January 2023 / 5 Min Read

3 Ways Insurance Industry Can Accelerate Net Zero by Facilitating Capital

Insurers can help advance a climate crisis solution. Here are three ways the industry can help accelerate the journey to net zero emissions.

Key Takeaways

Today, forward-thinking insurance companies are driving the global economy by originating solutions that safeguard businesses, governments and communities.
More work needs to be done as the insurance industry’s role in improving resilience in the economy evolves.
That includes helping accelerate a climate crisis solution by matching capital to risk where it is needed.

The emerging impacts of climate change are increasingly felt across the re/insurance industry, with much uncertainty ahead. But the industry now has a chance to transform volatility into opportunity. Today, forward-thinking insurance companies are driving the global economy by originating solutions that safeguard businesses, governments and communities.

However, more work needs to be done as the insurance industry’s role in improving resilience in the economy evolves. Insurers can help accelerate a climate crisis solution by matching capital to risk where it’s needed, such as via clean tech solutions, and by de-risking projects and technology development, which will encourage faster and more meaningful investment.

There are three primary ways the industry can help accelerate the journey to net zero emissions.

1. Supporting industries to transition to lower carbon operations

Instead of moving away on arbitrarily short timescales from carbon-intensive and high-emission industries, (re)insurers should be enabling and supporting these industries to transition to lower carbon operations. This can be done by both supporting and incentivizing these industries to transition, and by de-risking investments in low-carbon technologies, for example carbon capture and storage and new types of renewable energy. To fully grasp this opportunity, the insurance industry must change some of its mindset to formulate a consistent forward-looking pricing model for new risks.

2. Utilize longer policy terms

The industry should consider the need for longer policy terms than our usual annual renewal cycle. New clean tech industries, for example, are often not investable at scale, and insurance coverage’s stability and predictability over longer periods could free up capital flows. This “duration mismatch” is impeding financing for green technologies as the long-term insurability of assets comes into question – which in turn increase risk for investors. We’re leveraging the existing longer-term approach in some existing lines of business and working with new and existing capital providers to increase appetite for longer-term risks. Working with pension and investment markets could also inform longer-term thinking about assets and liabilities – enabling us to apply these insights to the general insurance world more systematically.

3. Collaboration with other stakeholders

Finally, the insurance industry must collaborate and innovate with stakeholders, including existing and alternative sources of capital, green technology startups, risk mitigation firms and the public sector, so our society can decarbonize at scale. As a recent example, Revalue Nature, which provides nature-based carbon offset projects, collaborated with Aon to insure those investments against unforeseen events such as wildfires or bug infestations (read more here).

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The Importance of Net Zero
To avert the worst impacts of climate change, science indicates that global temperature increase needs to be limited to 1.5°C above pre-industrial levels. Currently, the Earth is about 1.1°C warmer than in the late 1800s, and emissions are still rising. To keep global warming from eclipsing 1.5°C – as called for in the 2015 Paris Agreement – emissions need to be reduced by 45 percent by 2030 and reach net zero by 2050.

United Nations Climate Action

Decarbonization is changing the risk landscape and any un-insurability of increasingly volatile weather presents a risk to our economy. But by engaging new talent, partners and stakeholders, the insurance industry can play a truly transformational role in the climate transition by enabling better decisions for a more sustainable future.

For more information read Aon’s 2023 Weather, Climate and Catastrophe Insight Report.

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