With the next COP meeting fast approaching, the Lloyd’s Market Association (LMA) commissioned report, Underwriting the Transition, is a timely reminder of how important the insurance industry is in ensuring that the ambitious goals of the Paris Agreement in 2015 to achieve a low-carbon economy are met. The report is the first of its kind to examine the evolving challenges, risks and rewards posed by the transition and the implications for the insurance sector over the next 20 years in such a holistic and comprehensive way.
On the LMA’s behalf, KPMG has looked at the impact of low-carbon transition across eight economic sectors important for the Lloyd’s market, mapping out potential decarbonisation pathways. This is based upon KPMG’s extensive expertise in these sectors as well as interviews with Lloyd’s underwriters. The report details the potential abatement levers that could drive emissions reduction between a ‘business as usual’ scenario and a 1.5°C reduction in line with the Paris Agreement.
Paul Davenport, Finance & Risk Director at the LMA, said: “As the leading global marketplace for complex and specialty insurance, Lloyd’s is a centre of deep expertise, product innovation and capital. The 55 managing agents who are members of the LMA are already playing a pivotal role in supporting key sectors as they transition, but to maintain this leadership, they need clear insight into the strategic, operational, regulatory and financial risks that must be managed.”
Roger Jackson, KPMG’s Global Insurance ESG Lead who led the team doing the research, said: “Now, more than ever, insurance is needed to support the transition to a low-carbon economy. This report seeks to provide a common viewpoint across the transition sectors that are also key to Lloyd’s underwriters. In doing so, it provides deeper insights into the opportunities and risks from transition for underwriters, which supports the insurance recommendations in the recently published ‘Scaling Transition Finance’ report by the Transition Finance Market Review.”
A ’silent’ transition
The report highlights that transition is already happening around us. Businesses are already adapting to new types of transportation, moving towards renewable energy sources and using low-carbon materials in construction. It is no longer something in the future.
This ‘silent’ transition and the data/information challenges it poses, brings a risk of misalignment in terms of product and pricing if these risks are unknown or misunderstood. Insurers are undoubtedly already insuring the transition and so will benefit from a closer examination of how risks are changing, as well as, more importantly, the opportunities available to engage with insureds to become more relevant than ever.
Paul added: “The insurance industry, traditionally viewed through the lens of risk management and protection, is a critical partner in this transition. Without insurance, businesses will struggle to achieve their transition goals or build resilience against the impacts of a changing climate.”
Roger added: “It’s only by understanding companies’ transition pathways in more detail that insurers will really be able to assist, and in doing so realise the opportunities, as well as risks, of transition.”
Paul concluded: “There is clearly more work to be done in this complex and evolving area and it is something that the LMA and KPMG would like to address again in the future to monitor what shifts occur in government policies, regulation and in the portfolios and risk profiles of market participants.”
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