Fostering climate resilience and ensuring inclusive access to insurance

As the critical role of insurance in fostering climate resilience and adaptation becomes more apparent, Sustainable Insurer spoke with Varun Sarda and Chinyelu Oranefo of Lloyds Bank’s sustainability and ESG finance team, as well as Vicky Grinnell-Wright and Nataliya Tkachenko, who focus on ESG in insurance and AI and ESG data, respectively, within the wider Lloyds Banking Group.

What has been the focus of the industry’s efforts so far on tackling climate change?

Varun Sarda: Climate change is a complex and global challenge presenting both physical and transitional risks to society and the economy. To date, the industry’s focus has mainly been on applying their data, expertise and risk assessment capabilities to help price the frequency and severity of climate-related extreme weather more accurately. Additionally, insurers have sought to proactively manage their own carbon footprint to deliver on their net-zero commitments, and engage in product innovation around climate change (e.g. solutions centered around reducing risks for low carbon technologies). It is estimated that at least $10trn will be needed in new forms of cover to reach net-zero by 2030 for key sectors.¹

What new initiatives have emerged to support the insurance industry's climate goals?

Vicky Grinnell-Wright: The UN-convened Forum for Insurance Transition to Net-zero (FIT) is a new structured dialogue and multistakeholder forum to support the necessary acceleration and scaling up of voluntary climate action by the insurance industry and key stakeholders. Chaired by the UN Environment Programme (UNEP), the FIT will work with insurance market participants and engage with insurance regulators and supervisors, net-zero standard-setters and initiatives, the scientific and academic community, civil society, and other key stakeholders. The creation of the FIT is a major new opportunity for UNEP, the insurance industry, and key stakeholders to advance net-zero insurance thinking and practices.

How has the industry progressed since 2023?

Sarda: One major development has been the publication of additional guidance from the Transition Plan Taskforce (TPT), an initiative announced at COP26 and launched by HM Treasury in the UK. It seeks to provide a gold standard for corporate and institutional reporting in relation to their climate transition plans. In April of this year, the TPT published sector-specific guidance for asset owners and an insurance sector summary providing practical considerations for insurance companies that underwrite in the non-life space. On the sustainable financing front, there continue to be calls² for the insurance sector to help advance sustainability through their underwriting activities, investment decision-making and by engaging with their own clients on relevant sustainability issues.

Grinnell-Wright: The TPT guidance also encompasses practical recommendations for forward-looking climate transition strategies, including decarbonisation levers, climate risk sensitivities, integration into business and operational strategy, governance, and financial planning. Examples for non-life underwriters include reducing financed emissions from high climate impact sectors, investing in companies with credible transition plans, using stewardship and stakeholder engagement to encourage climate-positive plans, and ensuring there is adequate knowledge, governance, business and operational metrics, and targets.

How can insurers prepare for the Taskforce on Nature-related Financial Disclosures?

Chinyelu Oranefo: Insurers can develop their understanding of how to frame their exposures to nature by preparing for the Taskforce on Nature-related Financial Disclosures (TNFD). This requires an assessment of how they will integrate nature-based considerations into their risk assessment and underwriting processes. This includes investing in data and analytics to understand the dependencies and impacts of their portfolios on natural ecosystems in the widest sense and thereby understanding its material interventions.

What other steps can insurers take to better prepare for future climate risks?

Grinnell-Wright: Apart from investing in advanced data analytics and climate modelling tools to enhance risk assessment capabilities, insurers will also need to engage in new forms of policy dialogue, and collaborate more broadly with banks and institutional investors. The effective mitigation of future risks could be achieved through, for example, supporting public-private partnerships to develop and fund large-scale resilience projects, such as flood defences, or even exploring innovative ways to offer trade finance to aid the rapid deployment of new technologies necessary to deliver net-zero. The insurance industry cannot solve the climate challenge alone but it can support the development of new sustainable investment vehicles and advance the financing of large-scale adaptation measures.

How do collaborations support the insurance industry in tackling climate risks?

