Hurdles remain for energy transition covers

The insurance industry is working to deliver for customers when it comes to the energy transition, but a number of factors are preventing the market from offering the full range of covers needed, a leading CUO told Commercial Risk.

Stefan Riedel, CUO of property and specialty at Munich Re, said the fact that many of the green technologies are new is one limiting factor, but so too is the economic viability of projects and, in some cases, their lack of scale.

He added that it would be helpful if insurance buyers developing and implementing cleaner ways of producing and consuming energy are more transparent about the risks.

“Transparency and information are key in this field,” said Riedel. “We understand that it may entail intense and time-consuming conversations, but they need to take place for us to understand the exposures we are about to take into our balance sheets.”

Riedel pointed out that underwriters have little option but to keep up with new technologies emerging within energy generation and those helping to decarbonise production processes.

He acknowledges that a lack of loss information is a hurdle in the case of any new risks, and some of the new methods being introduced are still in the prototype stage. To overcome this problem, insurers and reinsurers have demanded more transparency from their clients and asked to be involved in the early stages of energy transition projects. They want to have a voice in the process when it comes to analysing their risk exposures.

But in the case of Munich Re, at least, technological understanding is often not the main reason why it is hard to allocate capacity to energy transition risks.

Take the case of geothermal energy production, which has been touted as a cleaner way to produce energy with plants fuelled by underground hot water sources. Although the technology is promising, it is not new but has not picked up commercial steam.

“We have the technical challenges of geothermal projects under control, the problem is rather the lack of scale in the sector,” Riedel said. “It is hard to build a sizeable portfolio where insurers can benefit from the diversification effect across it. And neither can carriers benefit from diversification over time. This inability to build a large scale portfolio has an impact on the price of the product.”

In his view, commercial considerations are also a big reason why it is tricky for underwriters to work with green hydrogen risks.

“Hydrogen energy has been going on for a while and we are able to get our head around the risk. But there are questions within the industry,” Riedel said. “There are issues like, where should all the natural resources come from in order to build the electrolysers required to produce green hydrogen? Those are stumbling blocks that need to be considered.”

Another key part of the transition is energy storage. Companies that have invested in the development of battery systems can often struggle to find the covers they need. Fire is a big problem in this sector.

“Fire hazard is a key risk of battery energy storage systems. In fact, fire caused by battery is very difficult to extinguish,” Riedel explained. “It can create major losses, as it did in the past. We keep learning about the risk in incremental steps and integrate these learnings into our risk assessment approach.”

When it comes to carbon removal and storage, the main concern holding up capacity is the fear of long tail liability exposures.

“The main risks are likely to be on the casualty side, from environmental liability, for example,” he said. “What happens if the underground storage has a leakage? The captured CO₂ must be stored for good, but the insurance industry cannot carry this exposure forever. This is a segment that is still in its infancy from an industrial perspective and from an insurance product perspective as well.”

And there are also situations where market economics are making some underwriters wary of allocating capacity. One example is offshore wind, which, despite the potential for serial claims generated by the exposure of plants to natural events, is not suffering from a lack of capacity. In fact it is just the opposite.

“It is not the case that there is a capacity shortage for offshore wind projects. Sometimes there is even more capacity than required, therefore we need to keep an eye on profitability issues,” Riedel said.

Like any other lines of business, the economics need to make sense for underwriters as much as for their clients. So for all the commitment the sector has shown to the energy transition, insurers and reinsurers will make underwriting decisions purely based on non-financial criteria, concluded Riedel.