Sustainability and Insurance: November Roundup
December 18, 2024
Welcome to our monthly roundup, keeping you up to date on the insurance industry’s most significant sustainability-related news. This month’s topic: 2024: a year of stalling commitments amid growing regulatory pressure
Read our summary and analysis below.
Analysis
2024: a year of stalling commitments amid growing regulatory pressure
The first year to breach the threshold of 1.5oC of warming, 2024 has been quite the year for (re)insurers. Back in April and May, intense rainfall and severe flooding in Dubai and Brazil caused US$8.3 billion and US$7 billion worth of losses respectively. We saw the earliest Category 5 Hurricane on record (Hurricane Beryl in July), and here in the UK, Storm Henk brought 150% of the typical 4-month average rainfall in mere days. Each of these hazards, among many others, were made more likely by climate change.
Against this backdrop, the international campaign of NGOs known as ‘Insure our Future’ recently published their eighth annual Scorecard, benchmarking the climate commitments of 30 of the largest non-life (re)insurers. It reported that climate change accounts for more than one-third of global insured weather losses over the last twenty years, at an estimated US$600 billion. The share attributed to climate change has risen from 31% to 38% over the last decade.
The rate of new commitments to transition from (re)insurers in Europe is slowing. Despite notable exceptions, such as Italian insurer Generali’s announcement in October that it would no longer insure risks associated with oil and gas expansion, including new liquified natural gas (LNG) terminals and gas-fired power plants, we have seen limited advances in transition plans and commitments across the region.
In the US, we seem to have come to a complete stop, with many of the largest US insurers having made no meaningful progress to limit underwriting of fossil fuel expansion (according to the Scorecard Report). As we stated in last month’s newsletter following the election results, increasing divergence across the Atlantic when it comes to sustainability regulation leaves global (re)insurers with strategic decisions to make about their approach to these different regulatory landscapes.
The renewables market remains challenging, with premiums sitting at less than 30% of those for fossil fuels. Currently, the only major insurers to write more direct premiums for renewable energy than fossil fuels are AXIS Capital, Aviva and Munich Re. There is a risk here that there will not be sufficient insurance capacity to match the scale of investment in the climate transition. Those sitting back may not be able to benefit as the transition takes off.
Transition plans will only become more important. As we saw in the first report from the United Nations Environment Programme’s (UNEP) Forum for Insurance Transition to Net Zero (FIT) – created to replace the Net Zero Insurance Alliance – the most important question is no longer whether an insurer should develop a transition plan but how they should go about it. From both a regulatory perspective and a governance perspective, (re)insurers cannot afford to proceed without a plan.
As we look to 2025, we may start to see where sustainability targets are on track and where the front-runners are not quite meeting the commitments of their transition plans. For example, it remains to be seen how Allianz and Munich Re will enforce their deadline of 1st January to restrict coverage for and investments in any oil and gas companies not aligned with a credible 1.5oC pathway to net zero by 2050.
On the whole, we have seen limited action from (re)insurers to match the rising tide of regulation. The transition is happening, even if it is slower than many might want.
Summary
Agreements at COP29
COP29 UN Climate Conference Agrees to Triple Finance to Developing Countries, Protecting Lives and Livelihoods (UNFCCC)
At the United Nations Conference of Parties (COP29) summit in Baku, representatives agreed a climate deal described by UN climate change executive secretary Simon Stiell as ‘an insurance policy for humanity.’ The agreement will triple finance to developing countries, from US$100 billion annually up to US$300 billion annually by 2035. It secures efforts to scale up public and private finance from industrialised countries to provide US$1.3 trillion per year by 2035 in funding to help developing countries transition. The conference also made progress in carbon market negotiations, agreeing standards for a centralised carbon market under the UN (Article 6.4 mechanism) and providing clarity around how the trading of carbon credits will be authorised and tracked in registries.
California legislation survives legal challenge
California Climate Disclosure Regulation Passes Major Legal Hurdle (ESG Today)
Earlier this month a major legal challenge was brought against the SB253 and SB261 regulations in California. The regulations, which were signed into law in October this year, require companies with revenues greater than US$1 billion operating in California to annually disclose the emissions of their value chains and report on climate-related financial risks. The regulations survived the lawsuit filed by the US Chamber of Commerce after a California judge refused the request to disallow the law on constitutional grounds. Corporate reporting under the law is due to begin in 2026.
