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    What is Net Zero Underwriting? Important things you need to know

    February 2023

    What is Net Zero Underwriting? Important things you need to know

    What is PCAF?
    The Partnership for Carbon Accounting Financials (PCAF) is an industry-led partnership formed in 2015. PCAF aims to standardize the way financial institutions measure and report financed emissions, insurance-associated emissions, and facilitated emissions. PCAF’s widely adopted Greenhouse Gas (GHG) Accounting and Reporting Standard (2020) was expanded to include insurance-associated emissions in November 2022, covering personal motor lines, and commercial lines.

    What are Insurance-Associated Emissions (IAEs)?
    Insurance-Associated Emissions (IAEs) are a type of Scope 3 GHG emissions associated with an (re)insurer's underwriting activities. For many insurers making the commitment to transition to net zero, IAEs can be a significant source of overall emissions.

    What is the difference between an insurer’s financed and insurance-associated emissions?
    Financed emissions refer to emissions associated with lending and investments. Insurance-associated emissions refer to emissions associated with an (re)insurer’s underwriting activities.
    PCAF highlight that insurance-associated emissions and financed emissions are not directly comparable, should be reported separately, and should not be aggregated.

    How are the insurance-associated emissions for a specific insurance policy calculated?
    By taking the total emissions of the insured customer or asset and multiplying by an ‘attribution factor’. The attribution factor reflects the proportion of emissions associated with the insurance cover provided. For commercial insurance policies, PCAF define the attribution factor as the ratio of Gross Written Premiums (GWP) to the customer’s revenue.

    What is likely to be the main challenge in implementing IAE measurement?
    One of the major challenges in calculating IAEs will be the collection and management of customer revenue and emissions data. Commercial insurance portfolios typically contain a large number of Small, and Medium-sized Enterprises (SMEs), where revenue and emissions data are particularly challenging to obtain. Where reported emissions data is not available, estimates or proxies are permitted under the PCAF IAE standard, with differences in data quality being accounted for in the measurement and reporting of associated Data Quality Scores.


    What are data quality scores in the PCF IAE standard?

    There is an expectation that data quality scores are calculated and reported alongside emissions, with PCAF defining scores on a 1–5 scale depending on the type of data used. This approach recognizes that data quality is not binary, and data limitations should not prevent insurers from getting started on their net-zero underwriting journey. Insurers should use the highest-quality data that is available but improve data quality over time where possible.

    Why is the PCAF IAE Standard important?
    It is the first global measurement standard for Insurance Associated Emissions. The ability to consistently measure IAEs is critical in meeting insurers’ broader efforts to set emissions targets, report progress against targets, and transition their underwriting portfolios to net-zero. The PCAF IAE Standard is a recognized IAE accounting standard under the Net Zero Insurance Alliance Target Setting Protocol.


    What is the Net Zero Insurance Alliance?

    The UN-convened Net Zero Insurance Alliance (NZIA) is a group of 30 leading insurers who have voluntarily committed to transitioning their insurance and reinsurance underwriting portfolios to net-zero GHG emissions by 2050. The NZIA launched the first Target Setting Protocol for insurance underwriting portfolios in January 2023.

    Which lines of business are in scope of the NZIA Target Setting Protocol?
    Version 1 of the NZIA Target Setting Protocol covers two lines of business: personal motor lines, and commercial lines. This is aligned with the methodologies covered in PCAF’s IAE accounting and reporting standard. Further lines of business may be added in future versions of the Target Setting Protocol, as associated accounting methodologies become available.

    What types of targets are covered by the NZIA Target Setting Protocol?
    The NZIA Target Setting Protocol suggests five target types, split into three target categories. The emissions reduction target category refers to targets for the insurer’s Insurance Associated Emissions (IAEs). The engagement target category refers to targets for the level of engagement with the insurer’s customers on their own net zero transition. The other targets category refers to targets related to developing (re)insurance solutions that cover activities contributing to climate change mitigation and adaptation.


    Do Scope 3 emissions need to be included under the NZIA Target Setting Protocol?

    Where significant and where data allows, it is strongly recommended that a (re)insured’s attributable Scope 3 emissions are included in the (re)insurer’s emissions reduction targets (in addition to the mandatory inclusion of a (re)insured’s attributable Scope 1 & Scope 2 emissions).

    How should insurers decide on the portions of their underwriting portfolio covered by their targets?
    NZIA members are expected to set portfolio target boundaries (i.e. the portions of their underwriting portfolio covered by the targets) for a “material and relevant portion of their respective portfolios where reliable data is available”. The NZIA Target Setting Protocol also states that “assessment of what is material and relevant should be guided by that portfolio’s reflection of real-economy emissions”, emphasizing that the materiality and relevance of a particular (re)insured depends on their emissions and not just business value metrics (such as premiums).

    Why is it important for (re)insurers to start developing the capability to measure Insurance Associated Emissions (including Scope 3 emissions) now?
    a) Existing NZIA members (and new members joining by December 31, 2023) only have until Jul 31, 2024 at the latest to set emissions reduction targets. Any new members joining beyond December 31, must set emissions reduction targets within 6 months of joining.
    b) IAEs can be used to assess and explain materiality in the setting of portfolio target boundaries. Indeed, IAEs are arguably the most natural measure of materiality as they reflect of the insurer’s share of real-economy emissions associated with individual contracts. Thus, it is important for (re)insurers to have an understanding of IAEs for a large portion of their portfolios, including contracts that they may ultimately choose to exclude from their target boundaries. In the absence of reported emissions, estimates can still provide useful information in understanding materiality.
    c) As a measure of materiality, IAEs (and associated PCAF Data Quality Scores) provide important metrics in helping (re)insurers set engagement targets and understand where to focus engagement.

    Learn how our solution can help your organization measure and report the emissions associated with your underwriting.