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Incentivising Climate-Ready Behaviours in the Insurance Industry

Icebreaker One’s SERI project has two goals: 

  1. To work with our partners in the insurance industry in developing climate-ready insurance products, and 
  2. To develop the shared data standards and infrastructure that will underpin the data requirements arising from these products. 

What does climate-ready mean?

There is a lot in there, so let’s start by defining what “climate-ready” means in this context. Icebreaker One’s definition of climate-readiness is twofold. Firstly, climate-readiness translates into delivering net-zero by stopping new emissions and balancing out, or offsetting, all prior and current emissions. Secondly, it means that we need to  address the consequences of climate change, by adapting and becoming more resilient to its impacts

What are climate-ready products?
Building on this explanation, we have defined a climate-ready insurance product as one that incentivises certain behaviours in the business models of the companies and individuals buying insurance. This includes incorporation of net-zero objectives and outcomes into their business model and operations, and demonstrating greater resilience and adaptation in response to climate and environmental risks.

What does a climate-ready product look like?
So far, so good. But how do we begin to identify the set of potential products that can best deliver climate-ready objectives? How do we work with our partners in order to test the appetite of insurance buyers and market participants, and to understand the challenges – both in general and those specifically data-related – associated with creating these? 

The ideal climate-ready insurance product has something to offer to everyone involved – reducing premium costs for the buyer whilst also incentivising climate-ready behaviours, and reducing the risk to the insurer and also helping them to manage their own transition risk, and giving brokers a clear choice and opportunity to present to buyers. 

From an insurer’s perspective, how does the ability to demonstrate climate-ready characteristics impact the risk assessment and pricing of a client’s insurance? There are obvious impacts, in addressing the consequences of climate change, on climate and environmental risk – i.e. catastrophe insurance.  However, there are also potential impacts in terms of the client’s credit rating and business continuity risk. A client having a sustainable, net-zero supply chain is arguably one that is more likely to have a robust ability to cope with the potential risks to its business continuity that arise from climate and regulatory change.

Where SERI comes in 
We want to find use cases that already exist, and where the absence of appropriate insurance solutions is holding back progress towards climate-readiness. For example, we can look at new and innovative technologies that can help advance a climate-ready agenda in sectors such as the built environment, shipping and agriculture. Are there some technologies for which a lack of insurance coverage is holding back adoption? How can SERI help address the challenges in providing insurance cover for these technologies, through the availability of shared data standards and infrastructure?

We can also collaborate with other existing green finance initiatives, in order to understand the challenges they face in developing their own plans, and how insurance may be able to help address those, or where the development of data standards can solve multiple problems at once. Are there incentives that can be created on a wider scale, in terms of receivables and project financing, if we can demonstrate that climate-readiness has a material impact on a company’s credit risk, and hence its trade credit insurance costs?  

Our goal is to internalise the externalities – turning climate-readiness into a material impact for risk assessment, in terms of both financial and non-financial risks. We also need to unravel and address the data requirements that are needed to support the process of moving climate-ready insurance products from theory into reality.

You can help!
The SERI Policy Working Group will be looking at all of these questions and challenges, and will identify the levers of change required across the industry, policymakers, legislators and regulators in order to solve them. If you’d like join us on either the SERI Policy Working Group, the SERI project more generally, or to find out more about Icebreaker One’s work and plans, please email michelle.brook@icebreakerone.org