London market has ‘real opportunity’ to be ‘an innovator’ for climate change transition risks

The (re)insurance industry – and the London market in particular – “can actively be a positive force” when it comes to creating propositions and supporting net zero transition risks because it can pull on its “long history of innovation” and “risk engineering skills”, according to professional services firm PricewaterhouseCoopers (PWC).

Speaking exclusively to Insurance Times at the Rendez-Vous de Septembre conference in Monte Carlo this month, Andy Moore, PWC partner and Lloyd’s and London market leader, emphasised that the London market is ideally placed to be an “innovator” when it comes to supporting the drive to net zero carbon emissions.

He explained: “The London market [has] a long history of innovation. So, although a lot of people look at the London market and think it’s very old, it’s antiquated, it’s stuck in history – actually, the history of the market is one of innovation. The first insurance policies were written at Lloyd’s.

“When you think about that market and the transition to net zero and all of this investment, why wouldn’t the London market be an innovator in that space? We think there’s a real opportunity for the industry to come together.

“The industry can actively be a positive force rather than sitting on the [sidelines].”

Jim Bichard, partner and global insurance leader at PWC, agreed – in his opinion, insurers and reinsurers are not openly discussing transition-related risks associated with moving to a net zero carbon emissions economy. This presents a missed opportunity.

As an example, he cited the currently “high carbon” automotive industry, which is transitioning into manufacturing electric fleets. This will require operational changes at manufacturing plants and greater consideration of how to capture and transport electricity.

He continued: “There’s an increase in investment to get to the new low carbon economy. Can say the same for energy. So, how do insurers play a role in that? It’s easy to see that as a negative, but it equates a big opportunity – how can we attract capital and expertise from insurance to help that transition?

“I actually think it’s a huge opportunity for the insurance and reinsurance industry because we’ve got all those risk engineering skills to help with the transition and understand the new risks [that businesses are] going to be facing.”

Ecosystem collaboration

Moore believes that each component of the (re)insurance ecosystem has a role to play in collaborating to support the transition to a net zero economy.

For him, brokers have “got the greatest opportunity to engage in what the risk is because they’re the ones talking to clients, to companies, to businesses and understanding the risks that those businesses have”.

“They’re able to understand not just the risks that they’ve got on their books at the moment, but also the investments that they want to make and the risk that those investments create,” he added.

Secondly, Moore thinks that “very prudent” regulators and markets need to be pushed and supported by governments to introduce greater flexibility and enable the industry to “take risks outside of their normal risk appetite”.

He explained: “[Regulators and markets] understand that the industry needs to take risks, but they want them to be calculated risks. They’re nervous about putting policyholders’ money at risk in these circumstances.

“So, when you’re thinking about new risks, regulators and markets are going to have to think about how they facilitate this change.”

Moore highlighted Lloyd’s of London’s insurtech acceleration programme, Lloyd’s Lab, as a good example of how markets can embrace and support innovation.

Lastly, Moore feels that insurers themselves “need to lean back on their innovative roots and remember the purpose of insurance”.

“The purpose of insurance is fundamentally quite a socialist concept. It’s the many coming together for the few in their time of need. The pooling of risk, hoping that you don’t need to make a claim,” Moore said.

“You shouldn’t be hoping to make a return on your insurance each year – you should be desperately hoping that you never have to make a claim. But somebody will.

“So, in that collective pooling of risk, insurers need to remember innovation, remember their purpose and think about how they can support that.”

Moore did acknowledge, however, that “insurers have the most to lose in this circumstance” because they are “the ones putting their capital at risk”.

Bichard agreed that supporting transition risks “requires innovation [and] collaboration” from the industry.

Potential challenges

Actioning these steps may not be plain sailing. Moore added that there could be potential challenges “around how we match the risk with the capital, but also how [to] get the public and private partnership to work collaboratively together”.

He explained: “If you have an insurance company with an annual earnings requirement, it is sometimes hard to look further forward than that and think about intergenerational issues, think about the longer time horizon challenges and think about making investments into it.

“Sometimes in these circumstances, it needs some collaboration of capital – not just private capital, but public and private capital coming together to [facilitate] more risk sharing in the first instance, but also reward sharing in the long term.”

Applicability

Although Moore started by discussing his ecosystem collaboration model in relation to climate change and transition risks, he told Insurance Times that the same approach could be taken to tackle any systemic risk, such as cyber.

He believes that cyber threats are growing and that the industry has only seen the “tip of the iceberg” when it comes to potential losses.

Nevertheless, he doesn’t think that any (re)insurers are currently “hurting” over cyber losses.