{"id":1965,"date":"2025-02-20T12:35:09","date_gmt":"2025-02-20T17:35:09","guid":{"rendered":"https:\/\/blogs.edf.org\/markets\/?p=1965"},"modified":"2025-02-20T12:35:44","modified_gmt":"2025-02-20T17:35:44","slug":"insuring-the-transition-underwriting-as-a-tool-on-climate","status":"publish","type":"post","link":"https:\/\/blogs.edf.org\/markets\/2025\/02\/20\/insuring-the-transition-underwriting-as-a-tool-on-climate\/","title":{"rendered":"Insuring the transition: Underwriting as a tool on climate"},"content":{"rendered":"

This blog was authored by Andrew Howell<\/a><\/span><\/i>, Senior Director of Sustainable Finance at EDF.<\/span><\/i>\u00a0<\/span><\/p>\n

This is the fourth blog in a <\/span><\/i>multi-part series<\/span><\/i><\/a> on how insurers can support decarbonization and the energy transition.<\/span><\/i><\/p>\n

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More than any other, the property and casualty insurance industry sits on the front lines of climate risk. Global economic losses from natural disasters in 2023 are estimated at <\/span>$280 billion<\/span><\/a>, with insured losses at $110 billion. So far in 2025, the economics of insurance looks set for what may be an even more challenging year, as the <\/span>effects<\/span><\/a> of a warming planet continue to be felt.\u00a0<\/span>\u00a0<\/span><\/p>\n

But insurers are not only involved after climate-change-fueled disasters hit as funders of the recovery. Amidst the mounting impacts from extreme weather, the insurance sector is also emerging as a potentially important player in supporting and accelerating a transition to a lower-emissions future. In <\/span>a series of blogs<\/span><\/a> on insurance and the energy transition, EDF has discussed various ways in which the insurance industry can respond to the challenge of climate change. These include requiring <\/span>climate-friendly rebuilding,<\/span><\/a> and adapting insurance tools to <\/span>accelerate technological innovation<\/span><\/a>. To this can be added a third lever: using the underwriting process to accelerate customers\u2019 energy transition.\u00a0\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

How to bring down insured emissions<\/span><\/b>\u00a0<\/span><\/p>\n

In recent years, some insurers have begun to integrate decarbonization into corporate strategy. First movers have set targets to reduce their own (scope 1) emissions or restricted the underwriting of certain high-emitting sectors such as coal mining, coal-fired power generation or oil sands.\u00a0<\/span>\u00a0<\/span><\/p>\n

While such exclusions of coverage can signal an insurer\u2019s commitment to climate goals, there are limitations to these approaches to decarbonizing the underlying economy. Real world emissions may not fall if customers are able to get coverage from another provider and <\/span>continue business as before<\/span><\/a>.\u00a0<\/span>\u00a0<\/span><\/p>\n

A more potent tool available to insurers is to encourage decarbonization through the underwriting process. Addressing climate in underwriting for emissions-intensive industrial customers can be a powerful tool through which insurers can address climate risk \u2014 and doing so may be in the interest of the insurance sector as a whole.\u00a0<\/span><\/p>\n

Engaging customers means working with them to encourage steps towards decarbonization. This is not necessarily easy to do: engaging on climate requires that insurers get to know their customers in new ways and ask them to do new things.\u00a0<\/span>\u00a0<\/span><\/p>\n

The underwriting opportunity<\/span><\/b>\u00a0<\/span><\/p>\n

Underwriting is the process by which an insurance company assesses the risk associated with an asset and determines terms, conditions, and premiums appropriate to ensuring it. It is an opportunity for an insurer to request information, and in some cases require a customer to take certain actions to reduce risk. For example, when offering property insurance, an insurer might require customers to install smoke detectors; when offering liability insurance, it might require workplace safety training \u2013 or reward it with lower premiums.\u00a0<\/span>\u00a0<\/span><\/p>\n

As part of the underwriting process, why not ask customers to take prudent action to reduce emissions in alignment with low-carbon transition pathways? Increasingly, this is something an insurer can, and should, ask of its clients. These asks can take a range of forms, from the high level (<\/span>What are the major climate-related transition risks faced by your business, and what are you doing to manage them?)<\/span><\/i> to more detailed, sector-specific questions. To these questions can be added other sustainability-related queries on topics like biodiversity, provided they are material to a company\u2019s risk profile. The logic is based on evidence that incorporating climate considerations into risk assessment and underwriting processes can lead to <\/span>better risk management<\/span><\/a> and decision-making, ultimately making companies more attractive to insurers.\u00a0<\/span>\u00a0<\/span><\/p>\n

In the annual cycle of P&C policy renewals, insurers have opportunities to engage with customers, ask questions, and decide whether to continue to offer coverage and on what terms. The annual cadence also offers openings to update underwriting standards with evolving climate data. It also presents a challenge, however, in that customers can switch carriers. Establishing criteria in partnership with clients to assist them on their own decarbonization journeys could be mutually beneficial.\u00a0<\/span>\u00a0<\/span><\/p>\n

Some leading insurance firms have taken steps towards integrating climate into underwriting, moving beyond exclusions of certain activities to a more holistic approach to climate transition risk:<\/span>\u00a0<\/span><\/p>\n