Beset on All Sides: The Insurance Industry Must Hold True to Its Convictions and Commitments on Net Zero

The insurance industry is battling a regulatory and legal challenge in the United States, which has essentially dismantled the Net-Zero Insurance Alliance (NZIA). Simultaneously, the industry faces growing exposure to climate-related disasters in susceptible geographies.

The insurance industry is currently undergoing a search for meaning, stemming from a letter penned by 23 Republican Attorneys General (AGs) of various states in the US. The letter claims that net zero aligned business practices will result in “increasing costs and decreasing productivity for companies, most notably those in the oil, gas, and energy industries [...] causing inflation and higher prices for consumers."1

The AGs further claimed that the UN-convened Net-Zero Insurance Alliance (NZIA) has targets and requirements that violate federal antitrust laws. They argue that acting to reduce emissions which stem from insured products would be “unreasonably harmful to competition".

While they no longer deny the climate crisis, a number of Republican party legislators are certainly delaying any form of action in the name of the economy. Their actions have had international repercussions resulting in the collapse of the NZIA. Following the letter, key members began withdrawing, with the rest toppling like dominoes. Every one of them insistent in their own way that their “commitment to [their] sustainability strategy remains unchanged", even as they withdraw from their commitments.4

So, having introduced the rock, let's consider the hard place. Insurers are both unwilling and, to some extent, unable to continue insuring in climate-risk-prone geographies.

The saying goes that in every great crisis lies opportunity – but not so with insurance. In his testimony to the Senate committee, Eric Andersen, president of Aon PLC, a global professional services and insurance solutions firm, made clear that the industry is experiencing “a crisis of confidence around the ability to predict loss".

These words reverberate while the biggest home insurers in California, All State and State Farm, stops issuing any new home insurance policies. The reasons cited include the increasing risk of wildfire, the rising cost of building materials, and the rising cost of reinsurance. Arguably, climate change is the common denominator behind all three of these issues.

On the other side of the continent, it is expected that insurance premiums in southern Florida will rise by a phenomenal 200% to 350% between Miami and Palm Beach. The Federal Emergency Management Agency (FEMA) released a new risk rating pricing plan to better reflect this increased flood risk, arguing that the increased premiums reflect equitable distribution. Yet the reaction has been resoundingly negative. Ten states and a host of local governments have moved to sue FEMA for “disrupting the housing market and business climate".

All this makes clear: it's not easy being an insurer. The industry must inevitably bear the costs of the climate crisis while, at the same time, catering to regulatory whims and maintaining market competitiveness.

The climate for insurers is currently an unfriendly one. At South Pole, we recognise the fundamental role that the insurance industry has to play in the urgent transition towards a low-carbon economy. Akin to deep ocean currents, insurance underwriting sends subtle but powerful market signals that dictate the direction of investment. As an example, global insurer CHUBB introduced methane management and conservation area assessments to its underwriting policies, requiring the oil and gas industry to meet its standards.

To aid in the herculean task of transitioning into a low-carbon future, South Pole's sustainable finance team has been helping clients with their accounting of insurance-associated and financed emissions aligned with the Partnership for Carbon Accounting Financials (PCAF) standard. This allows insurers to identify their carbon exposure to and understand the climate impacts of their invested capital and insured activities in carbon dioxide equivalents (CO2e). We complement this work in partnership with our risk and opportunities team by performing climate risk and opportunity assessments, analysing both physical and transition risks and opportunities for clients. The assessments take into account the geolocation of key assets, activities or operations, sourced commodities and raw materials, and value chain exposure. This work classifies and gauges climate-related risks and opportunities, and also enables the development of a business resilience strategy assessment, allowing clients to have strong TCFD disclosures. As climate consultants we help clients navigate all manners of storms, be they atmospheric or regulatory.

We supplement all of this work with internal capacity building in understanding climate-related metrics, making sustainability commitments, and developing market expectations. After laying this groundwork, our insurance clients are able to define paths forward, including setting credible targets (for managed assets) that can be aligned with guidance from either the Science Based Targets initiative (SBTi), the Net-Zero Insurers Alliance, the Net-Zero Asset Managers Alliance or the Net-Zero Asset Owner Alliance.

While the task at hand for insurers may seem daunting, it's not beyond the means of the industry, or our capabilities.

Insurance players are leviathans in their own right, governing kingdoms of premiums, dominating markets, and setting policies on which the rest of us must align. The current events impacting the world of insurance may be discouraging, seeming to suggest that working together is impossible or unfeasible. But the threat is too great for us to give up that easily. Tackling climate change is a moral and regulatory imperative, and every decision made by the insurance industry will reverberate across the global market. Let us help you rise to the challenge.