The global insurance industry is uniquely positioned to support the transition to a sustainable economy. For decades, insurers have been helping businesses, governments, and individuals understand, mitigate, and manage the impacts of increasingly severe climate-exacerbated disasters. Additionally, the industry plays a pivotal role in the investment and development of renewable energy and climate innovation, initiatives key to realizing the transition pathway and net-zero goals.
Our white paper, “SMI Insurance Task Force report,” developed in partnership with the Sustainable Markets Initiative Insurance Task Force (SMI ITF) and Lloyd’s Futureset, seeks to provide greater clarity on the key risks and challenges businesses across multiple sectors face in the transition.
Crucially, the research shows ways insurers can support in transitions across a broad range of industry sectors, and by identifying areas for partnership and collaboration, the authors hope to encourage the development of innovative insurance solutions to address these challenges. The research was carried out by interviewing CEOs and heads of risk management from various real economy firms. The analysis aims to document the transition challenges individual companies are facing and the level of support they have received so far from the insurance industry.
How the insurance industry can lead the way in high-emissions sectors
We identified seven sectors — energy, nuclear fusion, mining, aviation, shipping, space, and agribusiness where greenhouse gas emissions are especially difficult to abate, and where the insurance industry could be a key enabler of moving the transition forward.
The white paper explores the progress made thus far in each sector along with emerging and enabling technologies currently available or under development.
Alongside the research, we present a set of practical recommendations for the insurance industry, emphasizing opportunities to better support customers. It underlines the need for collective management of transition-related risks, while simultaneously capitalizing on the growth opportunities from the transition.
The three core challenges identified by firms on their path to net zero are managing reputation, navigating financial planning, and maintaining profitability (Exhibit 1).
The risk landscape for the climate transition and insurance industry support
Given that the climate transition has been a central focus for the insurance industry in recent years, there is a pivotal opportunity for insurers to provide tailored products that respond to unique climate change and sustainability challenges.
By developing innovative risk solutions and partnering across industries — such as mitigating operational risks related to potential supply chain disruptions — insurers can address wider transition challenges.
A common understanding of the risk landscape is vital to unite these stakeholders. The Marsh McLennan Climate Transition Risk taxonomy offers one potential common language to discuss risks from planning and development through later life. Below we summarize conventional and non-conventional insurance opportunities to meet new and existing risks.
Opportunities for the insurance industry to accelerate net-zero transition
The insurance industry has an important role to play in shaping the path to net zero. Leveraging the insurance industry’s risk management expertise and improving product visibility would support responses by the real economy to climate transition challenges. For instance, insurers could offer new pooling solutions for pioneering technologies and capital relief solutions designed to boost financial investment.
Insurance runs the risk of being a (costly) afterthought, if it is seen as a downstream solution rather than addressing the more urgent set of considerations that drive investment in the transition. To help push forward the transition, insurance firms should get involved in the earliest stages of projects with real economy firms as well as other financial and public sector partners.
Additionally, collaboration with policymakers could allow insurers to gain access to key data that would enable them to better support the transition. For example, the SMI Insurance Task Force spans several industries and geographies and has represented the insurance industry at global climate conferences like COP26 and COP27.
The SMI Insurance Task Force remains a catalyst for driving cross-sector collaboration through the creation of innovative and new insurance products and services and critical financial and risk management support.
Three ways insurers can support industrial sectors and build resilience
Here are three recommendations for insurers on how to better support the needs of industrial businesses and strengthen operational resilience:
- Enhance market innovation in product offerings. For example, by developing new, insurance-led pooling solutions to cover lower appetite risks or designing insurance solutions that allow for greater investment and capital relief for financial services. Exploring partnerships with banks to harmonize their risk assessment approach is another opportunity. Streamlining distribution processes can reduce costs and allows insurers to reach more clients efficiently, while maintaining competitive pricing.
- Reinvent and evolve existing products to meet emerging risks. Assessing and modifying current offerings can ensure insurers remain relevant and competitive. For example, implementing longer-tenure policies can improve coverage and provide price stability.
- Expanded capacity to cover existing risks. There are opportunities for insurers to improve risk mitigation practices, optimize distribution and underwriting processes, and potentially enhance claims efficiency, reduce operational costs, and process vast amounts of data with solutions such as generative artificial intelligence. For example, improving underwriting practices and claims processing can lead to quicker service and increased client satisfaction, and implementing pooled insurance strategies allows multiple businesses to share risks, thereby reducing individual exposure and enhancing capacity.
The insurance industry is moving fast to meet the different needs of the broader economy and finance community — offering longer policy terms, innovative credit risk structures, and greater appetite for uncertainty as well as traditional risk. By developing innovative risk solutions and partnering across industries, insurers can better support financial and non-financial enterprises on the path toward climate transition.
