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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. 

    Why is it important for (re)insurers to start developing the capability to measure Insurance Associated Emissions (including Scope 3 emissions) now?
    a) 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.
    b) 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.