The Big Question: Is the insurance sector meeting the challenges of energy transition risk?

The global energy transition has been at the forefront of the minds of many for the past six months following US President Donald Trump’s announcement  that the world’s biggest economy would be withdrawing from the Paris Climate Agreement. The decision saw a swift exit by a number of high profile banks from the UN backed Net Zero Bank Alliance, set up to focus finance on the funding of sustainable and green energy projects in recent weeks, and  the role of insurance in the funding of green projects has also come under scrutiny.

At an event hosted by the London & International Insurance Brokers’ Association (LIIBA) and Bankers for Net Zero (B4NZ), B4NZ COO, Hannah Cool said insurers have often been viewed as missing in action in the past when it came to the structure of green finance for projects.

Cool said “It’s a crucial conversation that deserves much more attention.

“You’re absolutely right, insurance has historically been somewhat ‘missing in action’ when it comes to green and transition finance. That’s not because of a lack of relevance or capability, but rather due to a combination of structural, regulatory, and cultural barriers.

“From the banking and finance side, there’s traditionally been a tendency to view insurance as a product for the end of the pipeline, something to wrap around a deal after the major financial structuring is done. But in the context of climate finance, that model doesn’t hold up. The scale and complexity of climate-related risk means we need insurance right at the front of the process: helping to shape deals, model long-term risk, and bring new types of capital to the table.”

Ian Summers, Global Business Leader, AdvantageGo.

The complexities and risks which accompany the transition to a future of sustainable energy have quickly become both significant and also a challenge for the insurance sector amid concerns that the systems being created do not fall into the traditional underwriting classes.

The market has reacted with broker Gallagher appointing Ian Picton into a newly created role of Head of Energy Transition in which he will have responsibility for supporting energy clients that already operate in the low-carbon and renewable energy space and those firms that are currently making the change from traditional energy operations.

He says the sector is looking at the way it can meet the needs of those who are looking to their transition strategies and those new projects.

Picton explains in his new role, the team will provide clients with specialist risk management and insurance advice for those clients in the transition space, acting as a specialist resource within Gallagher’s global energy practice.

“We recognise that those clients with interests outside of the traditional energy segments require an alternative approach with a specialist broker, who is able to identify the differing risks these projects face and provide bespoke insurance solutions,” he says. “We engage clients during their initial research, finance and acquisition stages, through to the construction and operational lifespan. This is a fantastic opportunity for us to build on our existing capabilities with a dedicated team resourcing to support clients with their specific transition needs.”

He adds: “Our clients base is across the broad spectrum of energy production and delivery. However, we are increasingly seeing energy projects which do not simply fit into the traditional upstream and downstream power and renewables risk categories.

“When we examined the issues around transition to new areas of energy, we found there were 12 different segments and various clients topics around the risks they faced. What they needed was a focal point, and with no natural home we can provide a solution and the ability to present these risks to the right markets in the right way.”

Picton continues saying that what has become apparent is that the new risks do not  fit into the structures that have been created for more established energy risks.  

“The transition risks go across various risk classes and the new practice is able to enable clients to access the whole range of the broker’s expertise.

 “The risks go across the market and the new team provide our clients with easy access to the whole Gallagher system and with it our expertise.

“Although a lot of the risks may well seem to be similar it has become clear they  are unique and bring with them unique challenges.

“We have seen for instance a rise in the work to create intercontinental cables to move the energy across the world. It creates  new risks, for example projects that look to connect an energy firm’s offshore windfarms to land based facilities.”

Picton explained the use of undersea cables for instance create a cover which spans the marine and renewables classes.

HVDC (High Voltage Direct Current) cables are specifically designed to transmit electricity over long distances with significantly less energy loss compared to traditional HVAC (High Voltage Alternating Current) systems. They are often used for connecting offshore wind farms to land or for transmitting power across vast distances, including underwater cables. 

“When you truly understand the risks,  we are better able to work with insurers to pivot the risks around HVDC cables  facilities and risks to use markets which traditionally may  have allowed others to do the hard yards,” Picton says. “When we build out the project we are always looking to align with the underwriters. However we are aware not all risks are for all markets.”

“The rise in carbon capture and storage is proving to be a significant weapon in the reductions of CO2 to combat climate change,” he explains. “Projects around methane extraction, hydrogen  and the use of thermal energy are growing in both scale and complexity. They bring with them a huge separation of the type of risks that these projects can present.

“Some of the challenges we see are regionally specific, but it is a truly global opportunity for the insurance market.

“What is clear is that these clients and projects need specific expertise and experience  and already we are seeing specific nations looking to bring in new law and regulations, the risks of which need to be understood.

“Our role is firstly to provide risk management advice  and the data to enable us to market the opportunities to the insurers.”

Picton believes that as the opportunities increase, so does the recognition from underwriters that there is a real opportunity.

“We need to educate the market so when our client asks if there is cover, we can say yes,” he explains. “There is much to do but the markets are there.’’