? You know, there’s a big agenda around energy transition. And the COP Presidency has set out how they want to get specific commitments around increasing renewables investment, increasing investment into energy efficiency, which I think often in the energy efficiency piece is something that is often really forgotten about.”

“Everybody focuses on the supply side,” he adds. “But actually, when you look at what’s going to happen with the pathways, there needs to be huge amounts of investment in energy consuming industries, and distribution, infrastructure, all of this kind of stuff to actually reduce the overall envelope of demand. That’s a huge piece of this. But then, the thorny bit in all of this is around fossil fuels. There’s a constituency of governments that will be pushing for language… for a fossil fuel phase-down and will see if they can get a timeline attached to that for when unabated fossil fuels need to exit the energy mix. So I think that’s going to be a key topic, and that’s going to be very relevant to insurers as well. Because insurers have to think about these things, not only from the point of view of what they’re investing in, but also what they’re underwriting – energy transition is a big topic.”

Pivotal role

According to Bailey, the (re)insurance market should not be afraid to play a key role in this year’s COP discussions: “I don’t think there’s a single industry that is so uniquely positioned to play a critical role in the transition to a low carbon resilient future. Insurers, asset owners and major asset owners all have a big role to play in investing in and directing capital, risk capital, and investment, through insurance activities. Even SME lines and personal lines can play a big role in nudging and behaviour change. Look at the UK: about 80% of a typical household’s emissions are touched by insurance. And so they are in an incredibly privileged position. And that’s just the transition side. But actually, there’s no other sector that has such an important role to play when it comes to resilience and adaptation, whether that’s through extending insurance, whether it’s through creating incentives for investing in resilience, whether it’s providing better data and information to insurance, or whether it’s working with governments on risk pools and these sorts of things for increasing cap risks by the insurance sector. This is all so important.”

Bailey adds that although insurers are in the COP28 mix, it’s really important that they now step up. “So we’ve talked about the energy transition, but we also need to recognise that when it comes to energy trends, there will have to be a similar set of strategies that insurers are going to have to develop beyond energy and power. And we’re kind of starting to see that now. Clients are asking: ‘What’s our underwriting strategy look like? What’s our product innovation strategy look like?’ And what about aviation, shipping, or construction, where you have all of these high carbon materials?”

“We did a quick scan of sustainability disclosures, and you see much less about adaptation, resilience, despite everything that we’ve talked about, despite the fact that it’s kind of an existential issue for insurance, … but there’s a big opportunity here to close the protection gap, and to extend insurance cover and support for both businesses and communities.”

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