Insuring the transition

According to broker body LIIBA, the insurance opportunity created by the transition could be as much as $125 billion, effectively doubling the size of the London market. Its analysis is based on data from Oliver Wyman that anticipates $5 trillion of global investment in green energy will be needed annually by 2030.

So, what is the industry waiting for? Now, during an energy crisis the likes which has not been seen since in the 1970s - and another summer of record temperatures, droughts, wildfires and floods, will insurance expedite our shift to a green economy?

Under pressure

From all angles, insurance and reinsurance companies are being pressured to divest of heavy polluting clients and assets.

In May, Lloyd’s was forced to hold its AGM virtually due to fears the meeting would be disrupted by climate activists. It is not a remote concern, given the market’s forced closure on 12 April after its entrances were blocked by climate protestors from Extinction Rebellion.

If insurers are facing more scrutiny, so too are their clients.

As Jacques Jacobs, a partner at Clyde & Co, explains, there are three key drivers for organisations to embrace ESG more broadly, and commit to transitioning as part of those responsibilities. Perhaps unsurprisingly for a global economy that continues to rotate based on the principles of capitalism, the first is investment.

“Some of the largest institutional investors around, and often with long investment horizons, have a unique and specific interest in identifying and managing risks around ESG,” Jacobs tells GR. “Equally, we’re seeing a constantly growing trend at the moment of international Capital seeking companies that are sustainable and embracing ESG.”

“The second one is around risk more broadly,” he continues. “Insurers are at the forefront of managing and paying for risk and we’ve already seen substantial global losses arising from climate change or climate change-related issues. So, insurers have a vested interest to lead on ESG issues from that perspective.”

“The third is around corporate social responsibility and reputation more broadly, and we’re seeing a lot of activity from customers, shareholders, and even internal stakeholders.

”The challenges around ESG are changing the global risk landscape. It’s giving rise to complex diverse and interconnected risks as well as new opportunities.”

Benchmarking success

Then there is the growing raft of regulations – an alphabet soup of requirements that firms not only commit to their own decarbonisation journey, but also to take stock and influence their entire value chain.

Ahead of COP26 last year, major financial institutions and MNCs launched the Taskforce on Nature-related Financial Disclosures (TNFD) to support businesses in how they assess emerging nature-related risks and opportunities.

The ability to assign a financial measure to a non-financial asset is key to benchmarking progress and unlocking many of the potential opportunities a low carbon economy presents.

Insuring (and reinsuring) the transition to net zero is a monumental undertaking, involving new and emerging risks, the underwriting of as-yet still prototypical technologies and ultimately, thousands of delicate, daily decisions.

Amongst them: How to strike the right balance by supporting insureds on their transition journeys, whilst satisfying your investors and other stakeholders you are doing the right thing?

Making the decision to step away from underwriting new thermal coal projects may seem straightforward. But it becomes more complex when those same clients are developing new, renewable sources of energy, including green hydrogen, a technology that is still very much in its infancy and demands the right support and investment.

It is further clouded by current geopolitical and economic uncertainties, including the looming energy crisis, exacerbated by Russia’s war in Ukraine.

Throwing down the gauntlet

At last year’s Ferma conference, European corporate risk managers threw the sustainability gauntlet back to insurers. Mario Ramirez Ortuzar, risk and asset manager, Exolum, said there was inadequate support from insurance partners on issues such as emerging risks and sustainability.

He said it was impossible to transition business models ‘overnight’ but explained the firm was investing heavily in adapting its organisation.

“From the perspective of a risk manager we haven’t seen anything in terms of reduction of premium in return for a sustainable business model,” he explained.

“We manage 6,000km of pipelines moving hydrocarbons across Europe so people can heat their homes and drive their cars - and we cannot stop from one day to another,” he continued. “It is a huge transition, and we need a lot of support from banks and insurers to deal with this transition.”

There are no easy answers or quick fixes, according to Rebekah Clement, sustainability director at Lloyd’s, but market practitioners need to be focused on supporting clients as they transition.

“There are clearly some carbon intensive industries that don’t have a transition plan but may be investing into carbon capture and recycling technology to reduce their emissions. We need to be awake to the wide range of real-world decarbonisation and transition pathways as an industry, and be ready to work with them customers to help them get to net zero emissions.”

“We have to understand whether customers are committed to net zero, and whether they’ve got a Paris-aligned transition plan in place and, over time, check how they are progressing against those objectives.”

The tipping point 

Clement thinks we are currently at a tipping point across various industries that are poised to transition but need capital to support how they mobilise this development. She describes it as a ’once in a lifetime’ opportunity for the industry to take a lead.

She submits that near-term energy security concerns could present a “distraction from the investment and need to focus on getting to Net Zero” but thinks the energy sector should be ready to “double-down” on its investments in clean energy – to see it as an opportunity rather than a challenge.

How underwriters position themselves now will determine competitive advantage, according to Martin Weymann, head of sustainability, Emerging & Political Risk Management at Swiss Re, and it is time to be a fast learner.

“You’ve got to look at all the different sectors and support those companies that are on the move,” he says. “It all starts with defining what the decarbonisation pathways are for different industry sectors and determining how the insurance industry can support those.”

“There are quite a few established technologies which have a proven loss experience and a means to price those risks, but there are other newer technologies where there is limited loss experience. In these instances, you need to start small before you scale up.

“And the market needs to create transparency around the risk for some of the technologies so that pricing can be commensurate with the loss potential.”

Time for innovation 

Both existing and non-traditional insurance solutions will play a role as the industry finds ways to support new economies. How do you compensate a solar farm when there is a lack of sunshine, or a hydroelectric dam during a drought, for instance?

These are not hypothetical scenarios. A record drought in southern China this summer caused massive hydroelectric dams to fail, forcing towns to impose rolling blackouts and increasing the country’s reliance on coal.

Due to the lack of power, car assembly plants and electronics companies were forced to slow production or close factories altogether.

“Insurance products which were originally designed more for physical risk events, such as natural perils, will be needed for transition technologies,” thinks Weymann.

Speaking at the Marsh McLennan Rising Professionals Global Forum earlier this year, Neil Eckert chairman of IncubEx and co-founder, Conduit Re, said underwriters needed to stop introducing blanket exclusions for risks they are uncomfortable with and instead start finding solutions.

This includes risk transfer products to hedge the peaks and troughs in tomorrow’s power grid, and others to cover the risks attached to carbon offsets. What happens, for instance, if a forest fire destroys large swathes of your organisation’s natural assets?

Parametric solutions are one way to get around the lack of data available from new and relatively untested technologies.

Meanwhile, capacity from the traditional markets could prove inadequate and re/insurers and brokers may need to tap the capital markets as solutions evolve.

The key is to seize the opportunity before you become a “financial refugee”, thought Eckert. “We are in the early stages of the development of this market, but innovation is what the London market does best and where we have a competitive edge.”

“Energy security is the biggest watchword of our time,” he said. “You’ve got to ‘dig for victory’, make your own power and make sure it’s renewable. Once you’ve created a market that prices carbon, that impacts the cost of fossil fuel. The change in behaviour will be driven by pure economics.”