Insuring the journey to net zero

Ofir Eyal, partner and director at Marakon, outlines how the insurance sector can harness its unique capabilities to facilitate the low-carbon transition across the real economy.

As the world grapples with the need to combat climate change, certain industries have emerged as key players in the global effort to achieve net-zero emissions by 2050.

Whilst the insurance sector has been characterised as slow to adapt, it has the potential to play a significant role in enabling the transition to net zero.

It will need to provide innovative solutions that can be adapted to emerging ‘clean’ economic activities, while also helping to manage increasing climate-related risks. Despite this being a major opportunity, the question remains as to whether the sector will move at the pace required to be a genuine facilitator of the transition.

The lay of the insurance land

The insurance industry holds a unique position within the global economy. Its primary function revolves around risk assessment and management, which make it an essential conduit in the chain of economic activity worldwide.

And like every sub-sector of the financial system, traditional insurance business practices have relied heavily on fossil fuel investments, and underwriting of high-carbon assets has perpetuated carbon-intensive industries and their associated risks.

As the world moves towards a net-zero future, the insurance industry must adapt to a rapidly changing landscape, which will generate new economic activities and products while simultaneously presenting new risk profiles associated with climate change.

The transition to net zero presents both new risks and new opportunities for every sector – but for the insurance industry, the dichotomy between risk and opportunity underpins its very purpose.

The question as to how the sector will react to these new risks remains to be seen, but what is abundantly clear is that a great deal of cross-sector collaboration will be required to get to the desired endpoint.

Overcoming the element of risk

One of the major challenges faced by the industry in supporting the net-zero transition is the debate over divestment from fossil fuels, as many insurers still invest in and underwrite high-carbon assets.

The growth of green funds and assets has given insurance companies the opportunity to better align their investment strategies and portfolios with net-zero ambitions. In doing so, they can not only reduce their exposure to high-carbon assets but also support the growth of clean and sustainable industries.

For example, insurers are also developing innovative insurance offerings for new financial products – such as carbon credits – which will naturally require new forms of insurance to work effectively.

In the case that carbon credits are exchanged for reforestation efforts and an area of the forest subsequently burns down, the company that bought the credits will need insurance to avoid renewed carbon liability.

It is evident that the sector has a unique opportunity to encourage sustainable practices among businesses through risk assessment. And by incorporating ESG factors into their risk assessment processes, insurers can also incentivise and reward businesses with sustainable operations. This not only reduces risks but also supports a more sustainable economy.

What’s next?

To overcome the challenges and seize the opportunities presented by the net-zero transition, collaborative effort within the insurance industry and externally with other sectors is essential. This includes collaboration with regulators pushing for greater alignment across the financial system, which will be a rapidly increasing influence in the years ahead.

Beyond this, the incorporation of new climate modelling capabilities and data analytics will enhance the accuracy of risk assessment, enabling insurers to predict and prevent climate-related losses more effectively. This will not only protect their bottom line but contribute to broader climate resilience efforts.

The insurance industry's role in achieving net-zero goals is complex. First-mover advantage is lost quickly, and as insurers see that another has a profitable product, it becomes easy for them to copy it.

The only way to safeguard this advantage is by fostering deeper partnerships with corporations in the green economy, and with companies that are transitioning to clean energy.

The path to net zero may be challenging, but it presents significant commercial opportunities for insurers willing to adapt and innovate in the face of environmental imperatives.