Ahead of the 2023 United Nations Climate Change Conference, or COP28, insurers have been urged to step up as investments in climate technologies and policies to steer countries towards a green economy move into overdrive.
World leaders, scientists, activists, and other stakeholders are converging at the annual climate talks, which are set to run from November 30 to December 12 in Dubai.
COP28 comes after a year of unprecedented extreme weather worldwide, including record-setting wildfires and storms in Europe and North America, and marks a critical juncture for international climate action.
For Nigel Brook (pictured), global resilience and climate change risk practice leader at Clyde & Co, the summit also represents a turning point for the insurance industry. But it’s one that requires it to embrace tremendous change.
“It is a major opportunity,” Brook told Insurance Business. “The insurance industry, of course, would have recognised this for some time. But it does require them to adjust their risk appetite.”
Insurance will play an increasingly important role as governments and private companies take more action to address climate change.
As novel technology is scaled up to de-carbonise hard-to-abate sectors, insurers will be called on to cover new projects in markets without a pre-existing risk assessment model, according to Clyde & Co.
Reinsurers must also do their part to de-risk projects and facilitate investment in new or emerging technologies, such as hydrogen and electric steel production.
“There’s been an underappreciated role of insurance, but I think it’s going to get more attention now,” said Brook. “There’s an imperative for these technologies to be scaled up, and if investors and lenders sit on the sidelines saying it’s just too risky to be on our appetite, it’ll slow down the transition.”
The good news is that more is known about the risks of renewables, such as solar and wind. Still, insurers and reinsurers must “learn best practice as they go along,” and, for some emerging technologies, they must take a leap of faith.
“Insurers used to go into areas where there are several years of data, so they can set their limits and premium, and structure their programs that reflect the loss history, but for some of these new technologies, there just isn’t much of that,” Brook said.
Brook also acknowledged that insurers have become more proactive in setting their own targets for the carbon transition, such as walking away from new oil and gas projects, or reducing their emissions.
Insurers who set ambitious climate goals are also more inclined to look favorably upon new climate technology, he noted.
“It will be challenging, but insurers must find a way to underwrite these projects in a way that doesn’t put too much of the capital at risk,” Brook continued.
“If you can take a long-term view and get involved in this early stage, you could become a leading player and become a magnet for this kind of insurance when it becomes mainstream.
“There will be a bumpy road. There will be nasty surprises along the way. But it’s not just doing the right thing by the planet, it could be good for long-term business to become a leading player.”
The mood around the upcoming talks is subdued, according to Brook. Shorter-term goals are on the table, with leaders expected to lay out targets for 2030 rather than 2050.
“Expectations are relatively low for this one,” he told Insurance Business.
One of the central discussions in this year’s COP revolves around a “loss and damage” fund to compensate low-income countries for the impacts of climate change.
Leaders at last year’s COP in Egypt agreed to establish the pot, but details on who will pay into it and who will have access to funds have yet to be decided. A preliminary agreement was reached earlier this month and will be up for approval at COP28.
I urge the #G20 to deliver an ambitious, credible & just outcome at #COP28:— António Guterres (@antonioguterres) November 22, 2023
Getting the loss & damage fund up-and-running.
Delivering all promised financial support.
Bringing clean power to all by 2030.
Phasing-out fossil fuels, with a timeframe aligned to the 1.5° limit.
The Clyde & Co leader also pointed to cynicism around the summit, especially with global demand for oil and coal remaining high, driven by the Russia-Ukraine conflict.
“One of the key things is to try to get [wealthy countries] to recognise that fossil fuels need to be phased out. ‘Phasing down’ or ‘phasing out’ are terms we’ve not yet seen in any readouts from a COP because of spirited resistance from fossil fuel exporting countries,” Brook said.
“There’s also some cynicism because the talks are being held in a petrol state and led by the head of the Abu Dhabi National Oil Company, who is also head of their renewables sector. But I suppose the optimistic view might be that he knows the optics are not good, so he will want to try to make this COP be seen as successful.
“And then recently, we’ve seen these two mega deals: the Exxon deal and the Chevron acquisition, multi-billion-dollar deals where that clear message is that businesses see a long-term future for oil, which obviously flies in the face of what people want to see from COP.”
What are your expectations for COP28? How do you think insurers should respond to the challenges of the carbon transition? Share your thoughts below.