High profile markets, such as Lloyd’s of London, are firmly in the cross hairs of stakeholders and activist environmental groups over their support for carbon intensive sectors and projects, but have declared their support for a clean transition by setting ambitious targets well above those of the UN.

Underwriting models are being challenged

New hazards will emerge as the transition to a greener economy takes place, requiring new products and new underwriting solutions. The challenges in shifting to clean fuels, such as hydrogen, are significant. Losses on offshore wind and on large solar plants have been substantial for example – green assets are just as exposed to catastrophe risk as traditional energy assets – possibly even more so.

Traditional modelling particularly around natural catastrophe exposures and, more broadly, past loss experience have not been predictive of the future, and that will need to be corrected. This will require coupling a deep knowledge of the risk landscape with technology advancements to map a better future, something that will require significant investment over time.

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The link between ESG credentials and loss ratios is established and access to more high quality data is improving. Progressive solutions to problems as complex and wide-ranging as these that speed up the transition will not be developed overnight nor in response to unrealistic demands, but through market alignment, collaboration and further sharing of data.

Chris Illman Chris IllmanHead of Responsible Business, Beazley

Much work still remains to be done to create a common framework for evaluating the strength of businesses’ green credentials. However, progress is already under way through moves like the Sustainable Markets Initiative11 and ClimateWise initiatives12 to support insurers to make informed decisions as part of the transition to a greener economy. It is also hoped that policies announced at COP26 summit will have a marked impact, including particularly the creation of the new International Sustainability Standards Board (ISSB) that is introducing new prototype global standards on climate-related disclosures and general sustainability disclosure requirements.

Initiatives like these are sparking a huge amount of collaboration across the industry to create common methodologies and appraisal mechanisms. The issue, as always, however, will be the quality and availability of the data needed to support informed decisions and how the industry implements new approaches in order not to destabilise communities dependent on particular energy sources for employment and power. The sometimes competing demands of the E, S and G agenda mean that for a while, insurers and others will be performing something of a careful balancing act, one that must end in favour of progression over paralysis.

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As underwriters, our goal is to be able to pick and reward strong performers and to identify which businesses are on the cusp of better ESG performance and to have open discussions with them. We want to support as many companies as possible to improve ESG performance and in time make a full transition to net zero.

Will Roscoe Will RoscoeHead of Alternative Portfolio Underwriting, Beazley

Portfolio management will need to step up

As obligations change, the industry will require new techniques for portfolio management. And there will be many more dependencies to model. The industry will need to determine for example what is the correlation between more frequent floods and the economic activity in a given region, making the work of underwriters even more complex.

As underwriting becomes more strategic, and more insurers reconsider their participation in areas including thermal coal, tar sands and Arctic energy exploration, it is hoped that companies with strong ESG credentials are, or will become, better risks. The insurance industry has a role to play here in encouraging a model of financial stewardship that helps countries and businesses transition to new energy models in a way that fairly balances the interests of current and future generations, developed and developing economies.

Insurance solutions need an overhaul

Environmental risks present a significant threat to the insurance industry. They have the potential to generate complex, integrated claims that straddle traditional areas – from pollution and environmental damage, through to new areas of risk like greenwashing and reputation damage. But they also represent an opportunity to work with clients to go beyond pure risk transfer to improve management and mitigation of risks to minimise the likelihood of a loss event.

Driving better alignment between business and social agendas is a complex challenge that requires long-term solutions and dedication if we are to succeed. A key factor in that success will be working together to forge stronger, deeper relationships and clear prioritisation to invest in a strategic roadmap creating a more sustainable planet for all.

Delivering on these objectives will require more breakthrough innovation in this space, greater collaboration around standard-setting and regulation, and a heightened sense of urgency to deliver real solutions.