Embracing change and securing growth: Climate and the insurance sector

Insurance, at its core, is about risk transfer. Risk transfer allows organizations, individuals and societies to innovate, evolve and experiment — which is what the world needs right now. Indeed, if the world hopes to meet its global decarbonization and climate change goals, a lot more innovation and experimentation will be needed. The insurance sector is therefore expected to be central to driving the shift to a decarbonized economy.

To be clear, this is not just about doing the right thing for the planet. It is also about doing the right thing for policyholders, shareholders and stakeholders. It’s anticipated that the shift to decarbonization will kill off some industries and birth a range of new ones. Those insurers who do not evolve their business models to recognize this fact will likely soon find themselves under significant stress. 

In our view, those that do move to understand and participate in the shift to a decarbonized economy stand to win significant competitive advantage. Innovation and experimentation are not just for climate scientists and technologists — they are also critical to the insurance sector. And, recently, we have been seeing significant innovation in the sector.

The Sustainable Markets Initiative’s Insurance Task Force has produced a Products and Services showcase(PDF 2.27MB) that spotlights some of the innovative products and ideas that insurers are creating to respond to the new reality. It includes "build back better" products that encourage more sustainable and resilient recovery actions. There are also a number of products centred on insurance for green infrastructure, for example, energy efficiency, green buildings and green technology.

The value of these types of innovative products and ideas can be twofold. First, they can allow insurance leaders to build new products, capability and capacity in emerging sectors, technologies and segments. That can lead to more diversified and stronger long-term growth. And it helps build credibility and trust with customers and regulators who are looking to the insurance sector to lead the transition to a green economy.

Secondly, these types of products can provide significant confidence to the markets, investors and innovators as they take their own risks to help move towards their decarbonization goals. Take the carbon offset insurance product, for example. This product can allow business leaders to invest into carbon offsets with confidence, enable financial markets to properly assess the value of these offsets, and help create greater demand for new and innovative carbon offset opportunities. 

Some insurers are going even further, using their balance sheet to encourage and inspire change. One catastrophe bond provider, for example, promoted their securitization by promising that the freed-up capital would be invested directly into sustainable infrastructure. They enjoyed preferred pricing on the deal from investors eager to green their portfolios

We are also seeing insurers use their investment capacity to drive change. Many insurers are looking at their investment portfolios to assess the long-term risks and opportunities that may be had. The decisions are not black and white; in fact, many of the companies leading the energy transition are the same companies that still make a small fortune pumping out hydrocarbons. Again, innovation is creating new ideas and insurers will likely have access to new technology solutions that make it possible to predict the positive or negative impact a particular company may have on the environment.

Therefore, one of the big questions facing insurers isn’t whether to move or not — it’s where they should move to and when. For that, there are no cookie-cutter answers. Insurers should chart their own path based on a combination of customer expectations, strategic goals, current capabilities, market position, influencing regulation and culture — among other inputs and influences.

That is why KPMG professionals often advise clients to start by gaining a clear understanding of the specific trends and opportunities facing their current business. Look at every line of business, every sector and every product and assess how these might evolve given the current trends. Identify the risks. But also look carefully for the opportunities. Take inspiration from competitors and peers. Explore the “art of the possible” with trusted advisors.

KPMG professionals can offer one piece of advice that holds for insurance players, regardless of size, market or sector: real value can be easier to access when the issue is managed at an enterprise level. Finance, underwriting, claims, customer service, HR, operations, IT and many others all have a role to play in helping a company transform for the future. And the activities of one will likely impact the activities of the others. An integrated and holistic strategy is key. 

Whether or not you believe in the climate agenda, it is clear that a massive transition is now underway. New opportunities are being created for insurers who know where to look and how to encourage innovation. Is your organization ready to capture those opportunities?