The global push toward achieving net zero emissions by 2050, a target set under the Paris Agreement in 2015, faces new hurdles as major energy companies adjust the speed of their transitions.
While these firms remain committed to net zero, the slower pace complicates the efforts of insurers to align their underwriting portfolios with rapid decarbonization goals. Specialist re/insurance broker Miller highlights the complexities re/insurers face as they seek to meet their own targets in an economy transitioning more slowly than anticipated.
Despite significant investments into clean energy projects – nearly double the combined global spending on oil, gas, and coal, according to the IEA’s 2024 Global Energy Outlook – the warming trajectory is estimated to reach 2.4°C under current commitments.
This figure exceeds the 1.5°C goal outlined in Paris, posing dilemmas for insurers aiming to decarbonize their underwriting books. Miller notes that insurers following a 1.5°C pathway must navigate difficult underwriting decisions amid slower-than-expected global progress.
Many leading insurers have committed to achieving net zero by 2050 across three areas: internal operations, investment portfolios, and underwriting books. Among these, the decarbonization of underwriting portfolios has the most direct impact on energy sector clients.
Miller reports that insurers currently rely on "category-based" restrictions, which apply to specific activities such as coal and lignite power generation, oil sands extraction, and Arctic oil and gas development.
Underwriting approaches within these categories vary. While new construction projects in restricted activities face stringent measures, renewals for existing operations are often permitted under conditions such as revenue thresholds. For instance, risks are phased out of underwriting portfolios over time, with 2030 frequently cited as a key deadline.
The category-based methodology, however, has its limitations. Miller cites cases where transitioning energy companies with significant investments in renewable projects have struggled to secure insurance due to high revenue percentages from restricted activities.
Insurers may grant exemptions for companies aligned with a 1.5°C pathway verified by the Science-Based Targets initiative (SBTi) or equivalent organizations. Additional exemptions exist for specific circumstances, such as Arctic drilling in areas like Norway's Barents Sea.
Miller notes that emissions-based underwriting would provide a more accurate framework but presents significant challenges. While the Net Zero Insurance Alliance (NZIA) aimed to address these complexities, its dissolution in April 2024 leaves the timeline for such methodologies uncertain.
The difficulty of collecting comprehensive emissions data, particularly Scope 3 emissions, further complicates progress.
Recent updates on net zero underwriting have been limited. Notable developments include new methane intensity guidelines from Chubb and expanded restrictions by Generali. However, Miller warns that without more robust approaches, the bluntness of category-based underwriting could lead to capacity withdrawal if the energy sector enters a period of unprofitability or stakeholder pressure increases as climate impacts intensify.
For risk managers in the energy and power sectors, understanding underwriting restrictions is crucial. Miller advises proactively aligning corporate strategies with underwriting criteria to maintain coverage.
Companies aligned with a 1.5°C pathway will encounter fewer challenges, but all energy clients should be prepared to address insurer questions on decarbonization and ESG strategies.
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