FIT launches transition guidance for underwriters

Underwriters are better able to plan for net zero thanks to guidance unveiled today at Cop29 by the UN Forum for Insurance Transition to Net Zero (FIT).

FIT is a UN Environment Programme (UNEP) initiative that focuses on accelerating voluntary climate action by the insurance industry. The FIT’s four initial priorities are: net-zero insurance metrics and targets; net-zero transition plans; to engage with the real economy; and to develop insurance solutions and taxonomies.

The paper Closing the gap: The emerging global agenda of transition plans and the need for insurance specific guidance is the first of three deliverables of the FIT transition plan project.

It was unveiled by Butch Bacani, UNEP’s head of insurance and FIT chair, at the climate talks in Baku, during an event that also presented the Fidelidade Impact Center for Climate Change.

In an interview with Insurance Day ahead of his departure for Azerbaijan, Bacani says UNEP plans to produce the remaining two editions of the guidance next year. This push reflects the urgency of the matter, he stresses.

“We’re filling a void to turn ambition into action. You can set a strategy and you can set targets, but ultimately you need to have an action plan and that should get embodied in a transition plan,” he says.

Bacani describes the two main elements of the guidance.

“The report closes a major gap because, when you look at the landscape of transition plans, frameworks and guidance, you find guidance specific to underwriting portfolios does not exist,” he says.

“The second thing we’re doing that hasn’t been done before is completing a project linking insurance underwriting portfolios with investment portfolios, so there is a total balance sheet approach to transition plans by insurance companies at the organisational, company-wide level.”

These two elements will ensure there is “cognitive consonance” for insurers, he adds, since their transition plans should cover both sides of the balance sheet.

Three key points

The guidance homes in on the three key points re/insurers should bear in mind when developing a transition plan that reflects the characteristics of their sector.

As with asset classes in investment, there must be “sophistication” across lines of insurance business. Recognising not every insurer writes global business nor do they each offer all products lines, Bacani says: “It’s important we articulate that sophistication because a lot of the guidance on the transition to net zero is either generic corporate guidance or financial institution guidance that does not highlight the peculiarities of the insurance business.”

“By addressing climate and related sustainability issues in your transition plan, you are also inherently communicating how you are addressing them in your core business, because transition plans are not just there to be developed, they’re also there to be disclosed”
_{Butch Bacani
UN Environmental Programme}

The second point is the insurance value chain, meaning the levers insurers can pull to support a just transition to a resilient net-zero economy. That could be embedding net zero and climate adaptation into risk management, Bacani suggests.

To do this, every insurer needs to be able to answer the following questions, he continues.

“What is your underwriting policy and criteria, particularly across industry sectors and across activities? Are you engaging with your clients on these issues, both corporate and retail clients? What are you doing in terms of insurance product and service innovation to support the transition to new technologies and the new risks these present, through to the full life cycle of insurance via claims management? That’s where we’re also articulating that you can also reduce emissions, pollution and biodiversity loss through sustainable claims management. And how are you advocating for change in public policy?”

In the context of the UN climate talks, advocacy concerns nationally determined contributions (NDCs) or national climate action plans. “It means matching what you can do within the private sector to the vision and urgent needs of governments to influence and drive climate action,” Bacani says.

The third element articulated in the guidance is the importance of a strong climate narrative, where the overarching long-term goal is net-zero global emissions by 2050.

That goal requires resilience and adaptation to the physical impacts of climate change, with plenty of examples now experienced and witnessed across the globe. In addition, re/insurers need to understand the groups that will be affected by their transition plans, such as workers, communities, supply chains and consumers.

Credible plan

The guide also helps re/insurers “wire in” interconnected and climate-related sustainability issues, particularly nature and biodiversity loss and pollution, Bacani says.

He continues: “Yes, there are global goals on nature and global goals on pollution, be it on plastics and chemicals, but what we’re also trying to say here is, by addressing nature loss and pollution, you’re also helping to build resilience to climate change and helping to reduce emissions. These are important elements that should be ultimately integrated into a transition plan.”

It is important to bear in mind, he adds, there are different motivations for and reasons why a transition plan is important. One is that many companies have made net-zero commitments and, to show credibility, they need to explain how they are going to achieve them, which requires a credible transition plan.

This is under pressure sometimes from policy and regulation. For example, the EU’s Corporate Sustainability Reporting Directive mandates corporate transition plans and is designed to incentivise market discipline, Bacani says, so investors have a better idea of the climate risk profile of their investments.

Another influence comes from so-called prudential transition plans, which can be used in financial supervision and macro- and micro-prudential monitoring to overcome some of the challenges inherent to assessing climate-related financial risks. Bacani points out these plans are important where the risk of misalignment with net-zero targets could have an impact on financial stability and the safety and soundness of financial institutions, including insurance companies.

