In excess of $10 trillion of insurance cover will be needed over the next six years if net zero targets are to be reached, a high-level industry report has revealed.
Cover will be vital for over half of the $19 trillion of investment that’s already been committed to financing the net zero transition – which will place “unprecedented structural pressures” on the insurance sector, according to the study by brokers Howden and Boston Consulting Group (BCG).
Between now and 2030, at least $10 trillion will need to be underwritten for huge energy infrastructure like offshore wind farms, solar farms, the upgrading of insulation within the current housing stock and road transport requirements.
Further pressure will be piled on the insurance industry because of the additional cover required to insure against natural disasters, the study also noted.
The widescale insurance challenges connected to energy transition were described as “a wake-up call” by Rowan Douglas, the Howden Climate Team Chief Executive. “We are going to be having this energy transition globally, at pace and scale, all at the same time,” he said.
According to press reports, executives and policymakers have increasingly turned their attention to the key role that insurance will need to play in establishing the requisite infrastructure and technology for the energy transition. But there is now a major question mark as to whether there is sufficient underwriting for “these sprawling and complex risks.”
Whilst Howden recognised that insurance held the key to unlocking the transition and helping economies to adjust to a new climate era, it would require “a paradigm shift in how risk management is prioritised” for climate finance to be deployed, so that businesses could be assured of a stable future.
Douglas continued: “The new energy technologies are pressing the envelope in terms of innovation, and therefore riskiness, and [so] are harder to underwrite. If there is going to be a shortage of capacity, it is likely that capacity will flow to areas that are more understood and more profitable.”
It’s not that the insurance world has been slow in offering support. There was recognition that the industry had already provided additional cover across a swathe of areas, encompassing hydrogen-powered and electric vehicles, offshore wind and hybrid building materials. Additionally, plans were in place to expand into newer technologies.
Nevertheless, insurance firms were exercising caution about the level of risk they should be exposed to, in areas for which there was little historical data on losses.
The Howden report also recognised that insurers were “working closely” with green energy groups, to reduce the risks associated with new technologies and projects. One example was making the positioning of solar panels more adjustable when bad weather was forecast. This had been prompted by the number of claims arising from heavy hailstone damage.
Big increases in insurance premiums predicted
The report authors warned that climate resilience and natural catastrophe protection, combined with accumulating climate-related annual losses, could see insurance premiums rise another 50% by 2030, hitting $250 billion.
At the same time, between now and the end of the decade, the report’s authors didn’t anticipate any big drop in the amount of insurance cover for fossil fuel projects. This meant that there wouldn’t be any extra capacity which could be directed towards green transition.
“While one might expect an offset of new investments to occur versus traditional, that will not happen in the short term,” explained Raphael Troitzsch at BCG.
The firm’s Managing Director and Partner, Lorenzo Fantini, warned: “Achieving net zero and climate resilience with adaptation strategies is an unprecedented challenge for all economies. Without sufficient insurance to de-risk markets, a smooth transition will be impossible.
“The insurance market must lead the de-risking dialogue to ensure the insurability and bankability of climate action,” he said.
The study encouraged clients to adapt to a long-term view of risk. This would provide more certainty of multi-year coverage and public-private insurance solutions. Such an approach would enhance the bankability and insurability of new investments, the study suggested. It would also support firms in achieving their chosen transition strategy and improve their climate resilience.
Meanwhile, it was reported that Howden has collaborated with the UN Climate Change High-Level Champions, to build an Enabling Climate Insurance Breakthrough, working with partner organisations. The aim is to encourage cooperation between insurers and clients, to gain a better understanding of risk and how to minimise its impact on projects. In addition, the alliance would look to marshal fresh insurance capacity and get behind investments designed to minimise carbon.
UN Climate Change High-Level Champion for COP29, Nigar Arapadarai, said: “Managing risk is one of the biggest barriers to a just and resilient transition. Insurance can provide the certainty, clarity and security to achieve the radical transformation needed and will be instrumental across sectors and industries globally to shape a net zero, fair future for all.”
At least $10tn of insurance cover needed to reach net zero, report says (ft.com)
