Climate and insurance: How carriers are preparing for a net-zero future
The insurance industry has had to rethink its business strategies to prepare for more ambitious decarbonization initiatives across sectors. In this episode of McKinsey on Insurance, McKinsey’s Sylvain Johansson speaks with fellow industry experts—Olivia Loadwick, Christie McNeill, and Philipp Schaumburg—to understand how insurers across the globe are preparing for a net-zero future and how they can gain a competitive advantage. An edited transcript of their conversation follows.
Sylvain Johansson: We believe the transition to decarbonized economies is a transformational time for insurers, and taking an offensive approach is critical for carriers to remain relevant in the net-zero future. Olivia, what are you seeing in Australia or in the Southern Asia region?
Olivia Loadwick: Climate impacts in Asia are expected to be some of the most challenging globally. Carriers in the region have started to act in response, but progress is in its early stages. We recently surveyed life and P&C [property and casualty] insurers across the region to understand the relative maturity of climate strategies in this part of the world. From this analysis, we learned first that shifting public and stakeholder opinions are having an impact on how companies address this issue—almost 80 percent of the respondents from our survey say shareholders and boards are key drivers of climate-related actions. Second, as a result of these shifting priorities, the starting point for most carriers has been to assess exposures and develop plans to transition to net-zero investment portfolios.
Third, insurers have seen real near-term impacts on profitability: almost two-thirds of respondents expected that there would be a material impact from climate risk on their books of business. Last, and most challenging, was that only about 20 percent of carriers thought they had a robust and adequate view of climate risk and were using quantitative measures to stress-test portfolios. There’s a real imbalance between recognizing these challenges and then feeling prepared enough to respond.
Sylvain Johansson: Christie, what steps are you seeing leading underwriters take in the United States, and what more should they do?
Christie McNeill: Underwriters have had to understand the physical risk on their books much better. Rather than using today’s catastrophe models to understand present risk, they’ve had to take a more forward-looking view based on different climate scenarios.
The leaders are understanding where the risk will be in five to ten years and thinking about how to steer the portfolio proactively so that they are identifying pockets of opportunity that will sustain the business. Then they’re taking a much more granular view in areas that are challenged and that are likely to suffer from major losses and a potential lack of affordability.
Sylvain Johansson: Philipp, tell us a bit about what you are seeing among European insurers.
Philipp Schaumburg: We’ve seen a clear shift in sentiment in the boardroom. The initial agenda for many players here in Europe was based on creating sector transparency—considering where companies should place their exclusions in their asset and underwriting portfolio. In the last six to 12 months, companies have instead been systematically thinking about how they can capture the business opportunities that are arising. So insurers must consider how they can support this transition and try to ensure a significant part of this investment in the next five to ten years, which could translate to multibillion dollars of revenue.
Sylvain Johansson: Christie, do you see the same shift in the United States?
Christie McNeill: Yes, over the last year and a half, companies have moved from thinking mostly about risk or regulatory requirements to looking at underwriting and understanding where there’s opportunity for new growth during the net-zero transition, as well as better opportunities to serve customers and be more credible in our current environment.
Sylvain Johansson: Philipp, to support the decarbonization of society, what skill sets do carriers need to bolster?
Philipp Schaumburg: We typically see insurers invest in three capabilities. Number one is systematic portfolio transparency. Number two is underwriting expertise and understanding how to assess risk for new technologies. Number three is the go-to-market strategy and how companies can fit into the broader ecosystem. The last point, to me, is a key success factor for insurers: how they partner with various parts of the value chain to stay on the cutting edge of delivering and underwriting emerging risks from the net-zero and climate transition.
Christie McNeill: We’re also seeing a recognition that there is a scarcity of talent within the industry to underwrite these new technologies. Traditional risk capital will probably not be able to fulfill all that demand—and the scale of investment is massive. So the carriers and industry players who are approaching this most proactively are looking at more lucrative partnerships: for example, working with managing-general-agent structures, facilities, or even directly with asset owners or investors. By doing this, insurers are gaining expertise and access to opportunity in areas like solar, wind, hydrogen, carbon capture and storage, and other newer technologies that they may not currently have enough expertise on to be able to underwrite.
Philipp Schaumburg: That’s also an obstacle that the insurance industry needs to overcome to capture this opportunity. As we know, the industry is quite comfortable in its ways, and this is uncharted territory. For companies to recognize this new risk landscape and understand what they need to do to better underwrite these risks, they need to be willing to innovate. That’s how they’ll stay relevant in a net-zero environment.
Sylvain Johansson: This is also a matter of leadership in the sector, figuring out some areas that are not too far from their risk appetite, deploying the right capital in a prudent way, and supporting the other sectors in the transition.
Where do you think insurers have the most work to do regarding sustainability?
Olivia Loadwick: In Asia, life insurers have been leading the charge in terms of understanding exposures in their portfolios. So quite a bit of work has been done on the investment side to understand exposures and develop plans for the transition. But there’s much more work to do on the underwriting side.
Christie McNeill: In the United States, insurers still struggle to commit to a clear aspiration around climate and then put the required resources and investment capabilities behind it. It’s important to recognize the goal, but the only way to gain a real foothold is to be incredibly proactive and invest resources ahead of demand, which hasn’t been done at scale.
Philipp Schaumburg: Many insurers have progressed on the investment side, but they need to accelerate the business side. I think the players who will have the advantage will invest in better partnerships and use that knowledge to bring about new business opportunities.
Sylvain Johansson: We do see polarization there—there are some carriers who are, to some extent, free riding. They wait for regulation, they will let all the sectors decarbonize, and they will benefit from this indirectly. But playing more on the offense—being proactive, taking action, and supporting the transition proactively—will be more beneficial for the industry in the long term. And having good underwriting and investment skills will offer companies a competitive advantage.
Thank you for sharing your global perspectives, Olivia, Christie, and Philipp. To the audience, thank you for listening to McKinsey on Insurance. Subscribe to this podcast wherever you listen.