The industry is increasingly being called on by different stakeholders to play a leading role in helping the world’s economies transition to a future where technological innovations accelerate progress towards stated climate targets.
“The role of insurers in assessing, pricing and managing the untested risks associated with the new technologies and processes will be fundamental for large-scale implementation and raising private capital,” says Maryam Golnaraghi, director of climate change and the environment at the Geneva Association, a global association of insurance company and reinsurance company CEOs which investigates key risk areas likely to impact the insurance industry, develops recommendations and provides a platform for stakeholders to discuss them.
The comments were made as part of a virtual conference, Future-Proofing Technological Innovations for a Resilient Net-Zero Economy, hosted by the Geneva Association.
An increasingly uninsurable world
The experts gathered at the conference say children born this year will face between two and seven times more climate-related events over their lifetimes than those born in 1960. “And they’re going to experience conditions that older generations rarely experienced, if ever,” says Patricia Espinosa, executive secretary of the United Nations Framework Convention on Climate Change.
“From our perspective, the challenge is increasingly clear and simple: We must cut emissions by about half this decade, the critical decade of the 2020s. And we need to then quickly decarbonize and reach net-zero by 2050. If we cannot do this, we’re looking really at a diminished future for us and for future generations and obviously a very difficult environment for business, including an increasingly uninsurable world,” adds Leonardo Martinez-Diaz, senior director for climate finance to U.S. special presidential envoy for climate, John Kerry.
Not one sector is likely to be left untouched by the problem. Even just a quick look at cement, heavy chemicals, steel, trucking, shipping and aviation, will give those who are trying to understand the scope and magnitude, an idea about what needs to be done.
“Once we bring a value chain together, all the way from raw material down to the end consumption and even the waste collection management beyond that consumption, once you do that, you begin to see the scale of the task ahead,” says Peter Bakker, president of the World Business Council for Sustainable Development.
Meanwhile, there is already a significant amount of capital flowing into some of the solutions being created today. Golnaraghi says there is also an interesting trend afoot where high-risk venture capitalists and large investor-led funds are converging to create a new asset class – corporate venture capital – the marriage of venture capital and those, like pension funds, that have traditionally financed large projects.
“Traditionally focus has been on alternatives for energy generation and carbon capture. But we are seeing a clear trend in investments towards new climate technology for food and agriculture, mobility, water, consumer goods and heavy industries like metal and so on,” Golnaraghi says.
As she mentioned, however, new technologies come with myriad untested risks – operational safety risks, environmental and disposal risk, construction risk, and market risks which have not yet been tested. “How can insurers step in and work with technologists, engineering firms and others to actually price and better manage risks?” she asks.
Transforming the industry
In imagining a transformed industry that is equipped to meet the challenge, Martinez-Diaz says there are several characteristics that will need to be present.
First, he says the industry should have actuarial models that are quick to adapt to emerging technologies. “This is going to be crucial, as the technological curves are beginning to shift.” Next, the industry needs to take the risk and offer attractive rates to innovative, renewable energy technologies. “This will be essential to boost that critical market.”
Third, he says the industry needs to be creative and flexible in addressing the particular risks renewable energy companies have, not just generic risks that apply to all sectors. Fourth, he says the industry should look beyond renewable energy and promote decarbonization in other sectors as well. He says it will be crucial for others to join companies that have already stopped underwriting in the coal market. “The science makes it clear that this is a bad investment long term. There are many insurers still missing in action. We need them to also make the same type of decision,” he says.
“Consider what it would mean to stop underwriting the expansion of oil and gas,” he adds. “Long term we don’t need more investments in fossil fuels. We’re going to need those to be in the renewable sector. This is, I think, a crucial consideration that insurers need to start making at this stage.”
Espinosa was even more pointed: “Colleagues, you cannot hedge your bets that fossil fuels are a good long-term investment,” she says. “I encourage you to underwrite only those portfolios that are consistent with the goals of the Paris Agreement. Anything else is a bad investment in the future.”
The industry’s influence
The recurring conference theme, meanwhile, is that the industry, in its roles as underwriter, risk manager, and investor can greatly help support the necessary technological transformation needed to meet climate targets. “Insurers can provide insurance products that mitigate risk for investors in new technologies such as renewables, while also providing important de-risking solutions for infrastructure development,” says Jeffrey Schlagenhauf, deputy secretary general of the Organisation for Economic Co-operation and Development.
It was added that in addition to innovative products and early-stage capital, the industry should also provide longer term, “patient capital” to encourage research and development and support the development of the necessary technologies.
“Insurance will have a key role in making these new technologies bankable,” says Denise Bower OBE, Executive Director with global engineering firm, Mott MacDonald.
Mark Versey, CEO of Aviva Investors, meanwhile, points out that insurers and reinsurers are also uniquely positioned because of the market share they possess. “We have a market share in the industry which is not large enough that we can impose our own positioning on the whole world,” he says, “but we do have a 12 per cent or 13 per cent market share. So, what do you then do? You can set a good example.”
He adds that fossil fuel consumption and production need to come down rapidly and it needs to be replaced by renewable energies and carbon removal efforts. “We focus everything we can to assess the risks associated with the new technologies. That’s the biggest contribution that we can make.”
“Finally, let me point out that your voice in society, as risk managers, is enormous,” says Martinez-Diaz. “Your ability to promote and raise awareness of climate-related risks is essential. Everything you can do, not just for pricing, but also through messaging, that this is a risk that we need to take seriously, even as we cut emissions, is going to be essential.”