Briefing: Climate risk must move from the boardroom to the underwriting floor

The insurance industry likes to talk about sustainability. Environmental, social and governance (ESG) commitments appear in strategy documents, press releases and glossy reports. But, for all the board level rhetoric, there is one area where ESG often fails to show up – the underwriting floor.

For insurers, underwriting is the beating heart of their business. And yet, for many firms, sustainability still sits on the sidelines of that process. Climate risk might be recognised in principle, but rarely does it make its way into technical pricing models, capital allocation, or day-to-day underwriting decisions.

And now the regulator is beginning to sit up and take notice of this.

The Prudential Regulation Authority (PRA) has long warned that climate change poses a material threat to financial stability. In April this year, it therefore proposed tougher expectations for how insurers and banks manage climate related risks – particularly through stress testing and scenario analysis.

It wants to see these risks integrated into solvency assessments and decision-making, not just acknowledged as reputational issues or long-term concerns.

In practice, this means that the PRA expects insurers to show how climate risk affects their capital strength, ability to pay claims and their exposure to different sectors. And it wants underwriters to be a key part of that response.

This is not just about regulatory compliance, though. There is a clear commercial incentive too.

Businesses that take sustainability seriously – those transitioning away from fossil fuels, investing in resilience and disclosing their carbon dioxide emissions – often represent lower long-term risk.

Supporting these companies with better terms or more tailored coverage is not just ethical – it is good business sense too.

Call to action

Some parts of the UK general insurance market are already better linking sustainability objectives and underwriting – this should be a point of optimism and inspiration.

Indeed, certain specialist lines are already experimenting with ESG linked underwriting, where coverage or pricing is linked to carbon disclosures or climate plans. But sadly, these are still the exception rather than the rule.

So, if the industry is serious about sustainability, it needs to move beyond promises and into action.

That means asking harder questions during underwriting processes. It means pricing in future climate exposure, not just historical loss trends. And it means recognising that supporting high emitting sectors with no transition planning is not just a reputational risk – it is a business one too.

Ultimately, underwriting will determine whether insurance is part of the problem or part of the solution. And right now, there’s still a long way to go.