Sarda: Insurers need to work closely with governments, NGOs, and other financial institutions to develop comprehensive strategies for climate resilience. Collaborations including the Climate Markets and Investment Association and the UNEP provide frameworks and support for insurers to integrate climate considerations into their operations. These collaborations help insurers set ambitious targets for reducing carbon footprints, improving nature and biodiversity outcomes, sharing best practices, and developing innovative solutions that address climate risks.

How can insurers balance collaboration against criticisms of being anti-competitive?

Oranefo: In the UK, the Competition and Markets Authority (CMA) published guidance in October 2023 with the sole purpose of reassuring businesses at the same level in the supply chain, NGOs, and trade associations that they can come together to act on climate change and environmental sustainability without competition law being a barrier to green initiatives. The guidance has already been cited as key to the entry into new “green” agreements in various sectors, and the CMA runs an “open door” policy to discuss potential projects.

How can insurers tailor existing offerings to cover climate resilience and adaptation?

Oranefo: Insurers have a pivotal role in promoting climate resilience and adaptation through their products and strategic messaging. Insurers need to communicate the benefits of risk mitigation measures and the importance of resilience-building initiatives to customers clearly and effectively and also continually set expectations of how they would like their own portfolio to be invested. Campaigns that educate policyholders about the potential impacts of climate change and the steps they can take to protect themselves are crucial.

Sarda: By developing insurance solutions that incentivise proactive risk mitigation measures, insurers can encourage policyholders to adopt practices that reduce their vulnerability to climate-related events. For instance, offering premium discounts for properties that implement flood defences or use sustainable building materials can significantly enhance resilience for some properties. Moreover, insurers need to communicate the importance of these measures effectively, highlighting how they contribute to long-term savings and resilience for policyholders.

In the UK, what is the significance of schemes like Flood Re?

Grinnell-Wright: Flood Re is planned to be in place until 2039 to help enable home insurance to remain affordable in flood-risk areas while managing a transition to home insurance prices that reflect flood risk. However, it’s important to note that when Flood Re comes to an end in 2039, properties not covered by the scheme will likely see a significant increase in premiums without further interventions at both market and local levels. This highlights the necessity for ongoing efforts across the sector and wider financial system in resilience-building and market adaptation to ensure that insurance remains accessible and affordable for all.

What is a “just transition” and how does it relate to the insurance industry?

Oranefo: In designing net-zero transition solutions for the industry is vital to ensure they are inclusive and fair. The transition is unlikely to be achieved effectively across society and all sectors without attention to broader social factors. Some advocate using the transition to net-zero as a way to remedy historical social injustices. In the insurance industry, the just transition principle translates into ensuring that everyone has access to affordable protection against the negative impacts of climate change and benefits from resilience measures.

How can the insurance industry innovate new and fair climate solutions?

Sarda: Leveraging advanced data analytics and climate modelling tools to assess risks more accurately and develop tailored solutions will be critical. For example, parametric insurance products could provide payouts based on predefined events, offering faster and more efficient claims processes for climate-related incidents. Additionally, insurers might explore microinsurance or community-based products to provide affordable coverage to low-income communities, thereby promoting inclusive access to insurance.

What role does AI play in addressing climate challenges in the insurance industry?

Nataliya Tkachenko: AI has a significant role in the insurance industry’s climate challenge. It can analyse huge datasets to provide unprecedented insights, allowing more accurate risk identification, tailored coverage and claim handling efficiencies, ultimately benefiting both insurers and customers. However, AI presents its own risks when it comes to accuracy and social equity. Historical claims data, customer behaviour, and external factors like social media trends can introduce bias, data misuses, and data insecurity.

How can we ensure AI presents a fair picture in assessing climate risks?

Tkachenko: The analysis of variables such as personal information, geolocation, past claims, and insurance history can result in favouring certain categories of customers, often those needing less support. For example, an investigation by Politico highlighted that the Federal Emergency Management Agency (Fema)’s system inadvertently penalised lower-income households residing in higher-risk zones and disproportionately benefited white and affluent communities. To remedy this, Fema introduced “pricing equity” among other measures to improve its methodology. Similar actions to “de-bias” datasets can and should be implemented in the insurance industry to ensure fair and equitable treatment for all customers.

¹ The bigger picture, The $10 trillion role of Insurance in mobilising the climate transition

² Insuring a sustainable, greener future: A roadmap for climate action

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