Carnegie-Brown: Sector not yet fully utilising green investment potential

Lloyd’s chairman Bruce Carnegie-Brown has said the (re)insurance sector could better utilise its role as an institutional investor to support green growth in the global economy but said regulatory changes will be needed if it is to use its assets to their full potential.

Carnegie-Brown said Lloyd’s had already taken steps to guide the market in how to approach climate risks and remained committed to helping insurers develop the plans needed to support a net-zero underwriting position by 2050. However, he stressed that there was still more the sector could do – particularly in its role as an investor.

“Certainly we can play a role on the underwriting side of the balance sheet and happily at Lloyd’s we have a stronger reputation than the industry as a whole for innovation although I think the industry itself needs to be more innovative than it is,” he told the RPC Global Access Conference, alongside Canada’s former prime minister Stephen Harper.

“But I think there’s a second part on the investment side of our balance sheet where we can do more.”

He said that 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.

“Governments are quite interested in solutions that don’t cost them money because they always argue they don’t have the money. So adjusted regulation, not in the way that debases regulation but has a pragmatic approach to assisting investment in smart sectors that will help the economy reduce actually the net impact of climate on financial services firms and the economy more broadly, then I think there is a receptivity there,” he continued.

Despite a strong desire from firms to allocate greater portions of their capital towards so-called green assets, Carnegie-Brown said the overly cautious approach adopted by regulators prevented the sector from fully utilising its role as an investor.

Under the current Solvency II insurance capital 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 such assets.

Carnegie-Brown explained that reforms to the capital treatment of such assets could significantly increase the sector’s contribution to combating climate change, and pledged to lobby policymakers for regulatory changes.

“Some of the issues are regulatory in nature so unsurprisingly in the non-life insurance market, we’re obliged to hold most of our assets in cash or short-term highly liquid instruments because the cash is ultimately there to pay claims. And there’s a huge capital burden if you try to invest in longer-term, less liquid assets,” he said.

“We’re appealing through the government and regulators in a number of areas to ask for a change within the regulatory requirements that would allow us to make longer-term investments that help the sustainability industry grow,” he continued.

In the UK, where reforms to Solvency II have been underway since its departure from the EU, industry trade body the ABI has previously reported that such changes to the regulations could unlock an additional £95bn of potential investment capital which can be funnelled into green assets.

The UK Government is currently pursuing plans to overhaul the regime adopted while Britain was in the EU, to spur an “investment big bang” and allow insurance companies to invest billions of pounds more in infrastructure, including green energy projects. The EU is pursuing its own changes to the rules which came into force in 2016.

But regulators on both sides of the Channel have been accused by the industry and policymakers of not going far enough in their reforms and of lagging behind peers such as Bermuda where changes are underway to allow insurers more freedom to invest in climate-change focused infrastructure and technology projects.

Carnegie-Brown acknowledged that while such conversations were difficult to have, policymakers have been “receptive” to the market’s pleas.

Harper, the former Conservative leader who has more recently built a name as an investor, consultant and energy executive since leaving office in 2015, backed this stance but said the (re)insurance market’s “conservative” investment approach typically prevents the sector from making riskier investments, such as in early stage start-ups focused on carbon capture and climate technology.

“The insurance investments are probably more conservative than certainly you can justify in early stage [projects and start-ups].  But I think there are opportunities once you’re into the infrastructure development for insurance pools to really assist in the deployment of that technology,” he said.