The sector has previously shown ‘inexcusable laziness’ by simply being reactive to client problems, but now the industry must lead on green tech cover to support UK’s transition to net zero
The insurance industry has “a massively important role” to cover the growth and roll out of green technologies in order to support the transition to a net zero carbon dioxide emissions economy, according to Domenico del Re, director of sustainability and climate change at professional services firm PricewaterhouseCoopers (PWC).
Speaking exclusively to Insurance Times at the Rendez-Vous de Septembre conference in Monte Carlo this month (September 2022), del Re emphasises that “the speed at which technology will have to be rolled out” to support a greener economy will present an opportunity for the insurance industry – especially as private equity and venture capital firms are “betting really heavily on green tech”.
According to del Re, $85bn (£73.3bn) of venture capital in 2021 was invested into clean or green technologies, marking a 100% increase on 2020’s level of venture capital investment.
In addition, $130tr (£112tr) was pledged towards environmental, social and governance (ESG) or climate-related projects at the 2021 United Nations Climate Change Conference (Cop26), held between October and November last year, del Re notes.
He explains: “There is a massively important role for the insurance industry to help scale these innovations.
“Innovations [in green technology] need to be rolled out at such amazing pace that risk finance [and] rapid financing, at scale, will be one of the most important levers that the insurance industry can [pull] to enable the transition economy.
“The world economy needs these new technologies rolled out at pace and the amount of investment going into this tech is phenomenal.
“When capital is redistributed in this way, insurance needs to be somewhere in this.”
As an example of how the insurance industry can help facilitate the transition to net zero, del Re cited the real estate sector.
He says: “The real estate industry needs to decarbonise really rapidly and will have to roll out a ton of brand new technology to do that - whether it’s solar panels or ground source heat pumps that we’ve never seen before.
“The impact [that] could arise for the insurance industry is a load of untested technology that needs to be rolled out really quickly. A lot of guarantees that real estate owners are expecting from design professionals about those technologies.”
He notes that insurance professionals must engage with the sectors they are insuring to better understand its specific journey to net zero – large risks, for example, may require a greater pooling of risk or even public-private partnerships.
Del Re bemoans the fact that the insurance industry can “lack foresight”, however, which has held it back so far in supporting the roll out of green technologies.
He believes that if a client presents a problem the industry has previously been unsure of, its first response has typically been to issue exclusions in policy wordings until it can get its head around how to cover the risk.
However, to really push ahead on the net zero transition, del Re thinks there is not enough time for this type of dawdling.
“In the insurance industry, we lack foresight. We don’t plan what’s happening next and we need to do that,” he says.
“The insurance industry can be so reactive. I hear voices in the London market saying ‘client comes with a problem, we develop a solution’. I don’t think that’s enough. That is just an inexcusable laziness.”
One example here is the use of hydrogen as an energy source. Del Re is in “no doubt” that the UK’s energy infrastructure will become hydrogen led, so the insurance industry must develop propositions to protect against new risks associated with its use, otherwise the industry will become irrelevant.
Insurance provisions here will need to consider new distribution centres for hydrogen, as well as the fact that the gas needs to be stored at high pressure.
These new types of insurance products “are both encouraging the transition, but also protecting any loss in value from challenges to implement the transition plans,” del Re adds.
Explore more sustainability-related content here.
Opportunity, not risk
To facilitate these types of product changes and development, the insurance market’s mindset has to change, del Re urges.
“The insurance industry has been consumed by the top down view of sustainability as a risk to the sector. It’s detracted from thinking of climate and the transformation as an opportunity for the sector to play a bigger role in society,” he explains.
For him, insurance should be pivotal in facilitating change, risk taking and technology growth.
One way the (re)insurance market specifically can achieve this prime position is by tapping into one of its “strongest skills” – scenarios and modelling.
Del Re explains: “We use [scenarios] in the context of natural catastrophes usually. That muscle memory, we need to use that to think of the foresight that we need around what will the infrastructure of the future look like? How can we ensure that the insurance industry will be enabling these scenarios to materialise? That’s more important than trying to measure your carbon footprint.”
The reinsurance market, in particular, will need “to [produce] sophisticated ways of looking at various versions of what climate could be doing in the future”, del Re adds, as historical data can no longer be relied upon to inform catastrophe modelling and capital management.
This is because the severity and frequency of today’s climate change-driven weather events remain “untested”.
Del Re continues: “Whilst we have catastrophe models that have been backward looking, we’re going to have to start thinking about various futures.
“There will be increased analytics because dealing with uncertainty calls for analytics and more education around those analytics as well, being really clear about language.”
- Insurance Times has converted dollar amounts into pounds using an exchange rate of £1 = $1.16, which was correct as of 1 September 2022.