ABI - WRITTEN EVIDENCE ESI0030 – UK ENERGY SUPPLY AND INVESTMENT INQUIRY

About the Association of British Insurers

The Association of British Insurers is the voice of the UK’s world-leading insurance and long-term savings industry. A productive and inclusive sector, our industry supports towns and cities across Britain in building back a balanced and innovative economy, employing over 310,000 individuals in high-skilled, lifelong careers, two-thirds of which are outside of London.  

Our members manage investments of nearly £1.7 trillion, collect and pay over £16 billion in taxes to the Government and support communities across the UK by enabling trade, risk-taking, investment and innovation.

We are also a global success story, the largest insurance sector in Europe and the fourth largest in the world.  

The ABI represents over 200 member companies, including most household names and     specialist providers, giving peace of mind to customers across the UK. 

Consultation response

1. We are grateful for the opportunity to respond to the Select Committee’s inquiry on the UK’s energy supply and investment. The ABI’s submission does not attempt to answer every question in the Committee’s call for evidence and sets out the role of the UK’s insurance and long-term savings industry in supporting the Government’s Net Zero goals. We look forward to continuing to work with the Select Committee and would be happy to provide further detail on any specific areas the committee are interested in as part of this, and future, inquiry. The ABI is accredited as an ‘Accelerator’ of the UN’s ‘Race to Zero’ Campaign and the industry is committed to playing its part in supporting the transition to Net Zero.

2. We support the Government’s Energy Security Strategy and the plans to strengthen energy independence and our own sustainable energy supply to help tackle climate change and the cost-of-living crisis, whilst ensuring we’re more resilient to geo-political events beyond our control. As investors, insurance and long-term savings providers have an important role to play in helping to provide capital to fund green infrastructure projects. We welcome the strong signal this provides on the pipeline of energy projects and our members are eager to work with the newly created ‘Great British Nuclear’ and the wider energy sector to unlock our sector’s investment capacity.  A meaningful reform of Solvency II would substantially increase the capacity of insurers in providing long-term capital to underpin investments consistent with the Government’s energy strategy

3. The UK insurance and long-term savings industry has set out a roadmap of new commitments to tackle climate change. The ABI’s Climate Change Roadmap focusses primarily on our sector’s role in supporting the delivery of the UK’s Net Zero strategy and meeting its carbon budgets. It focusses on areas where the ABI’s diverse membership can collaborate to drive meaningful action.

4. Ultimately, a problem on the scale of climate change can only be tackled jointly between networks of sector peers acting in tandem with local and national policymakers, and civil society. Therefore, the Climate Roadmap seeks to identify where ABI members are taking action and where further action is needed, but also where we will need to work collaboratively beyond our sector to achieve the change needed.

5. The Climate Roadmap sets out four key pillars where our industry can support tackling climate change, become a more sustainable sector and support the Government’s Net Zero ambitions:

• Meeting Net Zero by 2050 - The UK insurance and long-term savings sector is committed to reaching Net Zero by 2050 and to the global target of a 50% reduction in emissions by 2030 – in line with the Intergovernmental Panel on Climate Change (IPCC)’s Paris Climate Goals.
• Unleashing Investment Capacity - The insurance and long-term savings sector is ideally placed to be a long-term investment partner in delivering the Government’s Net Zero strategy and is committed to providing ‘patient’ investment capacity at every stage of the journey up to 2050. With the right kind of partnerships with Governments and regional authorities, our sector could provide up to one third (£0.9trn) of the total £2.7trn needed to reach the interim 2035 target of a 78% reduction in carbon emissions. A key part of this would come from reforming the Solvency II regulatory framework, allowing £95bn to be reallocated towards investing in sustainable energy sources and the infrastructure that will underpin more sustainable lifestyles.
• Ensuring Sustainable Industry Operations - The insurance and long-term savings sector aims to reach Net Zero within its own directly controlled operations by 2025. By 2030, we aim to have engaged pro-actively with suppliers to include supply chain emissions within the scope of the sector’s target of reducing overall emissions by 50% - which will mean our extensive network of engineers, repairers and technicians across the UK all being supported to be more sustainable.
• Helping Society Adapt - We can also play a wider role in helping our customers and the businesses we work with adapt to a changing climate, this would mean promoting the increased uptake of electric vehicles, both by reviewing the ‘Group Rating’ system to ensure insurance is affordable and by ensuring that electric vehicles become more readily available as alternatives when customers make claims. It also means using more sustainable parts when repairing buildings and vehicles, as well as promoting the switch to more energy efficient devices, like heat pumps.

Support for customers who want to make more sustainable choices

6. Our sector employs 310,000 people around the UK, manages £1.6trn in invested assets and handles £46m in claims every day. The roadmap sets out how, over the coming years, the industry will work together to explore how we can work with other industries to:

• Make it easier for customers to make sustainable choices about their pension savings by providing clear and consistent information, identifying moments in the saver’s journey where sustainable choices could be encouraged and developing a ‘jargon-buster’ so savers understand how climate change issues relate to their pensions.
• Help customers to make sustainable choices during the claims process. The ABI will work with members and engage pro-actively with our counterparts in other economic sectors to define what would be required to enable customers to take sustainable choices while resolving claims – focussing in particular on motor and property claims in the first instance. This could mean switching to an electric vehicle after a car is “written off” or having a broken gas boiler replaced with a sustainable alternative.
• Explore how firms can encourage customers to accept repaired or recycled items as part of a settlement, rather than offering brand-new items. As part of this, we’ll look at how items damaged during a flood or storm can be reclaimed and given to organisations who can re-use or repair them.
• Partner with the independent healthcare sector to develop safe alternatives to single-use plastic and other unsustainable items in hospitals and healthcare.
• Encourage the development of a sustainable secondary market for electric vehicles and establish consistent practice for re-using and recycling charging equipment.

