Are the industry players in emerging Asia equipped to contribute meaningfully in the race to zero? What are the challenges or impediments to more aggressive action, especially with the increasing frequency of severe climate-related disasters – windstorms, floods, wildfires, drought, extreme temperatures – occurring the world over?
Moderators:
Conor Donaldson, CEO, Global Asia Insurance Partnership
Karen Tan, Head Life & Health Products Asia, Managing Director, Swiss Re
Panel:
Henrik Naujoks, Partner & Head of APAC Financial Services Practice, Bain & Company
Steve Taylor, Head of Credit Solutions, Aon (Asia)
Audrey Walls, Head of Distribution, Customers and Growth, Zurich Resilience Solutions (Asia)
18th SIRC Plenary #2 – transcript
Opening Speech by Mark Ojeisekhoba, CEO, Reinsurance Swiss Re
Mark Ojeisekhoba: Clearly, net zero is just one component of the broader topic of sustainability, or ESG. For us as an industry, we have a significant role to play in trying to bring about the pledges that many companies around the world have made around net zero, and in three distinct ways.
1. In our own operations
For example, in Swiss Re, we've decided that we are going to reduce our carbon footprint by over 50% compared to pre-pandemic levels. That means we need to be much more thoughtful and deliberate about the actions we undertake. Things like the travels we do, the buildings we locate ourselves in, looking for greener buildings, and the source of energy for these buildings. And this contributes to the various pledges that each and every one of us makes.
2. As investors and asset managers
Swiss Re institute recently put out a publication which shows the amount of investment it would take for companies around the world to meet the net zero pledge. It is an astounding $273 billion. Those pledges were made as early as 2016, and if you take from then to 2021, only 3% of that investment have been made so far. There's 97% left to be made in order to meet the goal established by 2050. So that requires almost an annual investment of $9 trillion. The investments that were made in 2021 were just above $1 trillion. As investors and asset managers, we have a role to play in trying to make sure that we direct investments to the right industries, i.e. less carbon intensive industries, greener industries, industries that are trying to innovate be it in energy, materials or food. We have to make investments in the right places to ensure that we are able to move towards this goal.
3. As underwriters of liabilities
Almost no company in the world can operate without insurance. So we have significant leverage as an industry. We cannot say that we make commitments towards making the world greener, while continuing to support industries that we know are heavy and high in their carbon footprint. Of course, we don't make these changes overnight. We transition these things to allow companies to make the relevant adjustments. But it's important that we put our money where our mouth is, which means withdrawing transition capacity for carbon intensive industries, and into technologies and industries that would allow us to make the relevant transition, e.g. carbon capturing, green hydrogen, blue hydrogen.
From a macro level perspective, is there sufficient sense of urgency from the government and private sectors? Does geographic location or economic progress make any difference?
Henrik Naujoks: Fortunately, many stakeholders are putting a lot of pressure on businesses on their ESG practices. You have the government, where close to 200 nations have signed the Paris accord, consumers, investors, and even employees. In fact, 90% of Asia Pacific employees expect their employers to act sustainably and engage in this journey.
But if you think about whether the insurers, reinsurers and financial industry have reacted, then it's a more nuanced picture. When you look at the top 20 banks, 85% of them have their commitments to net zero until 2050. If you switch it to insurance, it's 35%, so only 7 out of 20 have made that pledge. If you translate this into numbers, you see that roughly $84 trillion or 35% of assets from the banks are captured by this commitment. For insurance premiums, it's $1 trillion or 14%. So the question is, why is the insurance industry behind? Despite the fact that the insurance industry has an important role to play in this. So we need to discuss where the industry should accelerate, and what's holding us back.
To your question on whether there are differences, I think we have to look even closer into each individual country. For example, Germany is simply financing the exit from coal, but we can't expect that from most of the Asian countries. So we need to ask, how should each individual country in the Asia Pacific react? Because nations are pledging for net zero, but putting it into action is the key challenge.
[Poll Question: In your organisation, what do you think is the level of priority and level of intent towards net zero?
