One of the biggest challenges to providing fully environmental, social and governance (ESG) aligned investment strategies in the insurance-linked securities (ILS) market is the inability to know what really lies beneath every transaction, in terms of what has been underwritten by cedents along the market chain.
As an ILS investment fund manager, or direct ILS investor, allocates capital to securities or reinsurance transactions, the lack of transparency in the insurance-to-risk capital market chain makes it near impossible to be able to say with confidence that every beneficiary of a pay-out is fully-aligned with ESG practices and ways of thinking.
While ILS and catastrophe bonds clearly tick a lot of ESG boxes from the start, given they are effectively a tool for provision of disaster risk financing capacity for response and recovery to natural catastrophes, the major ESG allocators of the world often want to see more granular detail behind where their investment dollars are deployed.
But a move by eight of the world’s largest insurance and reinsurance companies to launch the Net-Zero Insurance Alliance (NZIA) at the G20 Climate Summit in Venice yesterday, will assist, as these firms are all committing to transition their underwriting portfolios to net-zero greenhouse gas (GHG) emissions by 2050.
More companies from across insurance and reinsurance are expected to join this new initiative and so adoption of a net-zero transition route for underwriting is expected to expand.
Which means that the ILS market’s that transact in reinsurance or retrocession with them, or invest in the catastrophe bonds and other risk-linked securities that these major players sponsor, will also in time benefit as deals move towards having net-zero subject risk sitting beneath them.
The Net-Zero Insurance Alliance (NZIA) has been convened by the UNEP Finance Initiative’s Principles for Sustainable Insurance (PSI) and was launched by the eight global insurance and reinsurance players, which are AXA (the initial NZIA Chair), Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich Insurance Group.
These major re/insurers are already committed to net-zero in their investment portfolios by 2050, but on the risk side commitments were much slower in coming.
Now though, the whole group have committed to decarbonisation of their underwriting portfolios by 2050, with science-based intermediate targets set every five years and they will also report on their progress publicly and annually.
“Through the Net-Zero Asset Owner Alliance launched in 2019, insurers and reinsurers are already working towards decarbonising their investment portfolios in line with climate science and the Paris Agreement,” explained Thomas Buberl, CEO of the AXA Group, which chairs the NZIA. “With this new Net-Zero Insurance Alliance, we are raising our climate ambition further by using our underwriting, claims, and risk management practices to help ensure and enable the transition to a resilient net-zero global economy.”
“For generations, the insurance industry has served as society’s early warning system and risk manager by understanding, reducing, pricing and carrying risk. As we approach COP26 in Glasgow, the risks posed by global heating are escalating and the world is a long way from meeting the promises made when the Paris Climate Agreement was forged nearly six years ago,” Inger Andersen, Executive Director of the UN Environment Programme (UNEP) added. “Along with governments, the insurance industry and wider financial sector have the power and responsibility to drive progress towards a net-zero economy and a sustainable future for all. Guided by science, I am pleased to see leading insurers embed the net-zero ambition in their core insurance business. I urge the rest of the global insurance industry to respond to the climate emergency and urgently follow the example set by the founding members of this pioneering alliance.”
“Having a global financial system where every professional decision takes climate change into account requires harnessing the full role of the insurance industry as risk managers, insurers and investors for climate action,” Mark Carney, the UN Special Envoy on Climate Action & Finance, the UK Prime Minister’s Finance Adviser for COP26, and Chair of the Glasgow Financial Alliance for Net Zero further explained. “By committing to join the gold standard alliance for net zero, the Net-Zero Insurance Alliance will ultimately make underwriting contingent on underlying companies having credible net-zero transition strategies.”
These major players and anyone else that joins the NZIA commit to achieving their net-zero ambition on an individual basis, through the “setting of underwriting criteria and guidelines for the most greenhouse gas (GHG)-intensive activities within their underwriting portfolios, engaging with clients and potential clients with the most GHG-intensive activities on their decarbonisation strategies and net-zero transition pathways, developing and offering insurance and reinsurance solutions for low-emission and zero-emission technologies and nature-based solutions that absorb GHG emissions, improving claims management in an environmentally sustainable manner, and integrating net-zero and decarbonisation-related risk criteria into their risk management frameworks.”
As these eight are some of the most influential and largest insurance and reinsurance players, their transition to net-zero underwriting will have to spark a broader transition by the market.
The more re/insurers that join them, the less choice their will be for those looking to re/insure GHG heavy, non-net-zero compliant portfolios of risk.
By steadily withdrawing protection for the most polluting and GHG heavy industries, change will be stimulated more widely down the market chain, which is why the financial sectors of banking and insurance have always been seen as critical for any net-zero push.
This will, ultimately, make a difference to the insurance-linked securities (ILS) sector, in being able to deliver greater ESG certainty and transparency to its investors.
Which is going to become increasingly important, as large institutional investors become increasingly ESG focused and demand more clarity into the level of ESG-appropriateness of their investment allocations.
That said, with 2050 the target this is a slow road ahead.
So it does seem likely that the ILS market is going to have to keep up its demands for increasing levels of transparency, to help managers and investors in scoring ILS opportunities on an ESG-appropriate basis.
The other founding member companies all commented:
“As a founding member of this strong network, Allianz strives to accelerate the urgently needed transformation to a 1.5-degree economy. We are pleased to bring in our expertise and join forces to extend the net-zero ambition to the entire insurance market,” Oliver Bäte, CEO, Allianz SE.
“Our whole economy depends on insurance, so a net-zero insurance industry is a fundamental part of helping shift the economy towards protecting the planet. Aviva is proud to be a founding member of this Alliance as part of our own ambition to be net zero by 2040. It takes partnerships like these to tackle the big challenges facing us to build a sustainable future for everyone,” Amanda Blanc, Group CEO, Aviva plc.
“At Generali, we want to actively support a fair and inclusive transition to a net-zero emissions economy. The UN-convened Net-Zero Insurance Alliance allows us to join forces with institutions and our peers which share this commitment to achieve a greater and longer-lasting impact. United we are stronger!” Philippe Donnet, Group CEO, Generali
“Munich Re has set ambitious climate targets in 2020 that include the liability side of our business. Being a founding member of the Net-Zero Insurance Alliance underlines our climate commitment. As a leading global re- and primary insurer we will continue to support the transition to net zero through our pioneering risk solutions and pursuing science-based decarbonisation targets,” Dr. Joachim Wenning, Chairman of the Board of Management, Munich Re
“Collective action is the only way we can address the grand challenge of our time: climate change. SCOR is proud to be a founding member of the NZIA, working alongside other industry leaders to support the transformational changes that are critical to society. In doing so, we commit to accelerating the race to net zero and furthering our long-term mission,” Laurent Rousseau, CEO, SCOR.
“By co-founding the Net-Zero Insurance Alliance, Swiss Re can work with other reinsurers and insurers to build on its commitment to transition to a low-carbon economy, through its underwriting expertise. We see sustainability as a long-term value driver and the NZIA is an important and logical next step in the race to net zero,” Christian Mumenthaler, Group CEO, Swiss Re.
“Net-zero underwriting is a critical step and furthers Zurich’s climate efforts beyond our own operations and investments. It reinforces our deep commitment to continue to engage with our customers to deliver solutions as we navigate together the transition to a low-carbon world, benefiting future generations,” Mario Greco, Group CEO, Zurich Insurance Group.