More than half of the $19 trillion earmarked for the global transition to net zero will hinge on insurance coverage, creating significant structural pressures for the industry, a recent report reveals.
According to a joint analysis by insurance broker Howden and Boston Consulting Group, at least $10 trillion of new insurance coverage will be essential for the energy, road transport, and building sectors between 2023 and 2030. This includes major infrastructure projects such as offshore wind farms, solar energy installations, and the insulation of existing housing.
Rowan Douglas, CEO of Howden’s climate division, emphasized the report’s role as a “wake-up call” regarding the critical importance of insurance in facilitating the energy transition and the substantial challenges it poses. He highlighted that the market stresses will be “ubiquitous.”
“We are going to be having this energy transition globally, at pace and scale, all at the same time,” Douglas stated.
Both industry executives and policymakers are increasingly scrutinizing the insurance sector’s capacity to support the infrastructure and technology necessary for the energy shift, questioning whether the industry can manage these expansive and intricate risks.
Currently, insurers provide additional coverage across a variety of sectors, including hydrogen-powered and electric vehicles, offshore wind, and hybrid building materials, with plans to extend into newer technologies. However, there is an inherent pressure on insurance firms to carefully manage the new risks they undertake, especially in areas lacking historical loss data.
“The new energy technologies are pressing the envelope in terms of innovation, and therefore riskiness, and [so] are harder to underwrite,” Douglas noted. “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.”
In response, insurers are collaborating closely with green energy groups to mitigate the risks associated with new technologies and projects. For instance, they are adjusting the positioning of solar panels in anticipation of severe weather to prevent damage from heavy hailstones.
The report also indicates that there will not be a significant reduction in the insurance available for fossil fuel projects by the end of the decade, which could otherwise free up capacity for green initiatives.
“While one might expect an offset of new investments to occur versus traditional, that will not happen in the short-term,” said Raphael Troitzsch, a managing director at BCG. The growing need to provide more coverage against natural disasters will further compound the pressures on the insurance sector, the report concluded.
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