Insurance market must rise to challenge of green transition

Adrian Ladbury interviews Udo Kappes, head of insurance at RWE, and finds that, along with many other German and European insurance managers, he is looking for a braver and more innovative approach from insurers to support the shift to net zero.

Udo Kappes, chairman of the European Captive Insurance and Reinsurance Owners’ Association (Eciroa), took the role of head of insurance at RWE, the German multinational energy company headquartered in Essen, in October 2022.

He joined RWE from Franco-German aviation giant Airbus, where he had worked for two decades in various senior risk and insurance management roles. Kappes was head of P&C, financial lines, group employee programmes and reinsurance at Airbus Aeroassurances, the group inhouse broker, when he left.

In the lead up to this year’s GVNW Symposium in Munich, Kappes told Commercial Risk Europe that he made the move to RWE because he likes a challenge, problem solving and seeking out innovative solutions, ideally with a captive.

He spent the last couple of years at Airbus at its Toulouse base, moving from his native Germany, after the group re-organised and centralised management functions in France.

He enjoyed his time at the company and in France but decided to move back to Germany when the job offer at RWE was made because it represented the kind of challenge he relishes.

At RWE he certainly has a lot on his plate as the German energy giant manages its green transition, finally exiting the coal-fuelled power business and making a huge investment in a shift to renewable energy.

The group has already reduced its CO2 emissions by half since 2012 and currently plans to phase out its coal-fired power generation completely by 2030. It plans to invest €55bn worldwide in offshore and onshore wind, solar energy, storage technologies, flexible generation and hydrogen projects in Germany, the US and the UK.

It also has bold expansion plans in other European markets, plus selected countries in the Asia-Pacific region – such as Australia, Japan and Korea.

This is all very positive, fully in line with, and supportive of, German national and EU transition efforts. But, as everyone in the risk and insurance business knows, this transition comes with some significant challenges and potential banana skins, not least from a reputational perspective, that are holding the risk transfer sector back.

Following Russia’s invasion of Ukraine, Europe was plunged into crisis because it was so reliant on Russian energy. Germany was hit hard. Ultimately the German government felt it had to make the difficult decision to mandate the continuation, and even re-opening, of coal plants to plug the gaps on a short-term basis.

The challenge for the recently arrived head of insurance at RWE was to secure adequate cover for the unpopular coal-based operations and the new renewable investments at the same time.

This was, and is, a tricky job because insurers back away from fossil fuel operations under pressure from NGOs and, at the same time, often struggle to deliver solutions for the new technologies driving the green transition.

Kappes said that he was ready and willing to take up this challenge because he saw the right fit and the right culture at RWE, with a firm eye on making the transition work.

“Management was looking for someone who was a good fit to the group culture, a leadership culture, which is very important. I had other interested parties but this felt like the right culture at RWE. They fitted my views about the importance of relationships. It’s a very open culture and really people driven,” he explained.

Kappes’ international experience was important too, given the group has global expansion plans. “It was important to find someone with international experience and leadership experience. My job is not to sell what we do but rather help and coach and develop ideas together,” he said.

“It was important for me to be with a company with a strategy for the future, to create something for society. RWE was perfect because it is shifting from traditional fossil fuel-emitting activity into renewables, and needs dynamic and innovative insurance solutions that fit that strategy and help bridge elements between the insurance and investment strategy of the group,” explained Kappes.

The fact that RWE had an established captive was also a key attraction for Kappes, who is a board member of US-based Captive Insurance Companies Association (Cica), as well as leader of Eciroa.

“I wanted to retain a role in the captive sector; this was important to me and so it was again a good fit. We are currently working on solutions with the captive to help support the growth and transition of RWE, which is again positive,” he said.

Having a mature captive will be useful in the years to come as Kappes attempts to steer the group through the transition from an insurance perspective.

“The old part of the business, coal-based, is to be phased out under current plans in 2030 but it still needs cover somehow… many insurers are not keen to support coal mining and energy production by coal firing and so it is a challenge to convince them to still support us,” he said.

“But if we shift off coal firing right now, the security of electricity supply would be at risk. Then you have the challenge of the new technologies supporting renewables, which not all insurers are comfortable with yet and don’t understand, such as offshore and floating platforms in particular,” continued Kappes.

“The insurers say we need more time, but we need to find acceptable capacity at the right price now. This is a big challenge,” he added.

Fundamentally, it is a race against time as insurers make public commitments to pull out of insuring fossil fuel-based industries, and power generators such as RWE make the big investments in clean energy.

“There is cover out there for fossil fuel activity but the insurers have committed to reduce their carbon footprints so we will stay as long as necessary, which is fine. But when we lose capacity there is no replacement. Some [insurers] can stay with their existing share but no more. We appreciate the support of those that remain but it’s a big challenge,” said Kappes.

The captive helps, of course, but at the end of the day, it’s more of a risk management tool than a major risk transfer tool, he explained.

And then there is the difficult task of finding adequate cover for so-called transition risks, as supply struggles to keep up with escalating demand.

“There is a dedicated market for renewables but some insurers are still carefully developing experience; offshore wind operations especially require specific underwriting knowledge,” explained Kappes.

“This is why insurers want, and need, time to learn and become comfortable with the related challenges. We help them and we are OK with the level of capacity currently but for this growing market more players are needed,” he added.

Kappes clearly has the experience and knowledge needed to help steer RWE through this tricky time and insurance management challenge. But the scale of this challenge should not be underestimated and the insurance market needs to up its game to support such major players through the transition.

As ever, a more bespoke and less siloed approach would help. Surely the investment made by leading insurers in such a critical area will be worth it in the long run because they will be able to continue supporting their major customers into the future. Taking the reputational gamble of also continuing to back the legacy energy market as the transition is made will perhaps be more tricky.