The insurance industry could see the value of invested assets decline by 15% over the next 30 years, according to the Bank of England’s Climate Biennial Exploratory Scenario (CBES) worst-case scenario. The industry must use its capital to assist the transition to net zero.

“Insurers have a collective interest in managing climate-related financial risks in a way that supports that transition over time,” said the report. “They will need to improve their management of climate risks in order to be able to do so.” 

However, while an increasing number of insurers have pledged to increase investments into green technologies and apply pressure to heavily polluting clients, there remains contention between the industry and regulators over the capital treatment of long-term investments. 

Speaking to ICAEW, Linda Hedqvist, senior manager within Deloitte’s EMEA Centre for Regulatory Strategy, explained that reforming the capital treatment of such assets could significantly increase the sector’s contribution to combating climate change. 

“Governments can play a role in enlisting the insurance industry to invest in solutions that reduce emissions or enhance residence to physical climate impacts,” she said. “A case in point are the reform proposals to the review of Solvency II in both the EU and the UK, which aim to free up insurers’ capital to enable long-term and sustainable investment.” 

Under the current regulations, the insurance industry argues that the critical need for green infrastructure and technologies to reach net zero is not accurately reflected in the risk level assigned to the assets. 

In the UK, where reforms to Solvency II have been under way since its departure from the European Union, it has been reported that such changes to the regulations could unlock an additional £95bn of potential investment capital. 

You can read more on this topic from the Financial Services Faculty at: How insurable is climate change?