Net zero and insurance underwriting: The clock is ticking

Summary

For the world to reach net zero by 2050, the vast majority of emissions cuts need to occur within the next ten years.
The net zero transition represents a significant opportunity for carriers that embrace low carbon growth.
Net zero trends present transition risk and new exposures for insurers and policyholders with implications on all property and liability lines of insurance.
Several carriers are innovatively responding to these challenges by providing new solutions that benefit them, policyholders and society.
Achieving net zero underwriting involves practically all aspects of insurers’ business and operations.

Reaching net zero by 2050 seems like a far-off goal. It’s not. In fact, due to the time value of carbon, 75% of emission cuts required to achieve net zero must take place in the next ten years. If this does not happen, then a 1.5℃ future will be highly unlikely. In other words, there’s no time to waste.

Given the urgent need to drastically reduce greenhouse gas (GHG) emissions in the next decade, public and private investments need to go toward solutions with the highest near-term abatement potential. An estimated total net investment of $24 trillion has the potential to achieve the approximately 1,050 gigatons of CO2 reduction needed to achieve net zero. Solutions such as alternative energy (utility scale solar, wind energy), heating and cooling solutions (refrigerant management), alternative building materials (cement) and transportation (electric vehicle infrastructure) can be deployed rapidly, but all present different transition risks and opportunities for property & casualty (P&C) insurers.

75% of emissions cuts required to achieve net zero must take place in the next ten years.

Net zero trend assessment

Because they help all industries manage climate-related risks, insurers have a prominent role to play in the transition to net zero. However, this transition presents major changes to carriers’ underwriting and risk management practices. These include:

Quantifying and managing new and emerging climate and net zero transition risk exposures
Developing new coverages to address these risks, identifying the most promising prospects and future growth opportunities
De-risking emerging climate and related technologies and practices, incentivizing those with the greatest potential impact
Nimbly adjusting to changes in regulations and shifts in consumer preferences, behaviors and sentiments

To help carriers respond to these changes, we’ve developed a flexible low carbon growth framework that applies to different types of opportunities and sectors of the economy. A detailed analysis of how the transition to net zero affects different sectors points to the risks and opportunities insurers can capitalize on.

Existing properties may not comply with new standards as energy-efficient building codes become the norm. For new construction, including replacement of damaged or destroyed buildings, construction methods will need to change. There are several implications for insurers and policyholders, including:

Many new building materials are unproven, and loss patterns may be difficult to predict.
Changes in building codes may create unanticipated risk exposures and lead to higher than anticipated property loss costs if the cost of replacement increases.
Affected property owners may not clearly understand requirements for adopting new materials and climate-friendly technology and/or how to utilize them, leading to potential code violations, service failures and damages that could result in claims incidents.

Insurers that actively monitor and assess leading edge codes and standards, materials and construction/refurbishment techniques will be able to more accurately price loss patterns and potential costs, as well as help their policyholders make greener choices and comply with local regulations.

The International Energy Agency (IEA) expects more than 60% of all vehicles sold by 2030 will be electric (EVs). In fact, many jurisdictions will not allow the sale of new internal combustion engine (ICE) vehicles from that time on. For insurers:

As EVs replace ICE vehicles, insurers will begin to experience more (expectedly expensive) EV claims. Combined with an anticipated shortage of EV-trained technicians, this could result in prolonged high claims costs.
New motors and vehicle technologies present new potential safety risks, including battery fires and electric shocks. In fact, high-voltage battery fires can be intense, difficult to extinguish, and release large amounts of toxic gasses. This may increase the value of claims for fully written-off and damaged vehicles and increase business liability due to increased emissions.
As advanced driver assistance systems (ADAS) — technology many EV manufacturers are actively developing — become more prevalent, there may be a shift from personal to original equipment manufacturer (OEM) product liability. This has the potential to significantly change the nature of auto coverage. Furthermore, as ADAS systems put more vehicles and their operating systems online, vehicles and policyholders’ connected devices will be exposed to new cyber risks.
Considerably more electric grid capacity will be necessary when EVs predominate and there may be additional challenges meeting this demand with renewable energy sources. This is likely to increase the demand for renewable energy generation and transmission, resulting in more widely distributed energy sources and higher property values (e.g., solar panels, geothermal, wind turbines). This pressure on the electricity grid also could lead to more blackouts, increasing the need to enhance grid resiliency, as well as increase the risk of cyber attacks on utilities.

Some of this transition, such as widespread adoption of EVs, will be fairly gradual, allowing insurers sufficient time to respond to changes in exposures and loss trends. Other changes may be more abrupt, such as the adoption of aforementioned, stricter energy-efficient building codes. In addition, the deployment of more energy efficient technologies also often lead to new ancillary risk exposures, such as heightened cyber risk from connected homes and degradation of roads and other structures from EVs, which typically weigh more than ICE vehicles.

Easing transition

As you plot a course of action to achieve net zero underwriting and help your stakeholders along the way, you’ll need to involve the full breadth of your organization. Areas of your business and operations that will be particularly affected include:

Achieving net zero underwriting will require your entire organization’s involvement and support.

New product and service development

Considering the significance of net zero transition investments, you and your partners (including brokers, reinsurers and consultants) should identify opportunities to develop new products and services that facilitate low carbon growth. This could include entering new markets like clean energy or climate tech, coverage enhancements for green buildings, establishing partnerships that offer embedded insurance, and offering climate risk management and emissions modeling services that support clients’ net zero transition. The table below contains examples of how some carriers are already doing this.

