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Insurance market walks the energy transition tightrope

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Continued support for fossil fuel-producing clients will remain a bedrock of energy insurance underwriting for some time to come as the insurance market looks to shift towards environmentally friendly underwriting, market participants have told Insurance Insider.

Amid an upswell in the prominence of ESG initiatives, coinciding with the COP26 climate conference in Glasgow, sources stressed that the insurance industry retained an important role in supporting global energy security and would not walk away en masse from existing clients.

Rather, insuring the energy transition will involve substantial investments in renewables, working with clients to incentivise a move to sustainable business models, and providing risk management solutions for innovative technologies such as carbon capture and hydrogen-based energy, which are likely to be crucial aspects of achieving carbon neutrality.

However, underwriting sources emphasised the significant challenges posed by growing rapidly into markets dominated by new technology, with scant data making it difficult to accurately price risks.

Renewables business has already stung insurers with substantial losses, a dynamic that could be exacerbated as the pace of investment and technological change accelerates, and the pressure on insurers to transition their books increases.

John Neal told this publication that the Lloyd’s insurance market can “pat its head and rub its tummy at the same time” as it looks to achieve net-zero by 2050.

The Lloyd’s CEO said that the market must show “innovative and solution-based thinking” to develop products and services in support of the “Green Industrial Revolution”.

“At the same time this is about transition and so we must be prepared to insure our portfolio of customers to support them as they look to transition from where they are today to net zero,” Neal said.

We control some of the most powerful balance sheets on the planet and so can help to finance the transition,
John Neal, Lloyd's CEO

Sources in the energy market said they were endeavouring to maintain a “business as usual” approach for existing fossil fuel clients at renewals, whilst working simultaneously on how to manage a transition to a low-carbon business model.

“We can’t just leave those insureds out in the cold,” one underwriting source said.

Underwriting sources said that the rapidly growing renewables market represented a significant opportunity, but stressed that underwriting emerging technologies required a cautious approach, and that an unrestrained rush towards new technologies could lead to substantial underwriting losses.

“As an underwriter I fear being forced to make judgements without understanding,” one energy underwriting source said. “We have to introduce it on a scale where if it went wrong, we could absorb it.”

Meanwhile brokers are endeavouring to provide clarity about the ESG-related risk profiles of clients, with Willis Towers Watson having launched a climate transition pathway solution to help insurers identify companies with robust decarbonisation plans.

Neal said that insurers were faced with an opportunity to “develop a whole new range of products”.

“We control some of the most powerful balance sheets on the planet and so can help to finance the transition,” the Lloyd’s CEO said.

He added: “And of course none of this needs us to compromise on our underwriting and risk selection standards and our ability to generate meaningful returns and profits for our investors.”

Flood of declarations

The past months have been characterised by a marked uptick in the number of ESG disclosures and initiatives being produced by companies.

The accelerated push towards ESG by both energy companies and insurers is moving at such a pace that it has raised questions both about how underwriters can effectively price for unknown, emerging risks, and how to support long-standing clients from carbon-intensive industries.

A group of 13 leading insurers – including Allianz, Munich Re, Scor and Swiss Re – have launched the Net-Zero Insurance Alliance in a bid to transition underwriting portfolios to become carbon neutral by 2050.

Meanwhile, a host of leading insurance executives have joined the Sustainable Markets Initiative Insurance Task Force, which was launched by Prince Charles in Lloyd’s this summer.

The body is committed to the provision of climate positive financing and risk management solutions to encourage businesses and individuals to transition to a sustainable future.

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On the client side, there is also an industry-wide push towards the green agenda, with several oil and gas majors having committed to the goals of the Paris Agreement, which aims to limit global warming to below 2 degrees Celsius, and preferably 1.5 degrees.

The likes of Aramco, BP, Royal Dutch Shell and ExxonMobil are all parts of the Oil and Gas Climate Initiative (OCGI), which is committed to hitting net-zero.

Policy documents from the OGCI make clear that its targets rely on the success of technological solutions.

