The insurance profession is facing up to pressure to act on climate change. Liz Booth reports on some of the latest initiatives
In January, the United Nations’ (UN) Principles for Sustainable Insurance (PSI) team launched a final report on climate change transition in the insurance profession.
It was the largest collaborative effort in this area, involving the work of 22 global insurers, with the UN PSI concluding: “Managing risk is the purpose of the insurance business. Therefore, better understanding climate-related risks and opportunities and publishing decision-useful disclosures will position the insurance industry as a transparent, accountable, stable and resilient partner in tackling climate change.”
The report, says the UN PSI, “represents a strong collective signal from market participants on what climate change means to the insurance business, what the key challenges are and what can be done to better understand, manage and disclose climate-related risks and opportunities efficiently and effectively”.
Added to that, in November, the European Insurance and Occupational Pensions Authority (Eiopa) started a consultation on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive, as well as on the methodologies to build those ratios. That ran until mid-January and Eiopa is finalising its advice and submitting plans to the European Commission in February 2021.
At the heart of this is the concept of building a brighter future – a philosophy that the CII has long shared – and we are delighted to support the launch of these detailed plans for a more environmentally conscious marketplace
This work coincides with Lloyd’s launching their environmental, social and governance (ESG) plans for 2021.
Bruce Carnegie-Brown, chairman, launched Lloyd’s’ first ESG report, saying: “We do so with an ambition to integrate sustainability into all of Lloyd’s’ business activities; from playing our part in the global transition to net zero through the risks we share and the investments we make, to the way in which we support societal progress more broadly.”
He stressed that Lloyd’s has a long track record in contributing to the communities in which it operates
and in helping them to recover from disaster.
“We are proud,” he said, “of the enduring role we play in protecting society from some of the greatest threats and in doing so supporting economic growth and societal prosperity; during the last decade we have provided £145bn in claims payments to our customers in their time of need, as well as the insurance and reinsurance critical to propelling the advancement of clean energy and resilient infrastructure around the world.”
He said plenty of progress has been made, “however, we can and will do more”.
Mr Carnegie-Brown continued: “The events of 2020 have accelerated critical conversations, commitments and actions across businesses, economies and society to tackle some of the most challenging and urgent issues we collectively face. As the world slowly emerges from the impacts of the Covid-19 pandemic, it does so with an enormous opportunity to take positive action to build back better.”
For the first time, Lloyd’s is setting targets for responsible underwriting and investment to help accelerate society’s transition from fossil fuel dependency towards renewable energy sources.
Among those, Lloyd’s will start to phase out insurance cover for, and investments in, thermal coal-fired power plants, thermal coalmines, oil sands, or new Arctic energy exploration activities. From 1 January 2022, Lloyd’s managing agents will be asked to no longer provide new insurance coverages for, or investments in, these activities.
Not forgetting those with existing investments, the report states: “To enable the market to support its customers that are making the transition away from these energy sources towards sustainable energy and business models, managing agents will be asked to phase out existing coverages by 1 January 2030.
“In addition, we have also committed to the phasing out of the market’s and the Corporation’s existing investments in thermal coal-fired power plants, thermal coalmines, oil sands, or new Arctic energy exploration activities by the end of 2025.”
Test of commitment
The timing of the Lloyd’s report turned out to be even more interesting as, in late January, the UK government decided not to block plans for a new coalmine in Cumbria – the Woodhouse mine.
Nigel Brook, a partner at law firm Clyde & Co, comments: “Significantly, the mine provides an early test of commitment by the insurance sector to take account of climate risk. The Prudential Regulation Authority (PRA) is already pressing UK insurers to take action by requiring authorised re/insurers to meet the expectations set out in its Supervisory Statement SS3/19 by the end of 2021. The very largest of them will also be required to take part in the Bank of England’s Biennial Exploratory Scenario, involving detailed climate stress tests. UK re/insurers will also need to meet Task Force on Climate-related Financial Disclosures, which will become mandatory for most by 2023.”
Against this backdrop, he asked, will the mine be able to attract support from the insurance profession?
In a move that may be a sign of the insurer’s determination to push through with its changes, Lloyd’s states: “To strengthen its governance and to support its ambitions and targets, Lloyd’s has also set up an ESG advisory group”.
Keith Richards, chief membership officer of the CII, responded to Lloyd’s’ ambitions by saying: “The challenges of achieving the ambitions of the Paris Agreement and the more recent Net Zero by 2050 target by the UK government, are fundamental to the future of our whole society and insurance will play a huge role in the success of these goals, all around the world.
