• Nigel Raywood

Meeting insurance industry net-zero goal requires big change in risk management mindset

RiskACUMEN's Nigel Raywood highlights how underwriters, brokers, risk managers and subject-matter-experts will need to come together and change the way they think about risk, if goals set by major players in the industry around net-zero are to be achieved...

FOLLOWING ALMOST two weeks of environmental discussions and big commitments made by world leaders around the COP26 summit, there has been some inevitable scepticism. After all, it’s all very well saying that changes will be made, but how on a global scale will any of what is actually needed going to be implemented?


The simple fact is that attitudes and mindsets on the ground, in areas of vital rainforest for example, will need to change, otherwise people will simply continue to strip the land of trees for their own short-term financial gain. The argument of old industrial revolution versus the new, doesn’t help the environment, however unfair it may feel to developing countries. There needs to be a new way of thinking, a new approach, because what we’ve seen so far hasn’t been working.


A significant environmental commitment was made earlier this year by an alliance of global insurers and reinsurers. The companies concerned have established the Net-Zero Insurance Alliance (NZIA) and have committed to transition their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas emissions by 2050. The move is consistent with achieving a maximum temperature rise of 1.5°C above pre-industrial levels by 2100.


Each of the founding members, AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich Insurance Group, and others that subsequently join the alliance, such as Lloyds of London in the build-up to COP26, will decide how they will achieve the overall objective.


However, leadership alone will not bring about the required change. Those who are vital components in the delivery of this goal will also need to follow. Each member of the alliance should consider how best to adopt a risk management approach that has the support of other key insurance industry stakeholders, including brokers, risk engineers and risk management consultants, as well as independent subject-matter-experts and third parties across their supply chains.


There seems little doubt that unless underwriters, brokers and those who set standards around risk and are capable of implementing change are fully joined-up, not only in their commitment, but mindset and approach around achieving net zero portfolios by 2050, meeting the Net Zero goal is going to be a tough ask.


Last chance?

Climate change is a task we cannot afford to fail on. However, my biggest fear when I think about this issue and the task that major players in the insurance industry have now set, is that there is a way of approaching risk in our industry that does not lend itself to achieving this hugely important collective goal.


The truth is, portfolio level risk management and intervention, which is absolutely what is required here, is not where a great many ground-level stakeholders invest their time and energy. Insurers and reinsurers are, of course, adept at portfolio assessment, analysis and correction. However, brokers for example, are largely concerned with risk at individual client level. Where underwriters request the assistance of risk engineers to improve risk, it’s usually the same story. We tend to look at risks on a case-by-case basis.


Now of course, this case-by-case approach supports the underwriting process for individual high-priority risks, but it also breeds a mentality which focuses very much on what we see as the ‘insurable risks’. So, we look at fire, security, liability issues, from a rather narrow perspective of proximate cause. It’s the single probable event, like an unguarded machine, a physical break-in through a weak point in the perimeter or an ignition hazard, which we spend most of our time looking for and improving.


However, when we think about some of the environmental disasters of this year alone, and the unimaginable cost to the insurance industry, it does make me wonder if spending time assessing individual risks, in relatively low numbers in terms of the overall context, would support the achievement of the ambitious Net Zero goals. Should we not also be collectively focussing on the bigger-picture environmental issues that could potentially have a great impact across entire portfolios?


What are we doing?

Let me explain further. It is rare that our organisation is ever asked by an underwriter or broker to examine the broader environmental risks around an organisation, and certainly not for a specific segment of industry. Why? I believe it’s because there is a perception that this is in some way distant from what is covered by the insurance contract. The thinking goes… There’s a pollution exclusion in the policy, so no claim will emerge, so we don’t need to assess that aspect. Let’s make sure no major fires occur, because we cover that and that’s what will impact on our bottom-line. Traditionally, this has been the thinking and from a pure risk transfer perspective, it’s the correct thinking.


However, step back and look at things from a portfolio perspective and it’s possible to see things differently. With the right data and assessment at this higher-level, a clearer picture of pockets of weakness according to different segments will emerge. Encouragingly, we have seen this around cladding on properties recently, but this is an obvious insurable risk and one that is a widespread response to a single event.


Effective control measures, supported through incentives, guidance, training that is targeted according to where weaknesses lie could have a significant impact on changing the environmental performance of portfolios. This is where more of our thinking could be focused, if we are to genuinely tackle this issue. Individual risks still need to be assessed of course, but we need to get better at improving vast swathes of risks through co-ordinated portfolio level assessment, intervention and re-assessment. We all need to work together.


Ready to invest?

The key question of course is, are we as an industry willing to invest in bringing stakeholders together and making this portfolio approach to environmental risk assessment and improvement a reality?


My response to this is to ask another very simple question - wouldn’t it be worth it? Of course, for future generations, the survival of our planet and so on, it would be, but I’d also like to make a clearer link in terms of pure financial outcome, because there can be little doubt that one of the industry that will really suffer as a result of climate change will be insurance. We are seeing it already.


A report from reinsurance group Swiss Re earlier this year claimed that natural disasters in the first half of 2021 would lead to the largest insurance payout in 10 years, with the bill likely to reach around £30bn, the second biggest first-half loss ever recorded in the industry. The recent German floods are expected to cost insurers up to €5.5bn, with Aon estimating that this will be the costliest European weather event of the past 40 years.


These events are becoming more frequent and more severe as a result of climate change, but what are we really doing about it? Where is the support for customers, where is the intervention, where is the real measurable and actionable change?


Another fear of mine is that the NZIA will end up being an exercise in crude measurement and exclusion only. Targets will still be met, not because of fundamental widespread change, but because risks that do not comply will either be moved elsewhere in the market or simply priced out of insurance altogether. This is unlikely to be the solution the world needs.


Real change

So overall, what am I saying here? I’m not proposing any kind of clear or specific solution to achieving Net Zero. I do not have the expertise for that. Of course, no single individual or organisation does. Instead, I’m suggesting we all acknowledge that the achievement of Net-Zero requires investment and the committed involvement of all stakeholders in the project.


As well as assessment of portfolios to understand where compliance is weak, support for policyholders must then follow to improve performance. This means relevant information, guidance and intervention to really make a difference. Without involving brokers, risk managers and independent subject-matter-experts across the supply chain, the real change at the customer-end of the chain will not be achieved.


The insurance industry has the "power, influence, resources and motivation to," in the words of Inger Andersen, Executive Director of the UN Environment Programme (UNEP) “drive progress towards a net-zero economy and a sustainable future for all.”


So let’s all come together, united in our capabilities and strengths, to tackle the environmental performance of insurance portfolios by developing new approaches that are progressive and innovative and which recognise the bigger picture here. Ultimately we need to help save our world.


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