Underwriting

Starting with your current underwriting portfolio, you should assess where you’re likely to have net new exposures arising from the transition to net zero that warrant underwriting action, including new underwriting guidelines and/or revision or clarification of risk appetite. In some instances, climate-related exposures may warrant nonrenewal of accounts or withdrawing from certain markets altogether. For example, more stringent emission reduction requirements and increasing public and government scrutiny of high-emitting sectors like oil and gas could increase liability risks — especially in the context of social inflation — for the insurers that cover them.

Pricing

You should assess net-zero-related risks and analyze available data to understand current pricing adequacy. Scenario analysis can help project the future claims environment and how to price coverages in order to meet target loss ratios.This information can help you adjust pricing through the rate-filing process, where applicable, in order to cover new and emerging risks while maintaining profitability. Moreover, understanding emerging risks and how they could affect policyholders will enable you to advise them on risk mitigation.

Claims

To effectively categorize the claims that climate change affects, you should verify that existing claim type classifications are adequate to categorize emerging claims behavior and that existing systems can appropriately capture relevant data. Examples of data fields are the portion of a property loss that can be attributed to climate change, and the materials required to repair a property to the extent they’re dictated by new green regulations. This will help you better understand the types of claims you’re likely to receive in the future and adjust processes and systems accordingly.

Risk management and mitigation

You should assess the appropriateness of existing risk mitigation strategies in the context of climate change. This should include analyzing current portfolio risk metrics and choosing relevant (e.g., emissions-related) metrics. You’ll need to take into account developing regulatory guidance from state departments of insurance and federal regulatory bodies, considering the location of risks and the jurisdictions where they’re underwritten.

Reinsurance structuring and purchasing

You should assess existing modeling of claims emergence and how claim distributions could change under different climate change scenarios. This can help you determine the adequacy of current reinsurance structures should future claims behavior change.

Don't go it alone

Last but not least, make sure to align your net zero strategy and objectives to your business goals and formally document your progress. Keep in mind that you shouldn’t go it alone. Actively partner with all of your stakeholders — brokers, partners, governments, NGOs, scientists, et al. — to fulfill your plans and help them and society achieve low carbon growth.

Net-zero-related challenges: Insurer solutions
Net-zero-related challenge	Insurer solution	Benefits
Customers can be hesitant to purchase solar panels without verification of their long-term durability and effectiveness. In order to remain competitive and grow their customer base, solar panel manufacturers need to show customers that their products are dependable over the long term.	An insurer developed a long-term coverage for solar panels that provides protection of warranty claims for up to 30 years and pays compensation directly to owners if the solar panels underperform or the manufacturer becomes insolvent.	As warranties have become more widely available, manufacturers have seen increased consumer confidence in their products, benefitting brand and sales. Customers feel more comfortable buying solar panels knowing their investment will remain effective and protected from loss over the long term.
It can be difficult to obtain coverage for, and effective risk management of, new cleantech. Lack of insurance slows the transition to environmentally friendly and renewable natural resources and ultimately net zero.	A carrier has developed a suite of insurance products and services to businesses that develop or employ new technologies and processes that support the transition to a low-carbon economy. The business unit also provides risk management and resiliency services to help those managing the impact of climate change.	Relevant coverage and improved risk management for: 1) farmers and ranchers, particularly related to extreme weather events; 2) alternative and renewable energy companies, as well as traditional oil and gas companies as they transition to lower-carbon alternatives, 3) EVs, notably concerning the deployment of clean hydrogen to decarbonize fuel.
Marine acute and chronic events such as typhoons and rising sea temperatures, which often result in large and costly rescue and restoration efforts, could reduce the oceans’ carbon sequestration capacity, releasing CO2 back into the atmosphere.	An insurer has developed a new ocean carbon sink index insurance policy for coastal municipalities. The loss compensation from this coverage can be used for post-disaster relief efforts to rescue marine species and restore the carbon sink nature of the marine ecosystem	The new insurance index encourages sustainable fishing methods to protect and repair marine ecosystems, thereby enhancing the oceans’ carbon sequestration capacity. The index also allows carbon sink indicators of marine aquaculture to be listed and traded, therefore supporting the fishermen’s income.
Businesses need to create or expedite plans to reduce exposure to current and future natural hazards, lower their GHG emissions, and meet regulatory and stakeholder expectations.	An insurer is partnering with a sustainability consultancy to assess companies’ climate risk and emissions data, define their immediate and long-term climate resilience and net-zero targets, and help them establish a viable climate strategy.	Clients establish meaningful net zero ambitions that help them Improve their climate resilience, as well as meet increasing regulatory requirements and stakeholder expectations.
Some traditional insurance products leave coverage gaps, impairing insured parties’ ability to effectively manage financial risks related to weather events.	Several carriers are offering parametric insurance, which covers specific events by paying a set amount based on the magnitude of the event (e.g., rainfall amount, hailstone size, wind speed), as opposed to the magnitude of losses.	Parametric insurance offers a streamlined, binary process with a predetermined trigger event and payout amount, reducing uncertainty for insurers. Moreover, parametric policies offer transparent pricing and use objective, verifiable data to automatically trigger quick and efficient payments to policyholders.

PwC’s Xavier Crepon, Veronika Torarp, Graham Hall, Kyle Austin and Neha Srivastava contributed to this report.

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