Insurance and sustainability opportunities for 2023: 10 trends for insurers to consider
What’s next in 2023 for the insurance industry?
The sustainability agenda for insurers evolved rapidly last year and the outlook for 2023 is for more of the same. On climate, we expect to see a greater emphasis on strategy as insurers compete for new low-carbon opportunities — looking beyond disclosure and target-setting to net zero transition planning and delivery. Meanwhile, a new global deal to protect biodiversity means ‘nature positive’ is about to become the new ‘net zero.’ As the sustainability agenda accelerates and proliferates, a key challenge for insurance executives will be choosing where to focus and what to prioritize. To help, here is our pick of 10 sustainability issues that should be at the top of every executive’s list in 2023.
1. Operationalizing net zero underwriting
The proliferation of net zero target setting raises multiple questions for insurers. Those that have announced commitments through the Net Zero Insurance Alliance (NZIA) will face the immediate challenge of developing 2030 targets aligned with the NZIA’s proposed target setting protocol. This provides greater optionality than might have been anticipated, but that in turn requires member insurers to take a more considered approach to implementation. They must now decide which parts of their portfolio to begin with; how to sequence and set targets for emissions reduction, engagement and insuring the transition; then develop approaches to steer their portfolios over time without compromising commercial imperatives. Meanwhile insurers that have yet to announce net zero underwriting targets still need to begin building frameworks to measure portfolio emissions and compare clients’ relative emissions intensities, as this is a key part of the toolkit for navigating the energy transition.
2. Delivering on transition plans
Around the world, the emphasis is shifting from target-setting to delivery. Investors are increasingly asking not whether a company plans to reduce emissions, but how it plans to do so, and regulators in key markets such as the UK, US and EU have proposed rule changes that would require companies to publish transition plans. Insurers therefore need to develop their own credible transition plans — detailing how they expect to adapt their business as the transition unfolds, and build the necessary internal capabilities and frameworks needed to deliver against them.
“By understanding how client ESG characteristics correlate with underwriting outcomes insurers can gain an analytical advantage in increasingly competitive markets”
3. Incorporating ESG into underwriting
Beyond emissions, approaches to integrating environmental, social, and governance (ESG) into underwriting are becoming more sophisticated as insurers move from screening (to avoid negative impacts) to portfolio steering (to drive positive impacts), and risk selection (to improve underwriting profitability). By developing approaches to measure how their underwriting activities promote ESG outcomes, insurers can tell a more compelling story about their societal contribution. And by understanding how client ESG characteristics correlate with underwriting outcomes they can gain an analytical advantage in increasingly competitive markets.
4. Honing in on nature
Nature is the next environmental priority. At the end of 2022, governments agreed on a new global framework to halt and reverse nature loss by 2030, and work is already underway to develop guidance for companies to set ‘nature positive’ goals and disclose nature-related risks and opportunities. Regulators are not far behind, with many working on approaches to incorporate nature into supervisory activities. Insurers need to develop nature-based risk and portfolio steering frameworks and align their transition plans with the shift to a nature-positive economy.
5. Facing the energy crisis with practical actions
The energy transition took an unexpected turn in 2022, as efforts to shore up energy security saw a rebound in coal generation, while investment surged into new fossil fuel infrastructure and renewables. The energy crisis will continue into 2023, bringing a similar mix of headwinds and tailwinds. Insurers with significant energy books need clear strategies for how to navigate this landscape in the context of heightened activist attention and their own transition objectives. At a minimum this should include clear modalities for what they will underwrite, under what conditions, and until when.
“Sustainable claims will become a source of customer differentiation as well as a common component of target setting and transition planning”
6. Seizing the clean energy opportunity
To win, insurers need to innovate. Clean energy investment now accounts for the majority of energy capex but still needs to triple by the end of the decade for the world to reach net zero by 2050. This is a huge opportunity but a difficult one for many insurers to realize — due to the capacity needs of large-scale renewables projects and the challenges of underwriting novel technologies, such as hydrogen and carbon, capture and storage (CCS), with no loss histories. Winning could mean exploring public private partnerships, parametric solutions, and risk pools. Insurers will also need to invest in new skills across risk engineering and underwriting to develop client teams able to de-risk client transition plans.
7. Moving beyond climate risk disclosure
Insurers are making steady progress on climate risk disclosure, but as regulatory momentum on climate risk continues to build, insurers will need to go beyond disclosure and establish robust climate risk management. According to the Task Force on Climate-Related Financial Disclosures (TCFD) latest status report, the sector has improved its overall level of climate risk disclosure from 25% to 41% in the space of two years. But that still leaves a significant share of the sector with minimal levels of climate risk transparency. Nor does good disclosure necessarily mean good risk management and even advanced insurers have a long list of to do’s often including litigation risk, transition risk for underwriting, and integrating climate into risk appetite frameworks.
8. Getting to grips with greenwash
2022 saw a flurry of regulatory activity on greenwashing. In the US, the Securities and Exchange Commission (SEC) launched a new anti-greenwashing taskforce, the UK’s Green Taxonomy Advisory Group published its first tranche of advice, and the EU’s supervisory agencies launched a call for evidence on greenwashing. The second half of the year also saw a number of authorities take high-profile actions against financial institutions in response to greenwashing allegations. Insurers with asset management businesses must be confident their ESG product development, marketing and labeling stands up to scrutiny. But greenwashing risks are by no means limited to asset management. As insurers continue to set targets and exclusions, make claims about their sustainability, and launch ‘green’ insurance products, it will become critical to manage greenwashing risks across all areas of their business.
9. Making claims sustainable
Sustainable claims will become a source of customer differentiation and a common component of target setting and transition planning. Claims fulfilment constitutes a material share of the P&C sector’s emissions footprint: we estimate as much as 2% of national emissions in developed markets such as the US and Europe. Importantly, insurers have more influence over claims emissions than underwriting emissions, and action to green claims fulfilment has high visibility with customers. Leading carriers have begun to develop sustainable claims strategies, including approaches to measure claims-related emissions; targets to drive emissions reductions or increase recycling and repair rates; and plans for how to engage suppliers and modify underwriting strategies in pursuit of these goals.
10. Focusing on low-carbon transition
Through home, motor and travel insurance, personal lines touch up to 80% of a typical household’s emissions. Research shows that consumers favor companies that can help them reduce their personal carbon footprint, and as pressure to reduce emissions from buildings and transport grows, insurers have started to develop products to help customers adopt greener lifestyles. Examples include products to encourage lower carbon behaviors or to support the adoption of low-carbon technologies and products embedded with offsets to compensate for customer emissions. Insurers should also explore how green nudges and ecosystem strategies can be deployed to support the adoption of transformational technologies like heat pumps and all-electric vehicles (EVs).