Green Europe Today, November 16, 2021.
Author: Tomasz Bułhak
Due to its specific nature, the insurance industry is particularly sensitive to the effects of global warming. This is mainly due to the direct consequences of these changes, i.e. the necessity to pay compensation resulting from natural disasters. Torrential rains, hurricane winds, floods, droughts – all these events increase your insurance risk. The greater the effects of climate destabilization in a given region, the greater the risks, uncertainties and difficulties in controlling the profitability of the insurance sector.
Eco-investments stabilize the insurance business
The implementation of climate-friendly solutions is in the interest of insurers as it has a stabilizing effect on their business. In this context, it is important to directly and indirectly support local initiatives and investments that protect against the effects of dangerous climatic phenomena. This can be the construction of flood dams, supporting soil improvement programs to counteract drought and floods, promoting sustainable agriculture to improve the natural retention of rainwater, or planting trees that reduce the damage resulting from storms and storms, and thus reduce the risk of payment associated with them as compensation.
– Insurance companies play an important role in the green transformation, in particular as institutional investors and insurers of risks, including those related to climate change. Insurers participate in many projects as investors (eg renewable energy, green bonds), prepare products that contribute to the fight against climate change (eg insurance for wind farms, hydroelectric power plants) and introduce restrictions related to the insurance of fossil fuels. Insurers are supporters of evolutionary solutions, not revolutionary and realistic implementation deadlines. The Polish Insurance Association has established a special, permanent working group for sustainable finance, which develops positions on European and national regulations in the field of sustainable finance . To this end, PIU cooperates with state administration bodies, including the Ministry of Finance and the Ministry of Development and Technology, which issues a cyclical SDGs Newsletter (Sustainable Development Goals), in which it takes into account the contribution Of the Polish Insurance Association – says Paweł Sawicki, attorney-at-law, advisor to the management board of the Polish Insurance Association and secretary PIU working group for sustainable finance .
New regulations and reporting systems
The effects of climate change for the insurance sector are also indirect – they result from the obligations resulting from the implemented and planned legal regulations resulting from, inter alia, with the Paris Agreement or international agreements on global reduction of CO2 emissions. One of the major changes is the new reporting requirements.
– The Polish Insurance Association, in cooperation with the Polish Financial Supervision Authority, prepared the following from SFDR a non-financial reporting scheme for financial institutions. PIU prepared a webinar on YouTube em > explaining the basic responsibilities associated with it. On the one hand, they concern Sustainable Risks (RdZR), where the perspective is the impact of ESG (environmental, social, governance) factors on the investment value. On the other hand, they concern Adverse Sustainability Impacts (NSDI), where the perspective is the impact of investments on ESG. Thanks to the cooperation between PIU and the Polish Financial Supervision Authority, it was possible to clarify many practical issues, important in the context of the Polish market. Additional information can be found on the KNF website at tab Q&A . Examples of pension products offered on the Polish market to which non-financial reporting is applied are IKE, IKZE, PPK and PPE.
The Polish Insurance Association in cooperation with the Polish Bank Association, the Association of Stock Exchange Issuers, the Reporting Standards Foundation and the Chamber of Fund and Asset Managers also prepared a brochure entitled “A set of core ESG indicators in accordance with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on disclosure of information related to sustainable development in the financial services sector (SFDR), together with its description, identification and explanation.” The aim was to develop a standard for the exchange of information in the field of non-financial reporting between companies and financial institutions that have invested in these companies. European regulations in this area are not precise enough and required adjustment to Polish conditions. The brochure can be found on the PIU website – adds Paweł Sawicki .
Great potential, great responsibility
Adapting to the ongoing regulatory changes is not enough – the insurance sector has a much more important role to play in this area. Insurance institutions are in contact with all industries and branches of the economy, both in the private and public sectors. This means it is possible to support positive trends and promote decarbonisation. Insurance companies have great potential (including financial ones – it is one of the largest investors on the market) to inspire and support the necessary changes leading to business climate neutrality. This requires innovation, a change in mindset and the prioritization of sustainable development.
