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ESG Special: How will climate transition risks impact the insurance industry?

(Re)thinking Insurance Podcast: Season 3 – Episode 5

April 20, 2023

In this special episode of a ESG series looking at the climate risks faced by insurers, we hone in on the transition risks arising from the shift to a low carbon economy.
Environmental Risks|Insurance Consulting and Technology

For (re)insurers, climate transition risk has two distinct but related aspects. First, the assessment of their own climate transition across their operations, with a particular focus on emissions reduction and reporting, which has gained particular attention this year following the publication by the Net Zero Insurance Alliance of the first Target-Setting Protocol, which includes target setting for insurance associated emissions across underwriting portfolios. Secondly, the need to understand and assess what the global transition to net zero means for areas including underwriting, claims, products and potentially reputation.

In this podcast, Michelle Radcliffe joins Sina Thieme for this episode of (Re)thinking Insurance to discuss the challenges and opportunities for insurers of contributing to an orderly transition.

For insurers, it's really key to consider their strategy amidst these transitional risks.”

Michelle Radcliffe | Director, Insurance Consulting and Technology

Episode 5: ESG Special: How will climate transition risks impact the insurance industry?

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About our host

Sina Thieme

Director, Insurance Consulting and Technology

Sina is a Director in the Insurance Consulting and Technology business. A qualified actuary, she has 10 years’ experience of working with regional and international P&C insurers, reinsurers, captives, insurance-linked security funds and pension funds primarily in Germany, Switzerland and Bermuda. Her core areas of practice are capital modelling of insurance risk, real world economic scenarios, asset valuation and projections as well as loss reserving.


(Re)thinking Insurance - Episode 5: ESG Special: How will climate transition risks impact the insurance industry?

MICHELLE RADCLIFFE: Looking at insurers own transition to net zero, while the focus to date has really tended to be on internal operations, so improving energy emissions and investments, the focus now is really shifting to look at underwriting portfolios and claims management activities as well.

NARRATOR: You're listening to Rethinking Insurance, a podcast series from WTW, where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.

SINA THIEME: Hello and welcome to Rethinking Insurance. I'm your host, Sina Thieme and today, I am delighted to be joined by my guest, Michelle Radcliffe Hey, Michelle.

MICHELLE RADCLIFFE: Hi, Sina. Nice to join you today.

SINA THIEME: Today's discussion is one of our ESG specials. And the key theme of the specials is how insurers as key asset owners and as key risk takers and risk managers can and have to play a vital role in moving to a more sustainable future. The key questions for us at WTW, I think, are how insurers can design a top level ESG strategy and align that with their overall appetite, motivation, aspiration, and how they can embed that into their functional strategies and how they can translate that into more specific ESG programs.

We're also looking at how insurers can incorporate ESG factors into their strategies and target portfolios, both from an underwriting side and an investment side. Factors such as, resilience of buildings that are being insured, gender pay gaps that are insurance, et cetera. We're also looking at how insurers can identify growth opportunities that are arising from the transition to a low carbon economy because of new technologies, new sectors, new regions, new consumer groups. And of course, we're looking at how insurers can identify climate change related risks and assess their materiality and assess their potential impact for different time horizons. Adjust modeling approaches and assumptions and parameters where required. And include climate change related risks in wider risk monitoring and risk management frameworks. And I can't forget about data.

So we're looking at how internal and external data and models are used and how to define metrics that can measure your progress against the targets you're setting. Michelle, our focus today will be the impact of the transition to a low carbon economy on insurers, as well as insurers and how they can support the transition. And it's great to have you here actually because I think you can bring a bit of a different lens to the subject then us actuaries. You joined WTW in early 2023 and previously worked at the law firm CMS for 17 years. And there you spend the majority of your career in the insurance and reinsurance teams, advising on wordings, policy, covers, acting in the defense of claims across a variety of business lines. And you then specialized in financial lines, working on lots of subscription market claims across both the UK and Europe. And you were also seconded to claims and legal and underwriting teams at your clients. And then in the last year, you worked in the environmental team at CMS, right?