FIT’s guide to transition planning
Closing the Gap: The emerging global agenda of transition plans and the need for insurance-specific guidance (Finance Initiative)
The United Nations Environment Programme’s (UNEP) Forum for Insurance Transition to Net Zero (FIT) released its first deliverable of the FIT Transition Plan Project. FIT is a multistakeholder forum discussing the acceleration of voluntary climate action by the insurance industry, created to replace the Net Zero Insurance Alliance (NZIA). The Report, titled, ‘Closing the Gap: The emerging global agenda of transition plans and the need for insurance-specific guidance,’ highlights the role (re)insurers can play as risk managers, risk carriers and financial investors for the transition. It discusses the landscape of emerging transition plans and assesses the features of insurers’ underwriting portfolio which need to be considered for transition planning.
New insurance products for Nat Cat and environmental consultancy
Rokstone and NormanMax debut global parametric insurance product (Insurance Business UK)
Specialty MGA Rokstone have joined with NormanMax Syndicate 3939 to launch a new parametric insurance product: Rokstone Parametric. NormanMax Syndicate 3939 is the first Lloyd’s syndicate focused only on multi-peril natural catastrophe parametric reinsurance products, addressing a current lack of capacity in the Nat Cat market. The joint facility will offer coverage for perils associated with natural disasters including hurricanes, earthquakes, tropical cyclones and typhoons, with additional perils expected to be added next year. Rokstone anticipates it will generate US$50 million gross written premium in 2025.
RSA launches UK Climate Professionals PI product (Reinsurance News)
Commercial insurer RSA have launched a new Climate Professionals Professional Indemnity (PI) insurance product, the first of its kind in the UK to specifically focus on consultants providing advice on sustainability and climate-related topics. The product can be purchased by brokers and their clients via RSA’s Regions business. As the demand for specialised advice in this area increases, demand for sufficient PI coverage follows.
Europe’s fossil fuel assets
EIOPA recommends a dedicated prudential treatment for insurers’ fossil fuel assets to cushion against transition risks (EIOPA)
The European Insurance and Occupational Pensions Authority (EIOPA) published its ‘Final Report on the Prudential Treatment of Sustainability Risks for Insurers.’ The Report recommends that European insurers’ balance sheets have additional capital requirements for fossil fuel assets to reflect the high risks associated with them. For stocks, for example, the Report suggests increasing capital requirements by up to 17% on top of the current capital charge. The European Commission will now review the Report and consider implementing its recommendations.
Fitch reveals the impact of fossil fuel surcharges on insurer ratings (Insurance Business UK)
In response to the Report by EIOPA recommending additional capital requirements for fossil fuel assets, Fitch Ratings evaluated the potential impact on the ratings of European insurers. Their news release states that the additional capital requirements would have a ‘limited impact’ on Solvency II ratios because of companies’ ‘low direct exposures to fossil fuel-related equities and bonds.’ If the European Commission decide to implement the recommendations, Fitch predict that insurers would accelerate divesting from fossil fuel-related assets.
Closing the protection gap in Italy
Italy to require companies to buy insurance for climate risks (Bloomberg)
From 1st January next year, companies in Italy will be required to buy insurance protection for natural hazards. The most significant peril in Italy is flooding, and most Italian businesses have no insurance protection at all. The new law requires insurers in Italy to accept potential clients, prompting concerns that a single large catastrophe could wipe out the €5 billion state-controlled reinsurance fund backing the law. This development reflects growing anxiety about the insurance protection gap across Europe, following an increase in climate-related losses of 2.9% each year from 2009-2023.
About the author
Anna Gardner is a Consultant at Oxbow Partners who has worked on strategic engagements. She recently supported the design and implementation of a follow-only strategy for a global specialty insurer and writes about sustainability for Oxbow Partners’ publications. Anna has a particular specialism in carbon credits, having previously advised a provider of high-quality carbon credits on their communications strategy and led a delegation to the UN climate change conference at COP27. Anna holds a Masters degree in Geography from the University of Cambridge.
