Plotting a course of action on insured emissions and net zero underwriting

The most recent climate reports from the UN indicate that planetary warming should be limited to 1.5°C by 2100, relative to pre-industrial levels, in order to avoid the most dangerous impacts of climate change. To achieve this goal, the amount of greenhouse gasses (“GHGs”) added to the atmosphere each year must decline from the current annual average of 51 billion tons to zero by 2050. 

Insurers play a crucial role in the global economic system and facilitate the creation and emission of GHGs through the businesses and activities in which they invest and insure. Various organizations are coordinating the calculation and disclosure of relevant metrics to measure the impact that insurers have through their business activities. Key groups of note include the Net Zero Insurance Alliance (“NZIA”), a group of 29 leading insurers who have committed to transition their (re)insurance underwriting portfolios to net-zero GHGs by 2050, and the Partnership for Carbon Accounting Financials (“PCAF”), a global partnership of financial institutions that work together to develop and implement a harmonized approach to assess and disclose the GHGs associated with their financial and insured activities.

What are insurance associated emissions and how are they calculated?

Insurance associated emissions (“insured emissions”) are the emissions insurers facilitate with their underwriting. They form a subset of scope 3, category 15 emissions. For example, by insuring fossil fuel extraction, insurers facilitate the creation of greenhouse gasses when those fuels are ultimately burnt to generate energy. The calculation of the portion of a company's emissions attributable to the insurer has been defined by PCAF for selected commercial insurance portfolios and personal motor portfolios. 

To carry out this calculation, insurers need to collect data about the underlying companies and vehicles being insured to quantify the emissions their activities generate. Collecting the data is a significant undertaking and requires gathering reported emissions (where available) or estimated emissions via data on energy consumption, production output, vehicle mileage, and fuel consumption. In order to determine the percentage of real-world emissions-generating activity underwriting activity facilitates, insurers also need data from their underwriting systems on the insurance contracts they write, specifically the insurance premiums and revenue of corporate clients. 

Why should insurers calculate insured emissions?

There are a number of reasons why it is recommended that insurance companies calculate the insurance associated emissions of their underwriting portfolios, including: 

• Create transparency for stakeholders – As investor, regulatory and customer scrutiny of the environmental impact of insurers'  activities increase, calculating and disclosing insured emissions will help win favor with these groups and support alignment with target-setting initiatives.
• Drive progress towards target-setting initiatives - By understanding current portfolio emissions and  how they might change over time, insurers can set ambitious but realistic targets to reduce their associated emissions and develop plans to progress towards those targets.
• Support understanding of climate risk and scenario analysis - Insurers can mitigate climate-related risks by identifying underwriting activities in carbon-intensive sectors and accelerating climate change scenario analysis exercises.
• Facilitate the development of climate friendly portfolios - Understanding current products’ emissions and the basis for insured emissions calculation can help insurers modify existing investments, products and underwriting practices. This will help them move beyond just financial metrics and reduce the future, real-world GHG emissions their business activities facilitate. 

Where to begin

Where should insurers start on insured emissions and net zero underwriting? 

First, carry out a baselining exercise to understand your insurance portfolios’ current emissions profile. Model how those emissions might change over time under different climate scenarios, and what levers exist to change the future magnitude of the emissions. 

Next, consider your strategic positioning in relation to your underwritings’ environmental impacts. Consider your existing product portfolio and customers, and if you want to join any related industry groups such as the Net Zero Insurance Alliance or ClimateWise.

Finally, develop a strategy for your insured emissions, including target setting in relation to emissions reductions over time and an actionable plan to proactively move towards those targets. 

Thanks to Adam Kallin and Kyle Austin for their contributions to this blog.