A decade of progress in sustainable insurance underwriting

Opening ’The PSI after 10 years’ conference in Zurich, Christian Mumenthaler, Group Chief Executive Officer of Swiss Re, summed up the achievements of the UN Environment Programme initiative by saying:

“I think a lot has been achieved. At the time, we were 28 companies that founded it and now it's more than 200 companies and institutions.”

He pointed to the PSI’s development of the Net Zero Asset Owner Alliance and Net-Zero Insurance Alliance over that time and went on to provide three perspectives on the challenges the PSI and its alliances need to tackle.

Inger Andersen, Executive Director, UN Environment Programme (UNEP), addressing the conference, agreed that the insurance industry faces a tall order when it comes to its sustainable transition: “The entire insurance industry value chain of insurers, reinsurers, brokers and agents, along with insurance associations and insurance regulators have to make sustainability an integral part of their decision-making. I realise it's easier said than done. But you have no choice, this is the only way to secure your business.”

While the insurance industry itself has a very low carbon footprint that does not mean it can neglect to make its operations net zero. Mumenthaler talked about Swiss Re’s own journey. From buying carbon certificates in the early days – which he acknowledged is not sufficient in the long term – Swiss Re managed to decrease the carbon footprint per employee by 60%. The ambition now is to reach net-zero emissions by 2030 for the company’s operations, and across its portfolio by 2050.

The pandemic has influenced this process by showing that travel could be reduced dramatically without any significant impact on clients. The company’s current target is to reduce flight emissions by 50% compared to pre-COVID-19 times.

Speaking from a wider insurance-industry perspective, Mumenthaler diagnosed a continued hesitancy when it comes to acting on climate change within parts of the sector.

He cited different reasons for this, including a difference in risk consciousness in some parts of the world and a fear of legal repercussions if ESG targets are not met.   

However, generally, any exposure for insurance companies is less likely to come from their own footprint, which is relatively low. The net-zero challenges are typically related to the assets they invest in – and emissions associated with underwriting risks.  

Swiss Re itself has shifted $120 billion of assets to ESG, said Mumenthaler, meaning its focus is on the top ESG performers in each sector. Unlike some of its peers, it has not excluded any industries from investments. 

“I don't think that's responsible because then we basically check-out of these industries and they will be owned by other people who don't care and that’s a very dangerous path,” Mumenthaler warned. “I think it's much more sensible for us to remain invested but encourage the CEOs to act further.”

Mumenthaler also stressed that it’s this kind of pressure that has catapulted the sustainability agenda to the top of CEOs’ priorities.

“I think this is probably the biggest game changer in the last three, four years: shareholder or bondholder pressure on companies. Because many CEOs who were previously not very attuned to the topic are now paying a lot of attention.”

He pointed out that around a quarter of any company’s carbon footprint can be reduced through efficiencies alone. However, in some industries, getting to 50% lower emissions is much harder, because entire value chains need to be decarbonised.

This applies to makers and users of steel, aluminium and ammonia, for example. Here, decarbonisation technologies exist, “but they're much more expensive and you need green energy at a super large scale,” explained Mumenthaler.

The issue is that the biggest investments are required at the bottom end of the value chain – such as in green steelmaking – where margins are very low. While switching to green materials will only have a minor impact on end-user prices, costs for the producers of those materials could rise by half or even double.

“That’s where the idea of first buyers’ coalitions was born,” said Mumenthaler, “where companies who can afford to pay the higher price guarantee that they will take green aluminium, steel or green ammonia at the higher price. And that helps these companies produce more, go through a scaling effect, and make these goods cheaper.”

Add into the equation that the world will not only need to eliminate future CO2 emissions but also require technologies to extract large amounts of CO2 out of the atmosphere said Mumenthaler.

“It's incredibly complicated – probably the biggest challenge humanity has ever tried to solve. And that is just the carbon part. If you add in all the others, this is really a huge challenge. And it asks for a complete change in how we do business and how we deal together in the world. But it's needed.”

To UNEP’s Andersen, untying this Gordian knot will require the insurance industry to commit to and be accountable for transparent standards and target setting that put nature-positive principles, climate change abatement and health improvement at the heart of their decision-making.