7. In order to unleash the investment identified by Boston Consulting Group, the UK Government would need to consider the following options:

• As the ABI has previously outlined, significant changes are required to the industry’s regulatory regime, Solvency II. Amending how the Matching Adjustment and Risk Margin operates will remove barriers that currently limit the scope for Insurance and Long-term Savings providers to invest in green infrastructure.  
• Collaboration is needed between the UK Infrastructure Bank and the Prudential Regulation Authority to ensure that the investment opportunities identified as crucial to meeting the UK’s Net Zero targets are not then disincentivised through the regulatory regime.
• Ensuring that the criteria for the proposed Long-Term Asset Fund is as ambitious as possible, as this could dramatically increase the proportion of the UK’s DC pension pots invested in the illiquid assets that will be crucial to meeting the long-term challenge of decarbonising the UK economy.
• Working with the ABI, regulators and stakeholders to structure investment opportunities to align with the responsible approach to investment required to finance insurance claims and pension payments. Innovations such as aggregated innovation hubs and structured consumption funds would allow the sector to invest in transition infrastructure across its full lifespan.

Unlocking investment through reform of the Solvency II regulatory framework

8. Solvency II is the first major post-Brexit reform of the UK’s world leading financial services sector. The current Solvency II framework is one of the world's most prudent and cautious prudential regimes – now is the time to make sure we have a regime that is fit for the UK’s needs. The EU is also carrying out a review of the framework to ensure it offers greater flexibility and investment opportunity. 

9. Independent KPMG modelling, commissioned by the ABI, demonstrates that, with no additional cost to the taxpayer, two specific reforms to Solvency II can unlock £95 billion to help level-up our communities, help tackle climate change and invest in the businesses of the future, while still upholding high levels of policyholder protection to international standards.

10. The current prudential regulatory framework for the industry, designed for 28 EU Member States in the aftermath of the financial crisis, forces insurers and long-term savings providers to invest heavily in highly rated corporate debt and in sovereign bonds, skewing investment towards non-green investments and making it harder to invest in green assets and companies that will be vital to a successful transition to net zero. It is currently much easier to invest in a highly rated mining company than it is to invest for 30 years in a wind farm.

11. According to the KPMG analysis, the measure that we propose could help c£60bn (20%) of the total funds already held in Matching Adjustment portfolios (>£300bn) to be re-invested in productive long-term assets to help with the economic recovery and the green transition. The £60bn would stay invested but could be refocused on assets that help the UK and wider world meet Net Zero commitments. Amending the Matching Adjustment rules will ensure it reflects the types of investment that is safer and more productive in world that will be changing rapidly to meet the challenges of climate change and sustainability and support the Government’s net zero ambitions.

12. We welcomed the recent announcement from the Economic Secretary to the Treasury, John Glen, setting out the Government’s ambition to “Seize Brexit opportunities and slash red tape through bold reforms to Solvency II”. The announcement is a positive step that sees us well on the way to ensuring that we have a package that provides additional investment in the UK, without undermining the high standards of policy holder protection we have. We look forward to continuing to work closely with the Government, HM Treasury and the PRA to ensure that the final package of reform meets all of these stated objectives.

Working with regulators to invest in the green transition

13. It is important that regulators also consider how to improve process, not just the underlying principles that underpin the regime. As the IPCC has been emphasising in its Sixth Assessment Report, there is an urgent need to take action quickly. Therefore – while we are not calling on the regulators to abandon the principles that underpin financial stability – it is vital that decisions are taken more quickly and that the Bank of England recognises that asset classes that are fundamental to the development of a Net Zero economy need to be regularly reappraised. Decisions should be taken strategically so that investment can be mobilised quickly, rather than on a ‘case-by-case’ basis.

14. It is important that the different regulators that impact decision making in financial services work together and base their decisions on the same set of underlying assumptions. While the PRA’s regulatory regime for insurance and long-term savings focusses on financial stability and risk management, the FCA is also (rightly) focussed on consumer impacts and preventing ‘greenwashing’. There is a potential risk that, if the investment opportunities prioritised by the Government as part of its Net Zero strategy do not align with the definitions the FCA relies on to define what is or is not ‘green’, that firms are disincentivised from making investments that are necessary to move the economy to Net Zero. It is vital that all parts of the regulatory regime recognise the role of investment in helping the whole economy transition, not just in growing sectors that are unambiguously ‘green’.

15. Regulators should hold themselves to the same standards of transparency and accountability on climate action that they expect of the firms they regulate. There are already welcome moves in this direction, with each regulator publishing an adaptation report in 2021 for the first time, but this could be more extensive. In particular, we recommend that financial regulators regularly submit their climate strategies to detailed independent review. The alignment of their strategies with the UK’s Net Zero pathway should be reviewed by the independent Climate Change Committee, while their impact on the UK’s adaptation and resilience to climate change could potentially be formally reviewed by the Environment Agency.

16. The Government’s review of the Future Regulatory Framework for Financial Services, and the expected Financial Services legislation in the upcoming Queen’s Speech, presents a key opportunity to embed the activities of financial services regulators in the objective to reach net zero and prioritise economic growth/competitiveness. The ABI has been calling for the regulators to be given a new statutory objective to support economic growth, as many other jurisdictions do – including the US, Singapore and Australia. The House of Lords Economic Affairs Select Committee has a key role to provide scrutiny as legislation progresses, and of the future activities of the regulators, to ensure that the transition to net zero, and investment in green assets, is prioritised.

Association of British Insurers

11 April 2022

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