Whatever the external influence on transition plans, he stresses, everything boils down to an overarching company strategy that could be captured in a single transition plan to address risks and opportunities and also contribute to economic, social and environmental sustainability. This is, in short, the concept of double materiality – a company’s impact on the environment and society, as well as its financial performance.

Insurance and investment

Difficulty understanding the difference between investment activities and underwriting activities stems from a “misconception everything is homogeneous” in finance, as well as in insurance.

“Insurance is a very different part of financial services from investment, but an insurance company is actually a mix of these two professions,” Bacani says.

“The value chain for insurers is different. You have insured clients and you have brokers, insurers and reinsurers, where you have a system that spreads risks. You are there to manage risk and ultimately to pay losses should disasters and disease happen. And so, there’s also a concept of solvency.”

As an example, he contrasts marine insurance with property insurance. “Marine is a long-tail class of business, where you’re underwriting vessels and also the third-party liability of vessels. That’s very different from underwriting a house,” he says.

Moreover, life and health insurance – “where you’re talking about mortality, morbidity, longevity and hospitalisation” – is a very different business from non-life insurance, he says.

The plethora of distinctions within the insurance business thus means its transition planning need to be sophisticated, he adds.

Bacani highlights how the value chain in an investment is different from in insurance. “You have asset owners, investment managers and investment consultants. In terms of asset classes, you have public equity and private equity, which are different from fixed income. Because of the different ways these industries operate, you have to treat them differently,” he says.

The levers on investment are also different in insurance. One example Bacani gives is how responsible investment has been described through active ownership; that means how to engage with corporate clients in a way that stewards responsible and sustainable behaviour. It is also possible to engage with corporate and retail clients in insurance, but the way that will manifest in insurance is different from investment, he adds.

Institutional investment can be viewed as “arm’s-length investing”, but insurance clients are close to insurance companies, either directly or via brokers.

Bacani says: “The way you can influence corporate clients could be very different in insurance because, most of the time, you may have to go through an insurance broker. When it comes to personal lines clients, like homeowners’, that is also very different for engagement. That is the sophistication we need to drive action. Having generic guidance that could apply across companies and institutions is helpful, but to really drive change in core insurance business, there must be greater sophistication and that is what we are trying to achieve.”

Communicating ESG

On how companies can communicate their environmental, social and governance (ESG) strategies, Bacani directs them to UNEP’s Principles for Sustainable Insurance (PSI), which he says are “based on the spheres of influence of an insurance company”.

The four PSIs are: to embed in decision-making ESG issues relevant to the insurance business; work together with clients and business partners to raise awareness of ESG issues, manage risk and develop solutions; work together with governments, regulators and other key stakeholders to promote widespread action across society on ESG issues; and demonstrate accountability and transparency by regularly disclosing publicly progress in implementing the PSIs.

Since the PSIs were launched in 2012, there has been a “step-change in the narrative”, Bacani says. “Previously, sustainability issues were relegated largely to a philanthropic bucket or a corporate social responsibility bucket, but now, and you can see it in the new global guidance [of the FIT], we’re talking about core business activities, like risk management, underwriting and claims,” he says.

“You can’t be more central to insurance than that and this is why the whole purpose of the guide is zooming in on the very heart of insurance activities. By addressing climate and related sustainability issues in your transition plan, you are also inherently communicating how you are addressing them in your core business, because transition plans are not just there to be developed, they’re also there to be disclosed,” he adds.

FIT supporters

The guidance in all three reports is voluntary. Bacani says: “We believe an indicator of the success of the guidance will be insurers and other stakeholders, including insurance regulators and supervisors, are able to build on this work or use it in their own transition plans they will develop and also to inform standards and regulations on transition plans that would apply to insurance companies.”

Part of the consultation in producing this report was not limited to insurance market participants, insurance regulators and civil society within the FIT community, he stresses. “We also reached out to a wide community of external key stakeholders, such as the Transition Plan Taskforce in the UK and the European Financial Reporting Advisory Group in the EU,” he adds.

UNEP has also announced a new category within FIT, called FIT supporters, which includes market bodies, such as insurance associations. The first of these is the Brazilian Insurance Confederation. “That’s very timely, of course, because Brazil will host Cop30 in Belém next year,” Bacani says.

As a multi-stakeholder forum, there could be an agenda for companies in the real economy to join FIT, which currently involves insurers, regulators, academia, civil society and other stakeholders. “The door is open,” Bacani says. “We first had to get the structure right, which was completed in April this year, and the second priority was to deliver an impactful product to accelerate climate action, which is the guidance we have just published.”

The guidance will enable any company in the real economy to understand how insurers are transitioning their business model, which can in turn support their own transition plan.

Bacani concludes: “The real economy is currently high-carbon, so there’s an important conversation that has to happen with financial institutions such as insurance companies that underpin the real economy and how the transition to net zero could be catalysed.”