Rankings: Low > Medium > High]
How are credit markets responding, and what have been your observations on the level of urgency?
Steve Taylor: Regarding the poll, from an Aon perspective, we have committed to net zero and I think we have an important role to play to help our clients across a few areas in accelerating this transition, i.e. enabling more capital, helping with physical resilience and managing climate liabilities.
But to your point on credits, and I'll bring in a bit of political risk, we need the largest allocation of capital arguably ever, to reduce global warming and hit net zero. Concurrently, we need to balance that with countries' commitments to energy and economic security while attaining global collaboration to hit these goals. It's not lip service, but it is super tough. From a political risk perspective, the chances of hitting net zero have dimmed over the last 12 months. We've seen several conflicts e.g. Russia vs Ukraine, sanctions on China, etc. China and the US contribute about 40% of global emissions, and we need collaboration to be able to hit net zero. So how do we balance that see-saw of sanctions on one hand and collaboration on the other. Additionally, we are in this changing world order between China and the US in this battle for supremacy, so it's very complex.
Anything surprising from the poll?
Henrik Naujoks: The results are striking and it's a very interesting reflection. If we were to do the same for the banking industry, it would turn out differently. So it's a good spotlight on the state of the industry regarding ESG.
Conor Donaldson: One takeaway is, we need to be thinking, is there something that the insurance industry needs to be doing to be able to articulate the price of climate risk. And this is where I feel we have to lean on the insurance and reinsurance industry.
What can you share about the industry's view on net zero across Asia? Is there a differentiation between the global and regional offices, and between the Life & Health side versus the Property & Casualty side?
Audrey Walls: At an individual level, there certainly is commitment and awareness on the importance of this. I can't speak for everyone's journey to net zero, but I can talk about Zurich's journey.
At Zurich, our goal is for net zero to be in operation by 2030. So far, we've had a 70% reduction in travel emissions in 2022. We are working towards 100% renewable energy in all our locations by the end of the year, and we will use renewable credits if needed. 100% electric or hybrid vehicles in our fleet by 2025, and global sustainability programmes for our premises. We perform detailed climate scenario analysis on our own underwriting and investment management portfolios and we perform physical risk analysis leveraging our own climate change resilience solutions. We have a continued focus on the impact of our own and our customers' businesses on ecosystems and biodiversity. We are strong advocates for frameworks such as TCFD (Task Force on Climate-related Financial Disclosures) and SBTI (Science Based Targets Initiative). We support communities by supporting initiatives like the Zurich Flood Resilience Alliance. And at Zurich Resilience Solutions, we believe that to build resilience, we need to look beyond risk transfer and capacity allocation. We wish to build resilience through accessing the talent and technology that we have, in order to look at risk from physical, all the way to transitional, and see this transition as an opportunity to do a deep dive into risk management. And an important component of that is getting organised with the management in order to have transparency and visibility. So to Zurich, this is certainly not lip service.
Karen Tan: To sum up, the insurance sector is not that straightforward. First, you need measurement. What gets measured gets done. The NZIA (Net Zero Insurance Alliance) is working closely with the PCAF (Partnership for Carbon Accounting Financials) to figure out how we can measure the carbon emissions coming from underwriting activities. This is a concrete action of getting the measurements there before we talk about targets etc. Then there's also the SBTI, TCFD and the ISSB (International Sustainability Standards Board) who are working very hard to determine what the consistent set of disclosures can be. And when these are in place, actions will occur more naturally.
In terms of implementation, recognising where each local market, each region and player is, in their journey is critical, because we need to support this transition. We need to help and enable our customers and clients to move towards this net zero world, through insurance solutions and advisory.
As an observer, one of the challenges with a lot of insurance groups is that it is sometimes perceived as a compliance exercise. What role do reinsurance play in terms of helping to elevate the conversation away from a compliance exercise and to one where it's about meaningful commitments?
Karen Tan: Ultimately, it is about communication, explaining, and understanding. We need to understand where the drive is coming from and what we are trying to achieve, and this conversion needs to happen both ways. This way, the implementation isn't top-down, but rather a discussion-based roadmap and journey. And I feel that's the best way to create change.
