Climate change is set to transform businesses, requiring early engagement with insurers to understand the risks and develop innovative solutions, according to Kayne Sheppard, casualty underwriter, Zurich Global Energy.
Businesses face a sustained period of change as decarbonisation transforms business models and supply chains during the coming decade. This trend is forcing a growing number of companies to rethink their strategies and adopt new technologies and ways of working, which the pandemic has exacerbated. However, as business transformation programmes are set in motion, companies will need to proactively consider the implications for both risk and insurance, and thus understand the strategic relevance of a solid insurance partner.
Risk managers play a critical role
Risk managers can clearly play an important role in helping boards execute large-scale business transformation. The prominence of risk managers varies greatly by organisation, but risk managers have a key role in helping their businesses understand the risks and opportunities inherent in business transformation, and in beginning discussions on risk mitigation and transfer solutions.
In a changing risk landscape, businesses need to understand their future risks and opportunities, and adapt their insurance cover accordingly. Substantive business transformation – especially that brought about by climate change – will almost certainly lead to changes in exposure, creating new assets to protect and liabilities to guard against. Changes to business models and supply chains will also impact business interruption exposures, creating new dependencies and affecting revenue and profit streams.
Take climate change. The shift away from fossil fuels will involve the adoption of new sources of power, the creation of new supply chains, methods of manufacturing, the application of new technologies and materials, as well as the need to mitigate the physical effects of more extreme weather events. In a bid to lower carbon emissions, companies are already looking to use alternative energy sources, installing wind turbines onsite and solar panels on buildings, and investing in battery storage capacity. However, such moves may bring fire, windstorm or third-party liability exposures that will change risks and have implications for insurance programmes.
Insurance as a facilitator for change
Though it is often overlooked, insurance has an important role to play in business transformation. It can facilitate innovation, de-risking the adoption of new technologies and business models, as well as helping to attract financing and investment.
Insurance is not only about risk transfer. For instance, launched in 2021, Zurich Resilience Solutions helps companies to manage risk more effectively and improve their risk profile, in particular in the areas of climate change, supply chain and cyber risk management. We have been working with customers across different sectors to understand the effect of climate change on their assets, as well as the potential implications of new technologies, such as clean energy.
Insurers can increasingly offer advice, expertise and access to data and modelling tools to identify and assess risks, as well as risk management and loss-prevention services. The insurance industry can facilitate the exchange of knowledge by sharing the experience of working across sectors and geographies. For example, we have been engaging with customers in the energy sector as they transform their businesses and transition to net zero. The learnings from this engagement will be invaluable in helping us understand the transition to net zero in other sectors that follow.
Engage with underwriters early
The earlier that insurers are engaged in business transformation conversations, the better. Lenders and investors will take comfort from the backing and support of credible insurers, however insurance takes time to arrange and underwriters will need to understand the risks and get comfortable with risk management controls put in place.
Some risks may also require innovative solutions, which take time and collaboration to develop. Switching to new sources of energy, like green hydrogen for example, or adopting prototype technologies, will have implications for risk and insurance. Underwriters will need to work with customers to understand how new technologies will affect exposure and adapt their offering to meet future needs.
Risk professionals need to be proactive and take the lead. Whether adopting new technology or radically transforming a business model, it is important to start the conversation with insurers at an early stage, as this will avoid delays or surprises when it comes to arranging cover and financing. No one wants a lack of insurance to inhibit a transaction or business transformation.
Proactive conversations will become the norm
As climate change adaptation gathers momentum, business transformation is sure to rise up the agenda. Risk managers and insurance buyers need to start thinking about the implications of business transformation on their organisation’s future risk profile and engage with insurers on solutions to mitigate or transfer the risks, which could include non-traditional solutions like parametric insurance.
We are beginning to have these conversations with some of our customers, where climate change is already transforming their businesses. We want to maintain a dialogue with customers to understand their changing risks and insurance needs, bringing underwriting, risk engineering and claims experts to the table. Last year, I spent three very rewarding months on secondment, working with a global energy company going through a business model transformation, to understand the risks and opportunities of developing new green technologies, such as carbon capture and storage, and working through the insurance implications.
While secondments are currently the exception, and not the rule, closer collaboration between insurers and their corporate customers will need to become the norm as more and more companies undergo transformation towards more sustainable business models in the coming years. Many companies are making decisions and investments today that will have important implications for their future risks and insurance needs.
To fully benefit from megatrends such as decarbonisation and allow for business transformations to be a success, continuous engagement with insurance partners is essential to understand how risks are changing and to ensure that future products and services are fit for purpose. The earlier this dialogue begins, the better, and the earlier companies can leverage the opportunities that these megatrends create.
Contributed by Kayne Sheppard, casualty underwriter, Zurich Global Energy