MICHELLE RADCLIFFE: Yes, that's right. And it is actually quite unusual to move teams in the law firm, but for me personally, since the end of 2017, alongside my insurance caseload, I've had a real focus on climate risk. Now my interest was really sparked by a small roundtable dinner that I attended end of 2017, early 2018, which was organized by Grant Thornton.

And at this dinner, there was a lawyer from ClientEarth who was presenting a discussion paper he had written, which was called Risky Business Climate Change and Professional Liability Risk for Auditors. Now at the end of 2017, very few people were really looking at potential legal risks for auditors who failed to address climate change. And it was an area which sparked a lot of discussion around the table, particularly from obviously, the GT auditors. And it was reading that paper that led me to look at other pieces of climate litigation, the jurisdictions, most prevalent such cases, the frameworks used to bring the cases and the agenda setting focus of climate litigation by organizations such as ClientEarth.

So I then started presenting to insurers and re-insurers on climate risk and have really continued to do so over the course of the last five years. And to do it properly, obviously, was tracking climate litigation cases, new legislation, regulation, anything that could really increase the risk of claims for insurers across their different lines of business, whilst also keeping track and following markets and global initiatives on things like corporate disclosures and reporting requirements.

And it was that interest and specialism, which then led me to move teams to practice as an environmental lawyer to really broaden my knowledge beyond climate to wider environmental and transitional issues, as well as advising corporates on the whole raft of legislation aimed at transitioning the economy to a sustainable economic model, particularly at European level with the policy initiatives from the European Commission, which are all aimed at making the EU climate neutral by 2050. This is called the European Green Deal. And I was really fortunate then to be seconded last year to the environmental legal team at Amazon, which again, gave me a very different perspective on environmental and climate issues.

SINA THIEME: Great. Thank you, Michelle. Let's take a closer look at transition risk in particular today, which is one climate change related risk category. And transition risk typically refers to the risk associated with the adaptation, the adoption and the conversion to a low carbon economy, as you alluded to earlier. And this includes risks from changes in policies, for example, on greenhouse gas emissions and carbon taxes.

It includes technological innovations, for example, around carbon capture and storage. It includes consumer preferences, around shared mobility, for example, or recycling instead of replacements. It also includes societal or workforce pressures. And I guess some sectors of the economy face really big shifts in asset values or higher costs of doing business. And industry backed roadmaps have been developed across some of these sectors. And I think it's now key to understand what exactly this means for the insurance industry.

MICHELLE RADCLIFFE: Yeah, that's absolutely right. Totally agree. And I think considering that transition from an insurer and re-insurers perspective is really, really important. When talking to clients, I find it helpful to think of it as, essentially, two sides of the same coin. So one side is insurers own transition to net zero and what that means in terms of regulatory oversight, board decision making, as you say, emissions reduction and transition planning, disclosure, ensuring the just transition, which is obviously crucial, all against the backdrop of that external scrutiny. And really, the difficulty in providing comparison between insurers, given that each transition will vary hugely depending on client base and books of business and the like.

And then on the other side of the coin, there are then the implications as you say of the global transition to net zero amidst the impacts of climate change. And again, what does that mean for insurers? So looking at differing risks, different claims, different responses to claims, that sort of likely policy response. The suitability of capital modeling, pricing and reserving, so very much the actuarial your expertise there and the opportunities that are available in terms of developing market leadership and new product offerings and equally being seen to be attracting those kind of new client bases as well.

SINA THIEME: There is a lot to consider.

MICHELLE RADCLIFFE: Yeah. There really is. The pace of developments in the field are really significant. Just looking at insurers own transition to net zero, while the focus to date has really tended to be on internal operations, so improving energy emissions and investments, the focus now is really shifting to look at underwriting portfolios and claims management activities as well.

SINA THIEME: And to get a bit of a steer on potential considerations for underwriting strategies and target portfolios, I think it's useful to take a look at the target setting protocol that was published by the net-zero insurance Alliance, the NZIA These are requirements for NZIA members only, but obviously also provides useful thoughts and recommendations for non NZIA members, right?

MICHELLE RADCLIFFE: Yeah, absolutely agree. It's a really interesting protocol. As you said, it came out in January of this year by the NZIA And it's really that first target setting protocol for underwriting portfolios. Now as you said, it is only at the moment relevant to members, but there are 30 members of the NZIA.

