The insurance industry is set to play a pivotal role in accelerating the deployment of climate technology on a global basis that it is not currently prepared for.
Insurers are currently dealing with dynamic changes in existing markets associated with traditional industries. A paradigm shift toward climate-smart coverage, occurring simultaneously, makes it exceptionally challenging to devote, attract, and retain the human capital that is needed to develop comprehensive and innovative insurance products to accelerate climate technology.
Historically, in parallel sectors such as oil, gas, and chemicals, investors and operators have successfully transferred risks from the capital markets into the insurance markets, positioning the insurance industry as the critical ultimate facilitator of financing. While this has existed for decades in the old economy, the new economy is grappling with a fragmented market for innovative insurance solutions that support the adoption of climate technology.
“This will be an incredibly capital-intensive energy transition,” points out Aaron Ratner, Managing Partner of venture capital firm Vectr Carbon Partners, and Co-Founder of specialty climate insurance platform Climate Risk Partners. “Over the next few decades, and possibly a lot longer, the speed and scale at which capital and projects need to be efficiently deployed will create risks for investors, developers and operators. The insurance industry will need to evolve to play a critical role catalyzing a successful outcome.”
For decades, construction insurance, operation and maintenance insurance, and warranty insurance have helped reduce the risks associated with the development and operation of traditional infrastructure projects. The answer seems simple: the insurance industry could utilize its existing oil, gas, and chemicals teams to facilitate the underwriting of these policies and dramatically expand the capital market for climate tech deployments. However, it is far from simple, and many of the skillsets are not transferable to climate tech.
To make matters worse, insurers are actively paring back their exposure to technically intensive sectors in the old economy, where they could draw on parallel skillsets to create policies for climate tech. Insurers are competing for climate tech talent with major asset managers and corporations, also focused on aligning themselves with global climate targets.
Teresa Chan is Founding Director of Columbia University’s Master’s program in Insurance, and former AIG energy executive. According to her, “There is little or no reason for the insurance industry to miss out on the attraction and deployment of broad swaths of expertise in a variety of fields, among the many initiatives they have to address environmental and climate change issues. From data analysis and technical engineering to finance and project management, students of climate change can fulfill key roles in furtherance of climate targets. As the other ‘financial juggernaut,’ insurers can align with other members of the climate change ecosystem to create new products and services that support research, design, testing and implementation of new technology. The result should be a sustainable means of satisfying both the regulatory and practical need for climate change solutions.”
The insurance industry’s human capital transferability challenge was cemented in a recent announcement by MunichRe, which stated that it will not insure the planning, financing, construction or operation of new oil and gas fields, new oil-fired power plants or developments in “midstream” oil infrastructure like storage and transport from April 2023 forward.
According to data from insurance industry analysis group Insure Our Future, MunichRe’s share of the global reinsurance market is 13%, and its announcement resulted in a further 33% of the global reinsurance market restricting cover for oil. So, at present, nearly one half of the reinsurance market has restricted cover for the oil sector. The world’s largest insurance market, Lloyd’s of London, ceased the underwriting of a variety of oil and gas insurance contracts in January 2023.
“Climate change is forcing the Insurance Industry to move out of its comfort zone to be an effective bridge between providers of new technologies and the finance professionals who can fund the commercialization of those technologies,” says Bob Percopo, Professor in Columbia University’s Master’s program in Insurance and a former AIG energy executive. “The insurance industry took great confidence in using actuarial analysis and a unit’s underwriting skills. In the former, the law of large numbers rules.
“Unfortunately, with one-off technologies there is no large population within which to bury mistakes. There are also no large populations to develop trends or data to support underwritings.
“The industry’s approach to new technologies was an instantaneous approach, analogous to turning on a light switch — if the light went on, the coverage ends. However, the financiers not only want the light to go on, they want assurance that the light will stay on for a sufficient time period to prove efficacy. Senior, seasoned project professionals are the ideal bridge. Project finance deals with one-off situations without the crutch of large databases that have performed successfully since the 1970s.”
In conjunction with this, the insurance industry is dealing with significant turmoil in what constitutes “climate” in the eyes of the industry, severe weather and natural disasters. Climate change has already caused more frequent and severe natural disasters such as hurricanes, floods, wildfires, and droughts. This has led to heightened insurance claims and losses for insurers. To make matters worse, in many cases the data that was utilized to underwrite these weather-related policies was rendered incorrect by the impacts emanating from global climate change.
For example, areas that were previously considered low-risk for natural disasters may be at a higher risk due to these effects, which has led to substantially higher premiums or a pullback from providing coverage altogether, as has been observed in Florida in the United States.
This does not help, as insurers lump in climate tech with weather. The technologies that are critical to combating human caused climate change are in their early days, providing limited data for the insurance community to work from. For example, the more mature areas of climate tech, solar and wind, are just now becoming insurable from a data perspective in the insurance community after two decades. Despite this, many climate economy corporations are getting creative with risk and insurance to overcome this.
“The biggest choke point in renewable energy project finance is procuring insurance,” says Michael Kolodner, Global Renewable Energy Practice Leader for Marsh, the global insurance broker and risk advisor. “The smartest energy companies today are managing the risk rather than buying insurance. It’s the greatest strategic advantage that no one is talking about.”
If this pace is continued for breakthrough technologies in carbon capture and storage, hydrogen, biofuels, and battery storage, to name just a few critical sectors, the insurance industry will own some of the blame for the world’s missing its stated climate targets.
Our energy transition will likely not succeed unless new, innovative companies are developed to enable the existing insurance community to dynamically support the new economy in accelerating the deployments of climate tech on a global basis.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Nicholaus Rohleder
Nicholaus Rohleder is the Co-Founder of Climate Commodities, a climate economy-focused platform company with operating subsidiaries in physical trading, mineral processing & refining, transportation & logistics, renewable power, insurance, and financial services.
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