Climate change demands that insurance changes

The insurance industry was built on a promise: that the losses of the few would be covered by the many.

Though a simple idea, it had a profound impact. It is a promise that has given businesses the chance to turn risk into opportunity. It is one that gives peace of mind to millions of families, who no longer risk ruin if disaster strikes.

The promise and responsibility of our industry is to protect society from the great risks it faces. Today, there is no greater risk than climate change. It poses a very specific challenge to our industry, however. After all, the effects of climate change are felt by the many, not only the few.

Rising seas place millions of homes on floodplains that were previously safe. Droughts affect all farmers, and every business and household that depends on them. And forest fires are far from discerning. With such disasters forecast to become increasingly frequent, there is a risk that the costs become too large for the insurance market to meet, and the ‘protection gap’ that already exists in some of the world’s most vulnerable societies becomes wider.

This doesn’t mean that our industry has no role to play. Far from it. In fact, our industry has never been more important. However, to fulfil our historic role, we must evolve our own product offering and adapt how we work with Government and other industries

The insurance industry has already shown its ability to adopt new approaches to new challenges. Take Flood Re, for instance, a partnership between insurers and the government that keeps premiums down and people protected. Flood Re shows the power of an industry working together, and in partnership with the state, addressing challenges of a greater magnitude than we have faced before.

In other ways, our industry is already uniquely suited to helping deliver long-term solutions required to deliver the Government’s Net Zero strategy. Our members manage assets of over £1.6 trillion. These are invested for the long-term. As a result, our industry is able to make the kind of generational investments required to phase out fossil fuels and help a nation like ours achieve clean energy independence. These are investments that pay dividends not just for investors, but for the country and the planet too.

The insurance industry now has the chance to have a greater impact still. Ahead of last year’s COP26 climate conference, we set out a new roadmap to ensure it does, laying out four key pillars around which our members will work together to make progress.

Even in the context of growing pressures on energy security and living costs, the risks of failing to tackle climate change are so severe that we have to stay focussed on delivering on the four pillars of our Roadmap. On each, we have already made considerable progress.

The first is for the industry itself to halve its emissions by 2030 and achieve net zero by 2050.

Crucially, this covers “full scope” emissions. This means that, in addition to reductions in the industry’s own emissions and those of its supply chains, the emissions that the industry finances, through underwriting and investment, are included too. We recommend our members make a public commitment and join the UN’s ‘Race To Zero’. This goal brings the industry in line with the UN goals set in Paris in 2016, aiming to limit global warming to 1.5°C.

Our Roadmap sets out a series of milestones firms should achieve by 2025, but even before that date, we have seen good progress. Today, measured by market share, over half of general insurance and over 85% of long-term savings providers have become accredited members of the UN’s Race To Zero campaign and made their Net Zero targets public. We want to see the rest of the market follow their lead.

To support the delivery of these targets, the ABI supported WWF’s successful campaign to persuade the government to make it mandatory for UK-regulated financial institutions to publish their net-zero transition plans, showing the actions they will take to meet their targets. Our members have already made good progress developing these plans in advance of this becoming mandatory next year.

The second pillar is to unleash the investment capacity contained within the sector.

The UK government estimates that some £2.7 trillion of investment is required by 2035 to hit the UK’s Net Zero target. Analysis by Boston Consulting Group suggests that around a third of that could be provided by our members alone: an annual investment of £60 billion each year, and a total of £0.9 trillion.

The industry cannot do this alone. Today, there aren’t enough investment opportunities to back, and there is too much complexity and too many restrictions in the investment process. The potential, however, is there, and reform of Solvency II offers a unique opportunity to unlock investment, if the package of measures that emerges from the Government’s consultation is right.

The third pillar is for the sector to cut its own internal operational emissions hard and fast, reaching Net Zero in the areas businesses have direct control over by 2025.

This means how an office is heated, and how some 310,000 people get to and from work each day. But it also means how firms allocate the billions they are currently spending through their supply chains. It should be a prerequisite of those who supply our industry that they adhere to the highest environmental standards and that they are on a path to Net Zero too. In support of this, we published a new Good Practice guide on supply chain management in the sector.

The final pillar is to help wider society with its own adaptation to climate change.

This means helping people make sustainable choices with their own finances, such as by making it easy for a customer to align their pension plan with their own values. It can also mean encouraging more re-use, repair and recycling of things that might otherwise have been written off after a claim. And it means encouraging sustainable decisions at moments after an insurance claim, whether that’s switching to an electric car after an accident, or improving the energy efficiency of a house after fire or flood damage.

Flood Re’s Build Back Better scheme is an excellent example of how this can be done. It offers homeowners the opportunity to install flood resilient repairs up to the value of £10,000 in the event of flood damage. Five leading ABI members have already signed up to this scheme.

There was a time in our history when each time we fell ill, our family’s future was imperilled. Every flood or fire wreaked devastation that could not be undone. Each enterprising idea was accompanied by the possibility of financial ruin. Insurance changed that. Risk became something you could manage and account for. The law of large numbers meant that the few who experienced trials and tragedies would be supported by the many who did not.

Climate change changes that calculation. It poses a risk to us all, and all at once. However, our industry still has an important part to play, embracing new models to provide protection, and investing in our future in a way that only those who invest for the long-term can. In the face of climate change, insurance is rising to the challenge.