And I think they represent around 15% of the world premium globally. So that in itself is a significant amount of insurers and re-insurers there. Now the protocol sets out five different target types, two focus on emissions reductions, two on engagement and one focuses on what they call re-insuring the transition. So it includes, for example, climate solution opportunities. And just picking up on the insurance emission reductions, the targets which relate to the setting of those reduction targets across underwriting portfolios are very significant.

So they use standards, such as the PCAF Insurance Association emission standard, which was released in November last year to carry out such calculations, but obviously it goes without saying that there are challenges in collecting the data required to carry out the calculations of such Insurance Association missions, although that is covered, to some extent, these challenges are referenced within the NZIA protocol.

SINA THIEME: And those calculations also depend on the lines of businesses?

MICHELLE RADCLIFFE: Yes, that's right. So at present, there are calculation methodologies for commercial lines, although there are some exceptions. I think it's engineering, for example with CAR Surety, and personal motor lines is also included. For commercial lines to calculate the insurance associated emissions, you need to calculate what's called the attribution factor. And for that calculation, you need details of premium and customer revenue. And you also need to calculate the insurance associated emissions data. Obviously, that can be challenging. The collation of emissions data across your different policyholders.

SINA THIEME: Yeah, I think it's a good start and a very useful guideline. I think people just have to be aware that you won't be able to produce one total number for finance and insurance associated emissions. You can't aggregate emissions due to different methodologies and also potential double counts, and due to the fact that actually insurance associated emissions for commercial lines in particular are likely to be really, really small so it may need re-scaling.

I think there's also quite a bit of thinking that needs to be done in terms of how to sensibly group insurers and lines of business so that you can carry out comparisons over time and between insurers or groups of insurers, and also quite a bit of thinking that needs to be done around how to separate out actual emission reductions in the portfolio from data and reporting improvements, particularly around scope 3 emissions. And then also other changes, such as revenue changes. And as you mentioned, revenue is one component for the adjustment factor in the insurance associated emissions.

MICHELLE RADCLIFFE Yeah, I absolutely agree. And there certainly are challenges. And some of what you mentioned, all of what you mentioned is referenced in the protocol I think there is an understanding that this will need to be developed and a lot of these points that you're making will need to be considered and brought into the next version when it's released, I think, in 2024. But I think taking a step back from these challenges from an industry perspective really it is a big step forward. I think the fact that insurers and re-insurers are now at least starting to embark on this process is important. And of course, there are challenges, but I think if you, five years ago for example, would have expected this to be happening now and that engagement level to be happening across the membership.

But thinking about it, that step is in line with the general direction towards really ensuring a move away from merely setting long term net zero targets to really ensuring that robust transition plans are in place, which look at short to medium term plans to achieve those targets. And we've really seen that in the UK recently with the focus on the transition plan task force and ensuring those robust transition plans are being produced by companies.

SINA THIEME: Earlier you mentioned the considerations that need to be given, not only to ensure a transition to net zero, but also the impact of the wider global transition to net zero on insurers. Maybe you can elaborate a bit on that.

MICHELLE RADCLIFFE: Yeah, of course. So thinking about those impacts of the net zero transition on insurers and re-insurers, I won't go into it to climate litigation risk today, as I think we'll probably try and cover that in a separate conversation. But for insurers, it's really key to consider their strategy amidst these transitional risks. So looking, for example, across their underwriting portfolio, considering how industries are being and will be impacted by the transition and what that may mean for their insurance requirements. So I think insurers really need to be aware of the changing risks, but also how sectors may change over the coming years. But equally, there is really huge opportunity here as well. There's opportunities that might arise during the transition.

And it's important for insurers to look at solutions to differing risks which will emerge, whilst also, of course, as we've just been discussing, being mindful of their own transition to net zero as well and what that might mean across their underwriting portfolio. It's very worth just mentioning a couple of examples about the transition itself and the sectors which will be impacted. I was at a conference recently, or seminar really, about shipping and the transition within the shipping industry, which is really interesting. And essentially, the International Maritime Organization has committed to reducing total greenhouse gas emissions from shipping by 50%, compared to 2008 levels by 2080. And also to reduce carbon intensity of shipping by at least 40% by 2030.

