How ambitious are Australia’s insurers on net zero?
With temperatures in Australia rising, are insurers down under doing enough to tackle climate change?
It’s that time of year again. While large parts of the world welcome a festive winter, summer has arrived down under. Day-time temperatures in Australia have soared in recent days. This week, Melbournians braced for a blistering 40°C while residents in Perth and Sydney experienced day-time temperatures of over 30°C.
This year too, the title of “hottest summer on record” is very much in contention.
Extreme weather, of which this heat is a part, is costly for the Australian economy and the country’s insurers in particular. Last year, weather-related insurance losses totalled over $2 bn.
Australian insurers are facing a concerning reality - insurance premiums have risen and insurer profits have not. Between 2012 and 2020, every $100 in premiums amounted to $5 in profits. This number is now at $1.50. Climate change hurts both the insurer and insured.
Increasing physical risk resilience across the country is, therefore, an urgent proposition.
A new Climate Change Roadmap published by the Insurance Council of Australia (ICA) outlines how the country’s insurers are setting and pursuing net-zero targets.
The insurance industry is the financial shock absorber of the impacts of extreme weather events, which is expected to cost Australia $35.2 bn a year by 2050
Insurers’ ambition
In the fight to mitigate physical risk, Australia’s insurers are on the frontlines. “The insurance industry is the financial shock absorber of the impacts of extreme weather events, which is expected to cost Australia $35.2 bn a year by 2050”, says Andrew Hall, ICA’s chief executive.
The Roadmap outlines the approach insurers are taking towards setting and achieving emissions reduction targets. Scope 1 and 2, referring to direct and indirect operational emissions are relatively low hanging fruit. A survey of ICA membership shows that 85% of respondents have set a net zero by 2050 target and 50% are aiming for net zero operational emissions by 2030.
It is Scope 3 that is far more complex to address. For an insurer, Scope 3 emissions have to do with the claims supply chain and two key portfolios: underwriting and investment.
For Scope 3 targets, the scale of ambition is lower. Only a third of respondents reported setting targets for their claims supply chain and 40 percent have subjected their underwriting portfolio to long-term emissions reduction goals. In both cases, a lack of established consistent methodology is to blame, according to the ICA’s Roadmap.
The lower scale of ambition, however, might not necessarily imply inaction. “More than 50% of respondents are actively working on reducing emissions in their underwriting portfolios, by exploring new products and technologies, and assisting emissions-intensive clients with decarbonisation strategies”, the ICA points out in its report.
Barriers to net zero underwriting are wide-ranging and insurers argue some are outside their control. IAG, the largest general insurance company across Australia and New Zealand identifies a long list of barriers in its latest Climate Action Plan:
“Decarbonisation of our underwriting portfolio is dependent on government policy and action, the development and commercialisation of emissions reduction technologies, continuous improvement in emissions reduction methodologies, and the availability of data concerning insurance-associated emissions”, the plan reads.
Insurers as asset owners
Insurers are also investors in their own right. According to the ICA, Australian insurers have a collective investment portfolio of $87 bn – a figure which could double in the next 15 years.
Emissions reduction targets for investment portfolios have a lot to do with their structure.
Insurer portfolios are unique when compared to their institutional investor counterparts. For one, given the liability timelines of underwriting portfolios, the average insurance investment portfolio tends to be overweight short-term assets - particularly bonds. Other asset classes such as equities, private assets and real assets typically have a smaller financial footprint.
IAG, for instance, has an on-going $200m commitment for green bonds. Additionally, the insurer is aiming to reduce the emissions intensity of its Australian and global listed equity investment mandates by 25% by 2025 and 50% by 2030 respectively, compared to a 2020 baseline. IAG also has a venture capital arm – Firemark Ventures – with a climate technology mandate.
ICA survey results show that 45% of respondents have set net zero targets for investment portfolios. Some insurers are going a step further and tilting their portfolios away from emissions-intensive assets.
“65% of respondents are incorporating climate considerations into investment decisions
and almost half of respondents highlighted a shift away from investments in carbon-intensive activities (e.g., coal, gas, oil)”, the ICA concludes from its survey results.
For Australia’s insurers, the path to net zero passes through decarbonised underwriting and investment portfolios. The ICA findings show early signs of an industry-wide effort to set ambitious targets in that regard. A lot is riding on turning that ambition into progress – including Australia’s financial ability to weather the storm.