“Our success will rely on acceleration of innovative and large-scale solutions such as applications of efficiency measures, sharing of best practices, electrification, hydrogen solutions, and carbon capture utilization and storage, methane leak detection and elimination, bioenergy as well as responsible investments in natural climate solutions,” according to its strategy document.

However, there is growing evidence of a disparity between the net-zero pledges of governments and the reality of energy production and consumption.

The International Energy Agency (IEA) noted in a recent report that “a lot more needs to be done by governments to fully deliver on their announced pledges”.

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The IEA estimates that getting the world on track for a warming limited to 1.5 degrees Celsius would require a surge in annual investment in clean energy projects and infrastructure to nearly $4 trillion by 2030. Some 70% of the required spending would need to be deployed in developing economies.

Market sources said that investment, product development and strategic planning in the energy sector was currently moving at an incredibly fast pace and the future remained highly uncertain.

Industry executives have previously warned that a sharp withdrawal of coverage for fossil fuels would simply result in the risks being underwritten less effectively elsewhere.

As the situation develops, multiple market sources said they were prioritising continuity of cover for clients whilst transition plans are assessed, with the likes of large coal facilities still being placed in the market, albeit at higher prices.

Lloyd’s has recently updated its guidance to managing agents in developing their ESG strategies, specifically around the draw back from coal and other carbon intensive industries.

In its ESG report published in 2020, Lloyd’s stated that from 1 January 2022, managing agents would be asked “to no longer provide new insurance coverages”, for thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities.

But the 2021 report appears to pare this back, stating: “We are not mandating the exclusion of these policies.”

The 2021 report adds: “It is up to each individual managing agent to decide their own ESG targets and policy, including their approach to sustainable underwriting.”

Challenges of renewables

Whilst it is commonly accepted that both renewables and other low-carbon technologies represent a huge opportunity for the market, given the projected scale of investment, insuring emerging technologies poses inherent risks.

Renewable energy insurers have experienced chequered returns in recent years, with cable malfunctions on offshore windfarms and solar panel fires both proving persistent sources of claims.

Efforts to re-price the market have been hampered by traditional oil and gas insurers shifting capacity into renewables, dampening rating momentum.

In a recent report, leading renewables MGA GCube said that broad terms and conditions in the offshore wind market, as well as new entrants from the oil and gas sector, were starving the line of profitability.

GCube said that combined market losses in offshore wind had quadrupled in the last five years, rising from £124mn between 2010-2015 to £500mn by 2020.

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Tim Halperin-Smith of broker McGill and Partners said that the sector-wide ESG agenda had accelerated the switch towards renewables.

“The ESG agenda has certainly put pressure on insurers with heavy power and energy books to reduce their exposure to these risk types and re-allocate capacity into green risks,” he said. “In some cases this is a gradual phase out and in some cases this is a very fast withdrawal.”

Assessment complications

Seeking to comply with increasingly onerous ESG targets presents a huge challenge for businesses, in terms of accurately measuring the credentials of clients and investments.

“ESG generally is a minefield,” said Clyde & Co partner Nigel Brook. “There is no consensus at the moment about what the E means, what the S means, and what the G means. Let alone what are the metrics.”

The challenges are also exacerbated for global insurance companies.

“If regulations diverge that is awkward for multinationals, which face different regimes in different countries,” Brook said.

Brokers are looking to play a part by helping align insurance capacity with companies that demonstrate robust low-carbon transition plans.

Willis Towers Watson has signed up the likes of Scor and Liberty Specialty Markets to its climate transition pathway solution, which measures the decarbonisation strategies of companies against the criteria of the Paris Agreement.

Meanwhile insurers are also taking concrete steps to move into ESG-specific underwriting, with Beazley set to launch a syndicate in a box which will automatically provide additioncal capacity for clients that reach pre-determined ESG standards.

ESG-specific insurer Parhelion is also due to launch at the beginning of next year with backing from the likes of Howden.

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