With climate change centre stage at the 2024 UN Climate Change Conference (UNFCCC COP 29), the role of the insurance sector in the transition to a sustainable future is no longer a question but a matter of strategic importance.
In a bid to help formulate a practical solution, the Lloyd’s Market Association (LMA) commissioned a new report, Underwriting the Transition, to uncover the pressures climate change is exerting on the industry. Discussing the background to the report, the LMA’s finance and risk director Paul Davenport (pictured) emphasised the variable approach to transition planning by insureds and the fragmented and sometimes contradictory regulatory landscape around the world.
With that in mind, he said, the LMA wanted to provide a survey of transition activity and its emerging risks and opportunities, which it anticipates will be useful for its members as only a small number of the largest carriers in the Lloyd’s market would have the resources to devote to in-depth research for their portfolios.
“We have restricted the scope to eight sectors of the economy rather than focus on specific insurance products,” he said. “These are aviation, marine, road freight, mining, oil & gas, power generation, construction and commercial real estate. For each sector, we have set out the expected decarbonisation pathway from 2025 to 2050 with the range of abatement actions that are expected to reduce emissions from a ‘business as usual’ track to a 1.5C pathway.
“Then at five-year intervals, we present how the mix of assets in an insurance portfolio is likely to change based on the abatement actions, e.g. what percentage of marine vessels would use ammonia as fuel in 2025, 2030, 2035, etc. For each of the abatement actions, the report discusses the likely impact on insurance perils.”
The LMA commissioned KPMG to gather relevant information from its sector experts and also speak to over 40 underwriters in the market to prepare the report. Offering his perspective on the three key takeaways of the research, Davenport noted that:
Lloyd’s/London is the greatest concentration in the world of underwriting expertise and talent, he said, and this expertise is equipped to develop coverages and products to deal with complex and challenging risks, as well as attract the kind of capital that is able to back the risks involved. “Massive levels of investment in infrastructure, technology and adapting business models are required for transition, e.g. annual average power sector investment must grow from US$1tn to US$2.2tn by 2030. Insurance with deep and diverse capital backing is essential to unlocking such financial investment.”
Davenport noted that while Lloyd’s carriers are already supporting the ongoing transition, market firms are encouraged to better understand their clients’ transition plans and pathways and form their own ‘in-house’ views on what a good transition plan looks like and how to approach monitoring progress or react to departure from that plan. “The report can provide a starting point or a benchmark for what transition actions a client may take over what time period,” he said. “Training may also benefit underwriters in dealing with this.”
As to how the LMA is looking to support the market, he said that it aims to provide good research and guidance that is useful for all. “We intend to continue to develop the scope of this report with KPMG and refresh it annually as policy, regulation and technologies change,” he said. “We will be guided by underwriters and risk officers in the market as to how to expand the scope of the report into areas that are of use to our members.
“For example, it currently only focuses on physical risks in the sectors covered and does not consider nature impact, the just transition or litigation risks from climate change. Our Environmental and Climate Litigation Committee and its newsletter has a wider brief to communicate with the market about climate litigation which is outside the scope of the KPMG report.”
Overall, Davenport said he is feeling positive about the ambition and ability of the Lloyd’s/London market to support the transition due to its “unrivalled capability to continue to respond to the challenges of changing risks as a result of transition”. As with all parts of the insurance industry, he said, it is subject to a frustratingly fragmented regulatory environment and so the market’s ability to support transition would benefit from international alignment and clarity in regulatory approaches.
Equally, he noted that there is deep uncertainty about what technology or fuel changes will emerge as ‘winners’ particularly in, e.g. marine vessels where there is no consensus on a dominant alternative fuel. “The report pulls out specific challenges to transition like this in each sector,” he said. “And, although resolving the challenges is largely outside the direct remit of the insurance industry, the Lloyd’s market specifically is well positioned to have a voice in the industry groups which will set direction and define standards for new technology, process and operating models.”