What action can insurers take?
Deloitte and the University of Cambridge have published a report titled:” Climate product innovation within the insurance sector “, in which it identified 9 priority actions in this area. This includes advising and supporting initiatives to reduce CO2 emissions by customers, implementing an environmentally friendly system of claims settlement (e.g. by encouraging the repair of damaged equipment instead of throwing it away), supporting the flow of capital towards “green” investments, supporting start-ups developing technologies aimed at a positive impact on the reduction of emissions or active participation in the process of sustainable liquidation of high-carbon assets and capital flow towards environmentally neutral initiatives.
How to implement these goals in practice?
Experts from Deloitte and the University of Cambridge have defined 7 main activities that the insurance industry can take to achieve the above goals. According to them, the sector should actively cooperate with the government to respond to the needs related to transformation using the public-private partnership formula with broad state support. Another area is raising competences in the field of underwriting (i.e. insurance risk assessment) with the use of modern analytical technologies and coordination of activities within the entire chain of providing insurance services so that each of its links actively contributes to the reduction of CO2 emissions. In addition, a culture of innovation should be fostered, which should replace static business models supporting the status quo. The key is also the appropriate modification of the product offer so that it is adapted to the goals and priorities in this area. The main challenge is to change the system of identification, modeling and risk management – the scale of the phenomenon of climate change means that this task requires cooperation between insurers, government, local governments and research institutes.
Time for strong commitments
Insurance corporations have made some specific commitments in this area. For example, Swiss Re has declared that it will stop insurance and reinsurance processes and investments by 2023 towards 10% of oil and gas producers which emit the most carbon dioxide . The largest players in the insurance sector are 12 of the 26 members of the UN-established coalition Net-Zero Asset Owners Alliance , which brings together investors of $ 4.6 trillion in capital management. They declared that their portfolios would become carbon neutral by 2050. In the coming years, we will witness a spectacular flow of capital from the fossil fuel sector – as reported by Nature Climate Change, its assets will be reduced by between $ 1 trillion and $ 4 trillion by 2030. The insurance sector, which is owned by shares of such companies, will be financially affected by this, but it will certainly be an important impetus for a green transformation. Especially since the decrease in demand for oil or gas will go hand in hand with the increase in demand for electricity. Experts from Boston Consulting Group cite IFC data according to which by 2030 energy demand will increase by 30% and investment in renewable energy will consume $ 23 trillion. Insurers will certainly be interested in companies that have a share in this market.
One step ahead of the competition
The changes that are taking place require specific actions from the insurance sector. On the one hand, their goal is to adapt the current operating activities, including the product offer, to the new challenges related to the effects of climate change. On the other hand, the sector, due to its investment potential, can play a leading role in supporting the process of green transformation. The key issue is to take proactive measures – insurance companies that will be at the forefront of this process will significantly strengthen the strength of their brands, and thus – their market position. They will also have access to the best talent in the labor market.
Edited by:
Tomasz Bułhak – Chief Analyst, Green Europe Today
Tomasz Bułhak is currently working with the business, preparing comprehensive analyzes and providing marketing support. Actively monitors changes resulting from new trends and pro-ecological regulations and their impact on the business. For several years he worked in managerial positions in international companies from the automotive sector. He studied Journalism at the University of Warsaw.
Expert commentary:
Paweł Sawicki – Advisor to the Polish Chamber of Insurance board and secretary of the PIU working group for sustainable finance
Legal advisor, advisor to the management board of the Polish Insurance Association and secretary of the PIU Working Group for sustainable finance. For 20 years he was associated with insurance and financial supervision institutions. From 2007, he managed departments related to insurance supervision in the Polish Financial Supervision Authority. He was responsible, inter alia, for the draft Recommendation U, Guidelines for insurance distribution or Recommendations for product adequacy testing. Paweł Sawicki is a graduate of the Catholic University of Lublin and Postgraduate Studies in Economic Insurance and Risk Management Studies at the Warsaw School of Economics.