“Following the recent release of the government’s 10-point plan on net zero, its energy whitepaper and the Committee on Climate Change’s sixth carbon budget, this report is a welcome response to a changing landscape from the Lloyd’s market and highlights the leadership our profession can take during this global transition.”
He adds: “At the heart of this is the concept of building a brighter future – a philosophy that the CII has long shared – and we are delighted to support the launch of these detailed plans for a more environmentally conscious marketplace.”
Lloyd's 2021 plans
- Engaging widely with stakeholders across the Lloyd’s market to further develop and operationalise ESG strategy, policies and processes, including responsible underwriting and investment.
- Developing a framework to help insurance businesses in its market integrate ESG principles into their business activities in the next 18 months.
- The Corporation will review whether it can formally adopt the United Nations Principles for Responsible Investment and the United Nations Principles for Sustainable Insurance.
- Lloyd’s will consider how the insurance sector can best support the global effort to address climate change in the context of the 2021 United Nations Climate Change Conference (COP26), and also respond to the UK government’s Ten Point Plan for a green industrial revolution.
- It will recruit a dedicated team to support the implementation of its ESG strategy, monitor progress and to update its ESG advisory group.
Source: Lloyd's 2020
Added to its verbal support, the CII is proactively planning to launch a Chartered Body Alliance Certificate in Climate Risk this year. This new qualification is being jointly developed by the Chartered Body Alliance.
Jackie Mahoney, learning director at the CII, explains that the UK PRA’s recent work on climate risk disclosure has highlighted a capability gap, which presents a major challenge for firms in meeting the requirement to have fully embedded their approaches to managing climate-related financial risks by the end of 2021.
She says the new certificate, which concentrates on climate risk rather than ESG more broadly, aims to develop learners’ professional knowledge, understanding and skills relating to climate risk, and successfully apply these within the context of their role and organisation to support a culture of effective climate risk management.
The CII believes the new certificate will be appropriate for all financial services risk professionals globally who wish to develop and demonstrate their knowledge and expertise of climate risk. The course’s learning objectives are:
- Describe climate change and its impacts on the environment, economy, society and the financial services sector.
- Identify, describe and classify climate-related financial and non-financial risks, and the impacts of these on the economy, society and the financial services sector.
- Examine the challenges in measuring, monitoring and reporting climate risks, and the availability and quality of data.
- Outline common approaches to modelling climate risks, including the use of scenario analysis.
- Examine regulatory approaches and responses to climate risk at global, regional and national levels, and their impacts on the financial services sector.
- Explore approaches to defining, developing, articulating and embedding climate risk appetite, governance and culture.
- Discuss the opportunities for the financial services sector in supporting the transition to a sustainable, low-carbon world.
It will be appropriate for all those in the financial services sector, including risk managers in banking (retail and wholesale), insurance, investment management, policymakers, central bankers and regulators, analysts and consultants – and will be appropriate for financial services professionals across the world, not limited to the UK.
Ms Mahoney stresses that those wishing to gain the certificate will not need to have prior knowledge of green and sustainable finance and they do not need to be existing climate risk specialists.
Liz Booth is contributing editor of The Journal
For the market, Lloyd’s proposes:
- Lloyd’s managing agents will be asked to phase out insurance for some of the most environmentally damaging activities and industries, building on the policies some insurance businesses already have in place.
- Lloyd’s managing agents will be asked to provide no new insurance cover in respect of thermal coal-fired power plants, thermal coalmines, oil sands or new Arctic energy exploration activities from 1 January 2022.
- Lloyd’s managing agents will be asked not to renew insurance coverages for thermal coal-fired power plants, thermal coalmines, oil sands or new Arctic energy exploration activities after 1 January 2030.
- This also applies to companies with business models that derive at least 30% of their revenues from either thermal coal-fired power plants, thermal coalmines, oil sands or new Arctic energy exploration activities, from 1 January 2030.
- Recognising the practical challenges of implementing these targets, Lloyd’s has set two underpinning principles to help managing agents meet these commitments:
1) Firstly, if a policy falls within the scope of an underwriting target but is also supportive of clients’ energy transition, it should be escalated through the managing agent’s own governance processes to determine whether cover should be provided.
2) Secondly, other risks should be assessed by managing agents on a case-by-case basis, and where required should be similarly escalated.
- Detailed guidance including worked examples to support managing agents to implement these changes will be developed with stakeholders and issued during 2021.
- This will include helping managing agents to put in place robust governance processes to support their own underwriting decision making in relation to sustainable insurance.