There are then also other coalitions, I think there's one getting to zero coalition, which has 200 organizations who are committed to getting commercially viable deep sea zero emissions vessels powered by net zero emission fuels into operation by 2030 to ensure full decarbonization by 2050. Now this is really interesting, particularly, given the fact that any ships operated in it can operate for 20 years or more. So that means that ships entering the world fleet around 2030 can be expected possibly to still be operational in 2050.

So these transitional risks, these changes in fuel, for example, for shipowners, there's big decisions to be made. There's obviously a risk of stranded assets, there's risks of investing in the wrong type of technology. And a lot of these decisions are actually being made now without really knowing exactly what the best option is, for example, for alternative fuels.

And it is a challenge for the shipping industry what fuel to select. There are a number of different options. So in China, for example, they've seen a huge growth in the number of liquid natural gas, so LNG vessels, I think the most in the country's history last year. I've also seen that Disney announced last year on their Disney cruises that they're going to be building the first green ethanol cruise ship. So different choices are being made. And there's then the question of, do you purchase a new ship? Do you opt for retrofitting?

Retrofitting, as I understand, is a very complex process. A lot of time and skill required, you need the availability of dry docks. And then there's lots of questions about actually operating those ships with this different type of fuel on board. And I think all these important issues are really important for underwriters in that industry to understand, what does this mean for their portfolio, for example? What does that mean to the changing risks, having this LNG fuel on board, for example?

I mean, I think we're obviously more familiar with transition risks on vehicles, for example. So we're really seeing that move to e-vehicles, scooters, bikes, cars, all reliant on batteries. And I think we've probably all seen in the press in recent weeks that there's been an increase in the number of fires caused by lithium batteries in electric bikes and scooters, particularly in the US, which has been taken so seriously that New York State lawmakers have actually very quickly introduced two bills aimed at addressing the growing number of fires. There's one which requires all lithium-ion batteries and chargers for sale in New York to meet sort of certain minimum industry safety standards. And there's a second, which essentially, bans the sale of second-hand lithium batteries for e-bikes and e-scooters and mopeds.

And separate laws, again, have been introduced by the New York City council. So they've addressed that very quickly. In the UK, I think, we've seen guidance come out relating to the emerging risks associated with electric vehicles and charging equipment. And I think at the moment, it's still unclear whether the increase in electric vehicles and charging equipment will notably increase fire risk or frequency. But one thing from the literature which seems to be coming clear is that electric vehicles are-- they are a new hazard due to the presence of these lithium-ion batteries. And whilst perhaps they may not result in more fires, I'm certainly not qualified to opine on that. One thing that does seem to be coming through literature is that once the fire has started, these types of fires are a lot more difficult to put out.

And that's really seen to be a risk, especially, for example, in enclosed carparks. So for motor insurers, property insurers who cover car parks, or indeed shipping companies, where lithium ion batteries form part of the cargo, or they have electric cars on board. Being aware of these risks and what that means for policy exposure is really very important.

SINA THIEME: Yeah. OK. So you touched upon your coverage demands and opportunities arising from those. You touched upon change in risk profiles for existing covers. You touched upon the need for collecting additional data and then potentially pricing that in, whether that's increasing premiums or reducing premiums. It just generally sounds like a lot of change.

MICHELLE RADCLIFFE: Yeah, it really is. And I'd say particularly at European level. Whilst I was working as an environmental lawyer last year, a lot of my focus was on advising clients on transitional legislation. So as I said, particularly stemming from the European Green Deal. And these policy initiatives, which are all aimed at making the EU climate neutral by 2050, they impact so many different sectors. So construction, energy, transport, food, biodiversity, they're really ambitious changes afoot. And pending, obviously, agreement by member states, It's really important for insurers to understand those changes and where such changes really are material to the risk that they're writing.

SINA THIEME: Michelle, thank you so much for your time and your thoughts and I really look forward to continuing our discussion on ESG.


NARRATOR: Thank you for joining us for this WTW podcast featuring the latest perspectives on the intersection of people, capital and risk. For more information, visit the insights section of

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