It is extremely hard to predict the world’s capacity for preventing climate change. For now, though, let us assume that the world is successful at preventing the worst impacts.
Governments, scientists, businesses, and the public unite to decarbonize the global economy, and global warming is limited to just 1.5°C above pre-industrial levels — thought to be the maximum warming possible without risking catastrophic consequences. This scenario would represent a momentous achievement. It would be written about in history books for decades to come, picked apart by scientists and analyzed by economists.
Now here’s the question: How will the insurance industry be featured in those accounts? We know that politicians will be mentioned, as will scientists, individual campaigners, influential businesses, those responsible for technological innovations, and many others. But will the insurance industry play a role in the narrative, or will we be seen as bystanders?
Limiting global warming to 1.5°C is still possible — if only just. But here’s the bit you don’t hear talked about: The insurance industry has a pivotal role to play in making it happen. This is underappreciated both within the general climate change discourse and even within the insurance industry itself.
Action so far: following the pack
Let’s be clear, the insurance industry is making commitments to limit global warming. Like other comparable sectors, most actions fall into two categories:
- Decarbonizing operations: In the first category, insurers are promising to reduce their carbon footprint, even if tangible action is yet to follow. This covers operational emissions and supply chain emissions.
The highest-profile example is the UN-convened Net-Zero Insurance Alliance. This group of more than 20 major insurers representing more than 11% of world premium volume has committed to transitioning all operational and attributable greenhouse gas emissions from underwriting portfolios by 2050.
Addressing emissions within underwriting portfolios remains a thorny challenge, however, as it directly impacts insurers’ business models. Insurers are under growing scrutiny for providing insurance for major fossil fuel providers.
- Decarbonizing investments: In the second category, insurers are positioning their investment portfolios toward sustainable investing. Pressure is growing on all major asset owners to stop supporting fossil fuel generation, and insurers are starting to respond.
For example, in January, Swiss Re and Aviva committed to cutting investment-related emissions by between 49% and 65% over the next eight years.
As important as these commitments are, the insurance industry is, for the most part, simply “following the pack.” Pledging to reduce carbon footprints and shifting investment strategies are actions that apply to most sectors, especially as momentum grows for companies to achieve net-zero emissions by 2050.
Insurers as enablers
There is one additional category of action that has not received the same degree of attention. Unlike the previous two categories, it applies specifically to the insurance industry and is fundamental to achieving the Paris goal of limiting global warming to 1.5°C.
This third category is the financial enablement of climate innovation.
Climate change-related innovation is essential to saving the planet from climate catastrophe, be it small-scale cutting-edge energy efficiency inventions or a groundbreaking overhaul of major energy infrastructure. Some of the technology already exists but is struggling to scale fast enough; some technology is yet to be invented.
In modern economies, nothing new, risky, or innovative is possible without capital. Indeed, limiting warming to 1.5°C will require $3.5 trillion of investment each year. Globally, the money exists, but getting it to the right places is complex, challenging, and requires an appetite for risk.
Here’s where insurers come in. Insurance is ultimately a very specialized form of capital and serves a unique economic role. First, no other form of capital is as efficient at enabling long-term and high-risk innovations. Second, the presence of insurance capital acts as a catalyst for other forms of investment.
“Insurance is ultimately a very specialized form of capital and serves a unique economic role.”
The global ride-sharing service Uber serves as an example of how insurance capital can be transformative. This now core feature of everyday urban life very nearly failed to get off the ground. Why? Providing commercial insurance for a high volume of unknown, unregulated drivers was considered far too risky.
It was only when one insurer created an innovative insurance product that the venture took off. This paved the way for the startup to receive its first major funding, which facilitated rapid global growth. Without insurance, Uber would not exist as we know it now.
When it comes to climate change, this leaves the insurance industry in a very powerful position, but we have yet to fully exercise this muscle. If we could do it for Uber, why can’t we do it for climate innovation?
Not only do insurers have an appetite for long-term investment, but they are also highly experienced at linking risk exposures to capital requirements. Furthermore, if we as an industry can align our capital to the climate change agenda, it will provide the financial security to unlock a much greater volume of global investment.
A call to action
Financially enabling climate innovation is not just a minor step on the road to preventing dangerous levels of climate change — it is a critical hurdle.
There has been progress. Last year, for example, Lloyd’s of London set out a six-point plan to target climate-related emerging risks. It includes the creation of new risk transfer solutions to support green innovation and also details plans for scaling up investment solutions to accelerate the low-carbon transition in energy, transport, and heavy industry.
Even still, success will only happen if the entire insurance industry pulls together. Where can we as an industry begin?
First, we can get more comfortable underwriting climate-related emerging risks and new types of technological innovation. This means working more closely with relevant industries to understand new risks, committing resources to deeper research, and investing in the latest analytics and data infrastructure to find new ways of pricing risks.
Second, we can develop the necessary partnerships needed to mobilize capital to support climate innovation. The scale of this task is enormous — far bigger than the insurance industry. It will require collaboration on a scale not achieved before, both within insurance as well as with governments and key industries.
A place in history?
The industry faces a choice. Either it continues to focus on the first two categories of action —decarbonizing operations and investments — and leaves governments and other sectors to tackle climate innovation. Or it recognizes its unique position for mobilizing capital to enable critical climate-related innovation.
Committing to this third category of action is not easy. It requires unprecedented collaboration, inventiveness, and a few risks taken along the way. But taking this option acknowledges that the purpose of the insurance industry is much greater than just selling policies. At its core, our industry is an economic enabler, just as scientists or inventors are enablers. By pooling risk and mobilizing capital, the insurance industry makes major change possible.
If we recognize and act on this, insurers will be an important part of history and not merely bystanders in tackling one of the biggest challenges of our era.
Paul Mang is Chief Innovation Officer at Guidewire. Connect with him on LinkedIn.