Zurich did not mention antitrust concerns, but stated that it wanted to focus its resources on supporting customers with their transitions. These exits bring into focus the legal and competitive obstacles insurers face in coordinating their response to decarbonization, which could impede insurers’ ability to manage risk related to the carbon intensity of their underwriting portfolios.
Weakening of the alliance is credit negative for the P&C (re)insurance sector as a whole because it will result in a less consistent and transparent approach to decarbonizing underwriting portfolios and hamper the ability of creditors and other stakeholders to understand the changes to risk appetite of individual insurers. While it is the case that insurers will continue to work together on methodologies and tools for measuring emissions, a process that already takes place outside of the alliance, the NZIA has been key in driving transparency and consistency of targets and timelines.
However, the credit implications for individual (re)insurers are mixed, and smaller insurers that have fewer resources to devote to complex net zero plans would likely be more impacted by a weaker alliance and less opportunity for collaboration. The very large insurers, such as Munich Re and Zurich, will continue pursuing robust and transparent decarbonization plans outside of the alliance, while the reduction in legal risk is on balance credit positive.
Notwithstanding an individual (re)insurer's capability to pursue decarbonization outside of the alliance, all (re)insurers' ability to meet their net zero goals depends in part on the actions of clients and policyholders. Therefore, to the extent that weakening of the alliance reduces the momentum of decarbonization across the broader insurance ecosystem, it will also impact the success of even the largest (re)insurers' decarbonization plans.
Insurers with US P&C business most exposed to antitrust risk
Antitrust risks are heightened for the small number of NZIA members, such as Munich Re and Zurich, that have material P&C (re)insurance operations in the US, but are of less concern outside the US, where authorities in some regions are actively working on adapting antitrust measures to accommodate competitor collaboration on sustainability topics. Such measures could reduce the risk of many other insurers, which do not have significant US P&C businesses, exiting the alliance because of antitrust concerns.
However, the exit of large founding members risks eroding confidence in the alliance, which could precipitate further departures, even where US antitrust risks are not a material factor. Additionally, legal risks extend beyond antitrust considerations, and include potential for other litigation related to published decarbonization targets and attainment thereof.
Antitrust risks arise from the potential for alliance members to be accused of engaging in collaborative behavior that can be construed as anticompetitive, including price fixing, market allocation or other unreasonable restraint of trade. For example, a group of insurers coordinating to deny insurance coverage to companies in certain carbon intensive sectors could be deemed anticompetitive and in violation of antitrust laws because it could lead to higher insurance prices for these companies as a result of restricted competition for their business.
Coordination via the NZIA is credit positive for insurers
In January, on the NZIA’s publication of its first target-setting protocol, we wrote that introduction of the protocol was credit positive because it will help (re)insurers manage their underwriting exposure to carbon transition risk. Both Zurich and Munich Re will continue pursuing their net zero plans outside of the alliance, and significant work has already been done within the alliance and partner organizations to set up the frameworks to support the reduction of insured emissions. For example, measurement and tracking of Insurance Associated Emissions is one of the key pillars within the alliance’s framework – these are measured according to the Partnership for Carbon Accounting Financials (PCAF) Global GHG Accounting and Reporting Standard for the Insurance Industry, which provides guidance for insurers regardless of whether or not they are part of the NZIA.
However, the PCAF standards, and indeed the NZIA’s own protocol, do not yet cover all lines of insurance, with some key areas still under development. Diminished collaboration among insurers will impede progress in implementing methodologies and tools for measuring and tracking insured emissions, such as the PCAF standards, which are complex and benefit from harmonization across the sector.
Munich Re’s exit from the alliance, while at the same time affirming its commitment to its net zero objectives, highlights how antitrust risk arises from collaboration between competitors, not individual actions. Interestingly, Munich Re and Zurich both remain members of the Net Zero Asset Owner Alliance (NZAOA), the alliance focused on reducing emissions from insurers’ investment portfolios.
While the NZAOA entails collaboration between members, insurers’ ability to have a material impact on market competition through their investment portfolios is more limited than on the underwriting side, and therefore less exposed to antitrust risk. In addition, steering an investment portfolio to net zero is less complex and benefits less from coordination among competitors than is the case for underwriting portfolios.
In response to rising concern around antitrust risk, the NZIA was careful in its first target-setting protocol to emphasize the voluntary nature of the protocol and the fact that it will not instruct or recommend members to adopt specific measures, reach agreements on target setting measures or exchange competitively sensitive information. Despite this, there remains significant uncertainty around the extent to which insurers are allowed to collaborate on sustainability matters. Members’ decisions on whether or not to remain part of the alliance will be informed by their assessment of the legal risk associated with alliance membership compared to the risks of embarking on decarbonization on their own.
Approach to antitrust laws in the context of environmental coordination varies by region
Aware of the conflict between national decarbonization objectives and antitrust laws, authorities in some regions are actively developing guidance to facilitate firms’ collaboration on environmental matters without falling afoul of competition and antitrust laws.
For example, in February 2023, the UK’s Competition and Markets Authority published draft guidance to help businesses coordinate on the environment, which is expected to give firms greater certainty about when agreements addressing climate change will be exempt from competition law. Similarly, the European Commission published draft horizontal cooperation guidelines addressing sustainability agreements among competitors, while some National Competition Authorities within the EU, including those from Greece, Austria, and the Netherlands have also been active in developing competition law guidance for sustainability agreements.
The key risk stems from insurers’ business in the US, where there do not seem to have been efforts to provide safe harbor guidance on collaboration for environmental objectives, and the topic is more politically and socially contentious. Although there has not been widely publicized action on insurers to date, in October 2022, the Attorneys General of 19 US states launched an investigation into six US banks that are members of the Net-Zero Banking Alliance, alleging that the alliance “ … is a massive worldwide agreement by major banking institutions, overseen by the UN, to starve companies engaged in fossil fuel-related activities of credit on national and international markets.”
More recently, on 3 April 2023, a group of Republican state Attorneys General announced the publication of an open letter to over 50 of the largest asset managers in the US, which includes a statement that many asset managers have made commitments that cast doubt on their compliance with antitrust laws. The same letter also mentions insurers, and states: “Several insurers also face climate proposals that push for unlawful alterations of underwriting activities in order to achieve the ESG goal of aligning insurance underwriting with net zero by 2050,” which highlights the intensifying focus on insurers’ net zero commitments.
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