Insurers cannot ignore the global move toward net-zero emissions. (Photo: metamorworks/Shutterstock)
More than 130 countries and 750 companies have pledged to reach net-zero, meaning that all greenhouse-gas emissions would be either eliminated or offset. The global financial system is also involved, with $130 trillion in financial assets committed to net-zero. This transition will require transformation within every sector of the economy and represents an enormous reallocation of capital.
For insurers, climate change represents both challenges and opportunities. On the one hand, physical risks, such as flooding and drought, could stress balance sheets. On the other, if carriers take an offensive approach, they could unlock growth and build competitive advantage.
The balance between offense and defense will vary, depending on local market conditions and strategic choices. But one way or the other, insurers cannot ignore the net-zero equation.
There are two major questions to consider.
What does the net-zero transition mean for the industry?
There are opportunities in three areas:
- Insuring the net-zero transition;
- New risk transfer solutions; and
- Adaptation and resilience services.
In each, there is room to offer traditional property and casualty coverage as well as to develop innovative new products.
Insuring the net zero transition. Across high-emitting sectors, technology, demand reduction and business model changes will all be critical to make progress toward net zero. Insuring the development and deployment of climate technologies presents new challenges, but significant potential. By 2030, insurance premiums on top decarbonization technologies and renewables could reach $10 billion to $15 billion.
Near term, the greatest growth is likely to occur in established renewable-power and green technologies, including solar, wind, electric vehicle (EV) batteries and EV charging infrastructure. Over time, brown-to-green asset transformations, carbon capture, and hydrogen could become major markets. Insurers could also play an important role in catalyzing new markets, for example, by providing protection to both buyers and sellers in voluntary carbon markets.
In addition to standard coverages such as construction, surety, and liability, new opportunities will likely emerge to support de-risking along the value chain, from manufacturing to deployment to production. For example, a hydrogen developer may be more likely to pursue a project if there is protection in the event buyers become insolvent. And buyers could benefit from coverage in the event of reduced production from a green asset. [graphic]
New risk-transfer solutions. Even in moderate warming scenarios, more than half of the world's population will be exposed to climate hazards such as heat stress and flooding. More advanced physical risk modeling, as well as product innovation, will be essential for insurance to remain affordable and relevant. For example, parametric policies can be used for income loss on renewable assets, as well as to address the impacts of chronic weather shifts on climate-exposed sectors. Examples include heat stress on power grids and drought leading to crop loss. Multi-year policies are one way to provide more predictable, affordable coverage while also pricing in a forward-looking view of risk. Unlocking this opportunity will require the industry to reduce basis risk through improved modeling, and to build awareness and interest in the market.
Adaptation and resilience services. We believe insurers could play a much more significant role in reducing risk and losses. They could offer advisory and risk engineering services to manage and reduce clients' exposure to climate risks and enable more effective responses to climate-related losses. Examples include risk assessments and engineering for natural hazards, pre-construction risk advisory, and post-loss incentives to rebuild with improved resilience. Partnerships with third-party data and analytics providers and value-added services can strengthen and differentiate carrier offerings.
How can insurers go to market?
Insurers may find the net-zero opportunity difficult to crack due to a lack of data, loss history, and pattern recognition among underwriting teams. These are not insurmountable hurdles. Insurers will need to build climate capabilities, including integrating forward-looking climate risk modeling. They can develop partnerships to access opportunities and accelerate learning. For example, working together, insurers and infrastructure funds, private equity, and other institutional investors can diversify risks while sharing data and technical expertise. Recognizing many new technologies carry less loss history and yet demand near-term investment and protection, they could also pool green assets with different risk characteristics.
This could be a transformational moment for insurers, with significant climate-related risks and opportunities on both sides of the balance sheet. Taking an offensive approach will be critical for insurance carriers to unlock growth and remain relevant in a net-zero future.
Kia Javanmardian (Kia_javanmardian@mckinsey.com) is a senior partner in McKinsey's Chicago office. Christie McNeill (Christie_mcneill@mckinsey.com) is an associate partner in the Boston office.
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