How Insurers Can Capture Climate Opportunities

How Insurers Can Capture Climate Opportunities
May 21, 2024 10 mins

How Insurers Can Capture Climate Opportunities

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Climate change adaptation and the transition to net zero present huge premium growth opportunities for insurers. The key question is how to get started.

Key Takeaways
  1. Of the 80 transformative trends Aon has identified, around a quarter relate to environmental factors, including climate change adaptation and mitigation.
  2. Insurers can help individuals, businesses and governments navigate climate solutions by providing risk transfer solutions to accelerate financing for green technologies.
  3. Every environmental megatrend has an option to either mitigate, adapt or promote, depending on an insurer’s risk appetite and strategy.

The insurance industry sees both growth opportunities and risks in the world’s changing climate and the transition to a low or no-carbon future. It’s widely recognized that insurers have a crucial role to play in helping individuals, businesses and governments adapt to, and mitigate the impact of, climate change and the transition from brown to green energy.

Analysis from Aon’s Strategy and Technology Group (STG) has identified more than $20 billion in potential premium growth by 2030 related to environmental megatrends. These are powerful transformative trends that are shaping the future landscape and driving potential demand for insurance.

Of the 80 transformative trends identified by STG, around a quarter relate to environmental factors, including climate change adaptation and mitigation, the transition to green energy and biodiversity. Of the top 10, six were directly linked to climate adaptation or the transition to net zero.

Insurance for resilient infrastructure development, electrification, carbon capture, carbon storage and the decommissioning of carbon intensive assets combined could generate gross written premiums of between $8 billion and $25 billion. These transformative trends present immediate growth potential and can be addressed today — although carbon capture and storage would require some additional innovation or investment in capabilities.

Unlocking Energy Transition Investment

The transition from brown to green energy is attracting huge investment — from the expansion of renewables like solar and wind to emerging technologies like green hydrogen and carbon capture and storage. Annual clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion to reach net zero emissions by 2050.1

While the need to rapidly expand sustainable energy capacity is clear, investments do not always flow as smoothly and quickly as they could. For example, concerns for natural catastrophe exposures, proto-type technologies and political risks have held back investment in some solar and offshore wind projects. However, insurance can address a range of political, technical, credit and operational challenges that would otherwise deter investment or increase the costs of financing renewable projects.

Insurance in the renewable space has yet to fully meet its potential, in part due to uncertainties over catastrophe exposures and models. Aon STG has been working with insurers to assess market opportunities in the renewable space and attract much-needed capacity.

There is much more that could be done collectively to bring more insurers into this space and begin to fill the growing protection gap. Solar farms built in remote locations where there is data on damaging hail and wind perils is not widely available. If the market can collectively build more credible models, it will unlock significant capacity for potentially thousands of renewable projects.”

Helping Homeowners Adapt to Climate Extremes

While the renewable energy market has already attracted insurers’ attention and capital, there is also significant growth potential from helping individuals, businesses and governments build resilience and manage the risks of a more volatile and less predictable climate. However, when it comes to homogenous lines of business, such as homeowners insurance, the industry has yet to fully grapple with climate change.

Property natural catastrophe insurance remains the industry’s bread and butter. But natural catastrophe exposures and losses are on the rise due to a combination of changing weather perils and exposure drivers such as inflation, population shifts and the increase in insured values in catastrophe-exposed regions.

This is an area where the insurance industry can make a difference. Through experience, knowledge and tools, insurers can help society better understand risks and make informed decisions around investments in loss prevention and mitigation. This includes reducing exposure, while at the same time ensuring a sustainable flow of premium for the industry.

Some properties now struggle to afford insurance in areas prone to wildfires or other natural disasters. However, carriers can help homeowners better understand the risks and where to best invest in loss prevention and mitigation.

In 2023, Aon entered a partnership with the University of California Merced and UCLA to leverage the latest climate science to assess how environmental conditions may drive wildfire frequency and severity and look ahead to understand how it will change in the future given different emissions pathways. In addition to enhancing wildfire modelling, the collaboration will look at where and how best to invest in resiliency measures and develop long-term climate change strategies for physical wildfire risk.

Insurers can also find climate-related growth opportunities from sources and customers that are currently uninsured by the private sector. For example, insurers could write more flood insurance to complement the National Flood Insurance Program (NFIP), which offers limited coverage for homeowners and businesses. There are also opportunities for insurers to work more closely with lenders to create products that protect against mortgage default from natural catastrophes.