Audrey Walls: Despite all the long-term goal settings, in terms of the insurance community, we need to look at the impacts of climate change on near-term portfolios. Climate change is a systemic exposure with many different systemic flavours. So understanding the impacts of e.g. a flood, we need to look at its effects not only to properties but also at business interruptions, employers' liabilities, workers' compense, etc. We need to build resilience through our risk management and risk engineering expertise, because we, as experts of the physics of risks, have a role to play in this.
What do you think insurers and reinsurers need to do more?
Henrik Naujoks: Firstly, the insurance and reinsurance industry are impacting and influencing the behaviour of the clients. So we need to look at where we are actually offering solutions for them. The industry has to think broader than risk transfer, there are a lot more services that the industry can provide to clients that other players might not be able to provide. And this links to my point on value creation opportunities. We need to think about how we can get the business leaders to embrace it in their daily behaviour and decisions. And for this to happen, they must see the value creation opportunities, in things like new solutions and services that we can bring forward.
Second, would be our own behaviour, to cut expenses on some things and be more thoughtful of our decisions and actions.
And last, we need to start engaging the whole EXCO, the business leaders, and internal functions to come up with a comprehensive strategy to transition to net zero. Where everyone be it in underwriting, services, distribution, or internal operations, all play a big role.
Just like how digitalisation was all very new 20 years back, now if strategies don't have a digital element to it, it's simply not a good strategy. So hopefully, the same will come through with ESG, where it's as important as customers are to a business.
Audrey Walls: Whilst we may be lagging behind the banking world, we are very familiar with ERM. So going back to your point about embedding the ESG agenda into everything we do and into strategic thinking, we have a very good opportunity in insurance to combine ESG with ERM because we already have those frameworks set in our organisations.
Henrik Naujoks: Yes, it's not just about following the banks, the insurance industry has assets that are unique to us, where they can play a unique role in this transition. Think about all the data of physical risks we have, which the banks don't. We have these data and it's a hidden asset of this industry. And this makes us a very important player in this transition to net zero.
Give me a concrete example of what solutions exist in the credit market.
Steve Taylor: I think people need to feel the importance of this for themselves, because when we think of 2030 or 2050, it feels so far away. We can start by thinking about clients and what they need from an insurer and reinsurer perspective. Be it help with transparency and reporting, enabling capital, or insuring physical assets, we can think about the kind of solutions we can create around those. So the uninsured gaps, which are also solution gaps, are filled.
In terms of concrete examples in the credit world, on the capital enabling point we work with lenders. So we help manage their portfolios, credit concentration, capital optimization, essentially helping them lend more to their clients, who can then use that capital to invest in things like new technologies. So enabling capital is one example where we can do more to support.
What are other examples of what we can do more?
Audrey Walls: Like Henrik mentioned, we have rich access to data, and how we organise that is very important. If we look at companies who have commanded that data landscape e.g. Amazon, Meta, Google, they have disrupted so many markets with digitalisation. We now have a global social media platform, a global ecommerce platform. I believe that we can have a global risk management platform that provides crucial services. We as a community can disrupt ourselves right now, because if not, then there are Insurtechs that are going to jump in and do that for us.
[Poll Question: What are your impediments and challenges in trying to get a movement towards net zero to work?
Responses: Awareness, Mindset, Complacency, Consciousness, Management, Commitment, Budget, Lack of specialist, Innovation, Knowledge, Short term vision]
What were the challenges you've seen that insurance and reinsurance companies came to you about? And what is preventing or making it difficult for us to take action as an industry?
Conor Donaldson: This is a difficult regulatory problem for a number of reasons. One, taxonomy is a big challenge. For example, in Vancouver, we have lots of mountains and rivers and therefore a lot of hydroelectric power. From the locals' perspective, it's the greenest form of electric power. But to others, it's the worst form of environmental degradation because you're flooding arable land, killing trees and harming biodiversity. So simple things like having agreed definitions around what it means when we talk about climate risk, makes the conversation at the regulatory level very difficult.
