According to a new white paper from the Federation of European Risk Management Associations (FERMA), the (re)insurance industry must do more to support corporate clients in making the transition to climate neutrality.
- The shortage of insurance capacity is holding back the transition to low carbon.
- Insurers seem unwilling to cover new products and technologies that are part of the transition.
- Data issues are over-stated.
- The insurance industry’s aversion to risk and slow integration of knowledge aggravates data shortages.
- Insurers only gain experience if they underwrite; they must play a more supportive role in the transition.
Insurers ́ reaction to pressure
Overall, FERMA members have the impression that insurers are making a knee-jerk reaction to i) regulatory pressure and ii) pressure from NGOs and civil society in terms of their underwriting activities with little (or no) regard to their clients’ needs. The hard insurance market that companies are facing exacerbates this situation.
This results in businesses experiencing restrictions on insurance coverage regarding their transition activities. These restrictions can be witnessed in three ways:
1) Limited or unavailable cover because of current or past activities, such as links with coal or mining. This makes it more difficult for these companies to proceed with transition.
2) Lack of coverage for specific ‘new technologies’ or materials. This includes (offshore) solar panels, (offshore) wind farms, hydrogen fuel or storage, new construction techniques, solutions or materials, which all underpin the transition from fossil fuels.
3) Exclusions of specific risks. Property damage and bodily injury may be excluded when there is a direct or indirect link with coal plants, and mining activities, or when battery packs are stored or used in for instance in sprinkler pumps.
According to FERMA, corporate insurance buyers regularly hear from insurers that there is not enough data to underwrite certain risks or projects, such as those involving timber. To insurance buyers, this appears overly risk- averse and backward looking.
Further, it adds: “we find that insurers are slow to incorporate new information into their technical and underwriting standards. This is especially the case when it comes to safety systems where insurers do not yet recognise many of the technical developments.
From the client’s point of view, there is plenty of information available for most new technologies or materials, which could be incorporated in insurers’ models.”
“It is also our view that insurers could improve the use of available data. Risk aversion in the insurance industry, and the slow integration of knowledge and learnings aggravate what insurers perceive about lack of data.”
“Insurers cannot build knowledge without the experience of taking on new risks. Understanding losses from one project might help avert claims from many other projects. If projects do not go ahead or only proceed slowly due to lack of insurance coverage, loss experience does not develop quickly enough, either.”
Lack of consensus
FERMA suggests that another problem for insurance buyers is the lack of consensus in the market. In many respects this is a normal consequence of the market functioning. However, this lack of consensus, it says, has caused practical difficulties for insurance buyers. For instance:
- Lack of consistency. Each insurer sets different terms and conditions, standards and requirements for clients. Conforming to all these demands can make it challenging for companies to obtain full cover. When enterprises are implicitly forced to cater to different requirements by several insurers in multiple lines of coverage, insurance management is difficult at best and unmanageable at worst.
- Unsuitable standards. For example, some European enterprises are witnessing that the insurance inspectors’ standards for solar panels and roof loads are US-driven and so do not reflect the realities and needs of European clients. This can prevent some enterprises from installing solar panels because they cannot find suitable insurance coverage.
- Lack of transparency. Insurance buyers have to complete an increasing number of questionnaires for coverage, and these vary widely. Among the common complaints are that for some data points, there is no clear explanation how they determine the extent or price of coverage; and that the client cannot know how their answers will impact the insurability of the project.
FERMA suggests that this lack of transparency and subsequent absence of dialogue about risk mitigation measures in some cases prevents the execution of projects that could have otherwise gone ahead.
It also highlights poor service standards from some ‘local’ insurers. This ranges from the underwriting process to claims handling.
“Based on this current market environment, clients are unsure about their coverage options moving forward. Some buyers observe that they are paying higher premiums and increasing retentions for insurance coverage needed for contractual reasons with their customers, or to ensure financing from investors.”
“There is also an issue on affordability and adequacy of certain coverages. One example we have seen is the doubling of premiums by insurers with warranty clauses that would expose the insured to the full loss for certain timber projects.”
“Furthermore, the word ‘uninsurable’ is increasingly used by corporate insurance buyers about specific risks. More than 4 in 10 risk managers surveyed by FERMA in the 2022 European Risk Manager Report believe that some of their locations or business activities will become uninsurable in the future.”
“As a result, corporates increasingly feel that they need to self-insure or manage more of the risk on their own. Captives are becoming even more attractive as a solution, but they are not a panacea. The lack of sufficient risk transfer capacity will limit investments in innovative technologies innovation often entails new risks.”
This is an edited and abridged version of the FERMA white paper, ‘Insuring the Transition’. To access the full paper, please contact FERMA using this link.