World - Capturing the climate opportunity in insurance

The world’s transition to net-zero emissions will cost trillions of dollars and present new kinds of risks. Here’s the role insurers can play.

This article is a collaborative effort by Kia Javanmardian, Sylvain Johansson, Christie McNeill, Sophie Ru, and Ashish Srivastava, representing views from McKinsey’s Insurance practice.

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The world is at an inflection point in its climate transition efforts. As governments and companies worldwide pledge to achieve net-zero greenhouse gas emissions, the transition is poised to spark the greatest capital reallocation in a century, requiring an estimated annual investment of more than $9.2 trillion in energy and land-use systems.1

It’s a transformational moment for insurers, with significant climate-related risks and opportunities on both sides of the balance sheet. Taking an offensive approach will be critical for insurance carriers to unlock growth and remain relevant in a net-zero future.

What the net-zero transition means for insurers

As the net-zero transition unfolds, new forms of volatility are emerging. Capital reallocation to low-carbon technologies is rapidly reshaping industries. New technologies face business cases with uncertain economic viability and scalability. Companies face increasing demands for transparency on climate risk and emissions, driven by regulatory requirements and investor and consumer advocacy. The risk of litigation for climate inaction is also growing. And against this backdrop, rising physical risk continues to affect communities and economies.

Insurers have a once-in-a-generation opportunity to address these new forms of volatility—and help catalyze an orderly transition to net-zero emissions—through product and solution innovation. Yet in our experience, climate aspirations are often disconnected from commercial strategies, leading to a lack of a cohesive approach on two fronts: identifying and prioritizing climate-focused commercial opportunities, and taking a go-to-market approach to better source, underwrite, and share new types of risks.

Insurers have a once-in-a-generation opportunity to address these new forms of volatility—and help catalyze an orderly transition to net-zero emissions—through product and solution innovation.

1. Identifying and prioritizing climate-focused commercial opportunities

Insurers have opportunities to identify and develop climate-focused solutions in three major areas: insuring the net-zero transition, creating new risk transfer solutions for rising physical risks, and providing adaptation and resilience services. Within each area, there is room to offer traditional property and casualty coverage as well as to develop new and innovative products to meet emerging market demand.

Insuring the net-zero transition

Across high-emitting sectors, technology is a crucial decarbonization lever alongside demand reduction and business model changes. By our estimates, annual global capital expenditures in the top climate technologies could account for more than $800 billion by 2030, corresponding to roughly $10 billion to $15 billion in insurance premiums on capital expenditures alone (exhibit).

Based on current technology maturity, supporting infrastructure and favorable policies, and projected investment flows, the highest potential near-term target markets for insurers are likely in proven renewable-power assets and established green technologies including solar, on- and off-shore wind, electric-vehicle (EV) batteries, and EV charging infrastructure (EVCI). In the next several years, emissions-intensive asset transformations will also become a major market, along with various emerging technologies that catalyze the decarbonization of emissions-intensive assets—such as heat pump retrofitting; carbon capture, utilization, and storage (CCUS); and green hydrogen and electrolyzers.

In addition, insurers could play an important role in catalyzing new markets that are not yet proven. For example, insurers could accelerate the development of voluntary carbon markets (which could reach up to $30 billion by 2030)2 by providing protection to both buyers (for example, should an offset become invalid) and sellers (for example, should a nature-based solution such as a forest experience loss from pest infestation or wildfire).

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