Two, we spend a lot of time talking about climate risk from an asset perspective. We always talk about transition risks and physical risks etc, as it relates to assets. But we haven't spent as much time talking about climate risks as it pertains to liabilities. We need a whole of balance sheet approach and there hasn't been a concerted effort to enable a global dialogue around what is a whole of balance sheet approach as it pertains to insurance. If we want to get climate risk right from an insurance perspective, we need to have that conversation around insurer liabilities. From a regulatory perspective, I wanted to see a conversation where regulators and regulated entities could have a constructive conversation about how we can work cooperatively together to understand the issues and the complexity of it, and develop a framework that is sufficiently risk-sensitive to capture climate risk, but at the same time enabling the insurance sector to provide that critical role that it has to play in terms of supporting the transition to a net zero economy. This is difficult, but it's imperative that we recognise the challenge of it.
What can regulators and industry bodies do more to help this movement?
Conor Donaldson: First, we need a greater degree of ‘closeness' across how we define climate risk, so having a shared taxonomy.
Second, with regards to the poll of ‘Low' being ranked the highest in terms of awareness and intent on dealing with climate risk, I would see that as both a challenge and an opportunity. The challenge is that it's clear the industry isn't thinking about climate risk in a methodical way, otherwise it would be ranked higher in terms of priority. The opportunity here is to think about your core prudential and conduct objectives and say, how do we make sure that the industry continues to work for everybody who is a stakeholder in the insurance business. We need to think about the long-term sustainability of this industry, and that's going to come from being able to take on difficult challenges like this, and define the challenges and opportunities. And the regulators play a crucial role in helping to draw awareness to this topic. We then need to translate that into regulatory objectives and make sure that that's embedded within the entities that we regulate, otherwise, the sustainability of the insurance business comes into question in the long-term.
Karen Tan: In our estimations, we believe that just the renewable energy sector has about $60 billion worth of premiums to be had until 2035. Just thinking about the business opportunities and the money that we're leaving on the table, we really need to work on the underwriting elements as we, as risk managers for the world, can actually help influence how things are being done. For example, bringing out the standards of practice that people building new solar plants and wind farms abide by, so that the risks linked to those projects and infrastructure are well mitigated.
Next, operational procedures that should be put in place so that in the future, these projects can be run in an operationally sound way. These are the things that we as risk managers for the world should and can bring forward, so that we can help the transition be done in a way that is sustainable, and those projects actually turn out the energy throughput that we expect, going into the future. Because these are big capital investments that are being made right now.
Conor Donaldson: One of the points coming into the conversation is the capabilities and capacity of the industry. From a capacity perspective, we're seeing that increasingly, risk is being defined as uninsurable. There are ways that we can approach difficult to insure risks, but that's going to require us to build that foundational knowledge so that we can drive innovation and new solutions. And it's not going to be pure private sector solutions, there's a need for public-private collaboration.
How is environmental risk affecting credit markets? Is there enough capacity?
Steve Taylor: One of the problems we're seeing is that there's not enough urgency yet to create new solutions to tackle this problem. Currently, we're seeing an increased use of credit insurance to support projects for renewable infrastructure, and enabling banks to lend more into those projects. A hidden gem which I think we will see much more is the data the credit insurers hold on companies, where they financially assess them currently on credit ratings 1-10. Now I think that will involve into ESG ratings as well, and that can have a powerful impact on the industry on things like helping supply chains and their assessments. So the urgency is not there, but it's accelerating.
So you mentioned the ESG scores, so Henrik, is that what you meant when you mentioned about the hidden assets?
Henrik Naujoks: It's part of the hidden assets, and if you look at the value creation opportunities, I'm very convinced that there is a unique positioning of the insurance industry to capitalise on that instead of leaving it to the banks or other players in this space.
