To reduce emissions in line with a 1.5°C pathway, we need a 100% adoption rate of low- and zero-carbon solutions when our machines are retired or replaced [2]. Each decision matters. A new petrol vehicle or gas furnace purchased today will commit carbon emissions through its 10-20 year life cycle - until year 2040. Today, the adoption rate for proven downstream solutions, from electric vehicles to heat pumps, are in the low double digits. Our challenge is not a technological one, but a distribution, financial, political and behavioral one.
Tables: Adoption Rate Scenarios & Climate Pathways
The insurance industry is mobilizing to solve this decarbonization challenge, as a 4°C climate scenario creates an “uninsurable” world [3]. Commercial line insurers are underwriting renewables projects and energy storage technologies, brokers are analyzing loan portfolios with climate scenarios, and select personal line insurers are even paying customers to upgrade to electric vehicles [4]. Yet, the industry wants to do more - as demonstrated by the promising but gutted Net Zero Insurance Alliance.
The insurance sector can further accelerate the shift towards low- and zero-carbon solutions. With its comprehensive understanding of when assets are to be replaced, phased out or upgraded, and the compulsory nature of insurance, the industry has a direct influence on both individuals and businesses at decision making moments. Specifically, insurers, MGAs, brokers, agents and TPAs have access to:
- Data on the age of assets that can inform and guide asset planning.
- First-notice-of-loss and claims data, which can be used to influence replacement decisions after damage or loss.
To put another way, the insurance industry understands when a customer has buying intent and liquidity. This information is highly sought-after by marketers with a product to sell, yet isn't capitalized on by insurers as a net zero strategy today.
Each year, the global Property & Casualty insurance industry funds $400-470B in repairs and replacement of physical assets - everything from replacing vehicles and equipment to rebuilding homes and offices (5). The total dollars the industry can influence further increases when you incorporate deductibles, additional spend injected by the insured when upgrading an asset, and the potential to influence economy-wide asset planning. Of the $9T investment required annually to meet our net zero goals, insurance can play an outsized role [6].
To make it tangible, my friend Will was hit at an intersection while driving his silver Toyota Camry last summer. He fortunately did not suffer an injury but his car was deemed a total loss. His insurer delivered on their promise: they paid him his vehicle's value ($18k) promptly and conducted the process with compassion. Yet, there was a missed opportunity: Will had buying intent - he wanted to purchase a car, and liquidity - $18k in his pocket. Could his insurer have nudged Will towards purchasing an electric vehicle? Will ultimately purchased another Camry because it was easy.
Sludge is friction that makes it hard for you to get what you want. A derivative of Richard Thaler's nudge theory, sludge is the snail-paced queue at the Post Office or the sign up process for free school lunches.
Today, purchasing low- and zero-carbon solutions have high sludge. When electrifying your vehicle or home, you must learn stuff (difference between kW, kWh, AC and DC), research stuff (permitting, subsidies, quotations, financing) and install stuff (load center, chargers, apps). Each of these frictions provide an opportunity to drop out of the process - for example, 40% of Americans are unaware of the subsidies available for electric vehicles. While I'm not behavioral science expert, I imagine the effects of sludge can only be magnified during periods of high stress or time sensitivity, such as during the insurance claims process brought on by an accident, breakdown or catastrophe.
In Will's case, he choose what was familiar and easy. Would he have chosen differently if choosing an electric vehicle was just as easy?
Nudging low- and zero-carbon solutions during key decisions points - such as, during lifecycle planning and after a claim - is a missing net zero strategy for insurers. Yes, the risk profiles of assets and buildings change when we modernize and electrify everything. Yes, underwriting, pricing and claims processes may need to change. However, I see these changes as table stakes, given we operate in a changing world. Adaptation isn't a choice but a necessity.
This week at COP28, we will see the first progress report - the Global Stocktake (GST) - and I have a feeling that we aren't doing what we must.
Passionate about net zero and solving the world's greatest challenges? Please reach out, comment or like.
I'm looking to network, join groups and meet companies in this space.
Onwards!
Thank you Maura Maycock, David Rogerson and Buzz Doherty for reviewing drafts of this.
This was originally written in November 2023.
Notes & Sources:
[1] From Homes to Cars, It’s Now Time to Electrify Everything (Yale Environmental 360, Oct 2021)
[2] Indeed, there are few truly zero carbon solutions available today. Steel and plastic processes have seen minimal net zero progress and grid renewables mix depends on the country (US-China agree to triple capacity by 2030). Interpret 'net zero solutions' as the 'next best alternative to net zero solutions available' - they are improving by the day. Grid renewables mix depending on country; US-China agree to triple capacity by 2030 (NYT, 2023; NYT 2023)
[3] AXA accelerates its commitment to fight climate change (Dec 2017)
[4] Aviva Canada offers total loss subsidy, premium discount and adjacent services to incentivize switch (Nov 2023)
[5] Source: S&P. Notes: Global insurance industry paid $1T in losses in 2022. Selected relevant LOBs from US reporting across personal and commercial lines, which accounted for 41-47% of market (assume same globally).
[6] The net-zero transition: What it would cost, what it could bring (McKinsey, 2023)