Solutions for New and Emerging Liabilities

Climate change and other environmental and social issues are creating new liabilities for companies and their directors’ and officers’ insurance (D&O) that will increasingly require insurance solutions. An increase in regulation across a range of environmental themes will increase liabilities for companies in the future, while requirements to assess, disclose and act on climate risks by governments and regulators will create demand for insurance.

Companies face a wide range of sustainability and climate-related regulations, including increased disclosure requirements, caps on greenhouse gas emissions and supply chain transparency. Climate change-related shareholder class actions and derivative claims actions against companies and D&Os are on the rise, while sustainability pledges made by organizations are likely to give rise to future greenwashing claims.

Manufacturers also face emerging liabilities from sustainability-related labelling claims such as battery storage systems, or products and materials that fail to perform in extreme temperatures or weather conditions. Manufacturers and industrial companies could additionally face future claims for the harmful health effects of global warming due to their products and activities. Meanwhile, utility companies in the U.S. have previously been sued for contributing to wildfires.

Similarly, organizations have a duty of care for employees and customers at times of extreme heat or cold. High levels of heat stress have more than doubled over the past 40 years,2 while “wet bulb” temperatures are also on the rise around the world. Once the wet bulb temperature — a recognized measure of humidity — exceeds 35 degrees Celsius, the human body can no longer cool itself. Higher incidences of extreme temperatures will have implications for workers compensation insurance and employee benefit solutions.

Mitigate, Adapt and Promote

Of all the transformative megatrends analyzed by STG, climate change and the net zero transition is perhaps the most complex and biggest challenge for insurance.

For each identified climate or transition megatrend, there is an option to either mitigate, adapt or promote, depending on an insurer’s risk appetite and strategy. Due to the overlapping nature of environmental opportunities and risks, some megatrends may require a combination of the three.

Insurers will need to adopt at least one for each transformative trend that affects their business or segment. Here are some examples:

  • Mitigate physical risks

    Insurers should use data analytics to gain deeper insights into exposures and de-risk the portfolio through changes to terms and conditions or the use of reinsurance protection.

  • Adapt to support more sustainable forms of manufacturing or food production

    This engagement could see insurers surface new needs as novel risks emerge from the new activities their policy holder is undertaking.

  • Actively promote IP insurance for green energy technology, sustainable construction materials or drought-resistant crop varieties

    By insuring renewable energy, carbon capture, carbon storage and intellectual property, the industry can help accelerate the innovation and investment needed to tackle climate change.

Understanding Climate Risks and Opportunities

Understanding climate-related megatrends and opportunities is particularly challenging due to the interconnected nature of the risks and drivers for opportunity. For example, climate change is affecting the frequency and intensity of some natural catastrophe perils, but urbanization, inflation, litigation costs, as well as regulation and public policy can all exacerbate loss costs for insurers and affect their ability to provide a sustainable product.

Energy insurers will want to understand the opportunities and risks presented by renewable energy. But they will also need to have a position on the decommissioning of existing clients’ carbon-based assets, as well as innovative new technologies like carbon capture and storage or green hydrogen.

More widely, regulatory or policy changes will create risks and opportunities. Geopolitical risks could also come into play, with trade disputes or conflicts affecting the supply of green technology and rare earth minerals.

While several insurers are investing in the tools and expertise to underwrite renewables, more insurers are needed to develop capabilities in this area. With more credible models and industry knowledge and expertise, companies will achieve a smooth transition of investment capital to renewables and other innovative technologies required to achieve net zero.

The industry is also missing out on opportunities to provide climate-related solutions to sectors that are currently largely uninsured. Financial institutions and public sector bodies have huge transition, physical and liability exposures related to climate change. Insurers can look beyond their traditional customer base and work with these sectors to assess risks and create new products.

Meeting the needs of customers is also part of the insurance industry’s wider role in mitigating the impact of climate change. Many insurers have net-zero goals and are committed to reducing the greenhouse gas emissions associated with their investment and underwriting portfolios. We owe it to our customers to provide products and solutions as they decarbonize, and not just step away from carbon intensive industries.

With the knowledge and experience of the risks that are coming, insurers will be well-positioned to guide clients through climate risk prevention and mitigation.

Aon’s Thought Leaders
  • Liz Henderson
    Global Head of Climate Risk Advisory
  • Dominic Probyn
    Director, Climate Risk Advisory
  • Wouter Bosschaart
    Director, Strategy and Technology Group

1 https://www.iea.org/reports/net-zero-by-2050
2 https://climate.nasa.gov/explore/ask-nasa-climate/3151/too-hot-to-handle-how-climate-change-may-make-some-places-too-hot-to-live/

This article first appeared in Aon's 2024 Climate and Catastrophe Insight.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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