Three ways the (re)insurance industry can accelerate net zero by facilitating capital

The emerging impacts of climate change are increasingly felt across the (re)insurance industry, with much uncertainty ahead. Aon’s global head of climate strategy Richard Dudley examines how 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 our role in improving resilience in the economy evolves.

(Re)insurers can help solve the climate crisis 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.

First, 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 incentivising 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. In order to fully grasp this opportunity, the (re)insurance industry must change some of its mindset to formulate a consistent forward-looking pricing model for new risks.

Second, 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 (re)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 increases 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 reinsurance world more systematically.

Finally, the (re)insurance industry must collaborate and innovate with stakeholders, including existing and alternative sources of capital, green technology start-ups, risk mitigation firms and the public sector, so our society can decarbonise 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.

Decarbonisation is changing the risk landscape and any uninsurability of increasingly volatile weather presents a risk to our economy.

But by engaging new talent, partners and stakeholders, the (re)insurance industry can play a truly transformational role in the climate transition by enabling better decisions for a more sustainable future.

Richard Dudley is global head of climate strategy at Aon