Conor Donaldson: In a conversation about blended finance, one thing that struck me was that it is a conversation that is predominantly dominated by other actors in the financial system, so a lot more activity from the asset managers and the banks. Another thing that struck me was that it seems that there is opportunity not only for insurers as investors, but also insurers as providing services to facilitate these blended finance solutions. To Steve, are you seeing more capacity on the part of the insurance industry in trying to support these types of innovative financing solutions?
Steve Taylor: Definitely, whether it's the traditional insurance industry or the alternative capital market space, we're seeing more interest in providing solutions to enable that unlocking of capital to mitigate non-payment and credit political risks. But given the size of the challenge, it's not enough, and this is where as industry we need to do better. To provide more capacity and look more at uninsured risks that you mentioned.
So Karen, just to bring your perspective in, as somebody who works so closely in the insurance sector, as a reinsurer, what's your view on risk appetite and capacity?
Karen Tan: This is a partnership and an opportunity to help reduce and mitigate the risk upfront. This is our opportunity to be good underwriters, good risk engineers, and work with the projects that require financing to bring the transition through and help bring in the features that will mitigate risk. We need to be at the table early, be responsible stewards, be there as part of the entire financing ecosystem, and that includes banks, the blended finance world and other players, in order to fill the gap that is there. And if it's not done now, there is a risk that the risk becomes uninsurable.
Can each speaker bring about the point around capabilities building, and wrap that into your concluding points?
Audrey Walls: We need to look beyond risk transfer. There's so much innovation out there in the renewable space and we have a role that goes deeper than just pure pricing, and that is allowing these innovations to become commercially viable. We can do that by deploying the information, the technology, expertise, that we have in order to propel that forward.
Steve Taylor: Insurance can unlock capital, but there's not enough awareness of how that can be done. There's the intangible asset finance which can help new tech companies, and things like carbon credits and insuring political risks around carbon credits. So a lot more can be done in unlocking capital.
Henrik Naujoks: First, this is an opportunity and not a burden for the industry.
Second, commitments and targets are good, but they need to be combined with your company growth strategies.
And third, we need foundational capabilities in our organisations, and there's a lot to build up on in this fastly evolving space. It's not just about data analytics capabilities, it's about change management and how we embed sustainability in our culture. We need to increase the overall knowledge level of all employees so that like digitalisation, it becomes an integral part of everyday life.
Conor Donaldson: So one, we need to do a better job at putting a price on climate risk. It's not thinking about it from a perspective of how we can make sure that we protect ourselves as an industry, from insuring the uninsurable. It's about doing the difficult work required to put a price on climate risk, and develop innovative solutions that allow us to live in an environment where climate risk is more of a reality.
Two, we need to do more to recognise that we have the best position, out of anybody in this whole conversation, to make a meaningful contribution. We can do a better job of leading the conversations that need to take place around how we manage the transition.
And last, capability building is so critically important. We need to make sure that we're drawing in the talent necessary to make the industry sustainable in the long run and have the human capabilities within the organisation to be able to address these challenges. And this is also in the regulators. The industry has the strongest value alignment with young people today to say this industry gives you the opportunity to do work that closely aligns to values you hold dear. And this has been reflected in the last few years where there is a greater awareness of ESG, and an appreciation by the younger generations of finding meaning in life, and not just a job that pays well. It's about values alignment and the insurance industry offers that. So we need to be able to say come, work, understand how you can apply these things.
Karen Tan: To reiterate Moses's points earlier, insurers and reinsurers have three roles to play. The first is that we are our own operators. We can manage how much emissions we put out through the energy sources we use, and things that are within our control.
Two, as investors of big amounts of funds, we have the ability to move how these are being invested.
Three, as underwriters and risk managers, we have so much we can do to influence how things are being set up now, for future transitions. Such that they are risk managed, they can be insured, and are priced right. And this is important to ensure the sustainability of not just the environment and the economy, but also ourselves as an industry.
Finally, it is important to see what we are trying to do now with students in their tertiary education. We can combine the different faculties, it's not just the finance and insurance folks, it's also people from natural sciences, engineering and geography. We have the opportunity to get a talent pool who are interested in this topic and train them up to be talents of the future, so that we bridge that awareness and knowledge gap.
