While our focus on the green transformation journey may seem to be directed toward high-emission sectors, we must realize that we need to address the issue together with all stakeholders. Could the insurance industry be both a victim of the climate crisis and a key solution partner?
Like all companies, insurance companies are responsible for the emissions associated with their operations. However, this responsibility extends beyond their own activities to include the carbon footprint caused by their insured customers, which becomes a much more complex liability than initially anticipated. Emissions resulting from insurance products are considered Scope 3 emissions and should be reported accordingly. A global standard for calculating emissions associated with insurance has been established through Section C of the Global GHG Accounting and Reporting Standard, published by the Partnership for Carbon Accounting Financials (PCAF). This methodology covers two main segments: commercial insurance portfolios and personal motor portfolios. Attribution factors are defined for each segment, and formulas are developed to calculate the emissions of each portfolio. This methodology adopts the "follow the risk" principle rather than the traditional "follow the money" principle due to the nature of insured risks, which cannot be directly controlled. Hence, the calculation of emissions focuses on the emissions from the customer’s activities within the insurance portfolios.
Emission Calculation for Commercial Portfolios
In commercial portfolios, an attribution factor based on customer revenue is used. This factor determines how much of the greenhouse gas emissions from a customer’s activities can be attributed to the insurance company. The calculation is based on the following formula:
Attribution factor = (Insurance premiums / Customer revenue)
Emissions associated with insurance = Attribution factor × Customer's total CO₂e emissions (Scope 1 and 2, and Scope 3 when applicable)
This methodology calculates how much of a customer’s total emissions can be attributed to the insurance company through their insurance policy.
Emission Calculation for Personal Motor Portfolios
For personal motor insurance portfolios, emissions are calculated based on the cost of ownership of the vehicle. Variables such as the type of fuel used and the usage of the vehicle are considered. The formula is as follows:
Attribution factor = (Insurance premiums / Cost of vehicle ownership)
Emissions associated with insurance = Attribution factor × Total CO₂e emissions from the vehicle
Although PCAF has established a methodology for calculating emissions associated with insurance, one of the biggest challenges insurance companies face is the quality of data. A common issue is the lack of or poor quality of data needed to accurately calculate emissions in both commercial and individual portfolios. PCAF recommends that companies use the best available data, even if it is of low quality, and improve their data collection processes over time. Improving data quality and data collection methods over time will be a crucial step in the sustainability journey for insurance companies.
With a premium volume of 8 trillion USD, representing 6.8% of the global economy, insurance companies play a critical role in the global economy. By investing in low-emission technologies and developing their operations in these areas, they can become key stakeholders in the green transformation while also taking action to ensure the sustainability of their businesses. The insurance sector, which ensures and manages risks in economic activities, is significantly affected by the climate crisis, whose impacts are increasing today. The negative effects of the climate crisis on insurance activities can be summarized through several key reasons:
Rising Natural Disasters and Claim Costs
The frequency and severity of natural disasters such as floods, hurricanes, and wildfires are increasing due to climate change. The rising number of natural disasters leads to an increase in insurance claims and compensation payouts.
Unpredictable Risks
The uncertainty brought about by the climate crisis makes risk management in the insurance sector more challenging. Risk models based on historical data may become misleading due to abnormal weather patterns caused by climate change.
Decline in Asset Values
Climate change leads to a decline in the value of insured assets. For example, in agricultural insurance, extreme weather events such as droughts, excessive rainfall, or storms can lead to agricultural production losses, resulting in asset depreciation.
To mitigate these negative impacts and achieve sustainability goals, insurance companies should regularly report their operational and insurance-related emissions, invest in low-carbon technologies, raise awareness about climate risks, and offer sustainable insurance products for their customers.
In conclusion, insurance companies that calculate, report, and work on reducing both their operational and insurance-related emissions will align themselves with global sustainability goals while also enhancing their financial performance. In addition to reducing the impacts of the climate crisis, investment in green transformation strategies and business models will make the sector more resilient. The PCAF report is an important first step in calculating and reporting greenhouse gas emissions for the insurance industry. In the coming years, more complex reinsurance structures, such as treaty reinsurance, will likely be included in this methodology, further expanding the scope of sustainability initiatives within the insurance sector.
For any questions on the topic, feel free to contact us at info@carbongate.io. We would be happy to work with you to develop solutions together.
