Insurers hold key to supporting emerging risks of energy transition

The head of strategy at insurance group Beazley has told Emerging Risks that the industry has a central role to play in enabling the transition to clean energy.

As society attempts to square the current energy crisis with increasing pressure on climate change commitments, Rachel Turk (pic) said the insurance industry can and should be at the forefront of helping businesses to navigate through the energy transition.

“Record summer temperatures and catastrophic flooding across multiple regions in 2022 amplified the importance of energy transition for tackling climate change, but one of the biggest wake-up calls for governments this year was the impact of Russia’s invasion of Ukraine on energy security,” she added. “With gas comprising more than a fifth (21.5%) of primary energy consumption for countries in the European Union, and nearly a third (32.1%) of domestic energy consumption, the impact of the UK and EU’s reliance upon Russian gas has been a significant spike in pricing and enduring concerns about future supply chains.”

Turk explained while demand for gas fell by 29% on average in October across Europe, and by 24% in November – driven by milder temperatures and a desire to cut industrial and domestic energy costs – a drop in temperatures in early December has seen gas usage increase again, exacerbated by a record number of offline nuclear power stations in France and a drop in wind-driven generation.

“The move away from reliance on Russian gas by European countries has been enabled in part by liquefied natural gas imports from the United States, but countries are now tapping into reserves built up over this year as winter temperatures take hold,” she continued. “The current energy crisis has turned the collective approach to energy transition on its head, but in the longer-term, it has highlighted the need for a concerted push towards alternative sources of energy.

“The current dilemma faced by governments in reducing fossil fuel reliance is also a challenge for businesses which have made environmental issues, including energy transition, a central plank of environmental, social and governance (ESG) commitments: companies that have publicly vaunted their environmental credentials, but failed to back these up with demonstrable action on carbon emissions, are increasingly coming under fire from climate activists wielding accusations of ‘green-washing’.

“However, failure to tackle the energy transition is more than just a reputational risk for companies. Businesses face compliance challenges from a growing number of regulatory reporting frameworks for environmental issues, some of which – like the climate-related financial disclosures outlined by Financial Stability Board – are now a mandatory requirement for publicly quoted companies and larger privately-owned firms.”

Meanwhile, with the banking sector focused on developing climate risk appetite frameworks to inform regulatory disclosures, Turk said clients with a poor record on environmental issues may find it increasingly difficult to secure banking services. The insurance industry is also under pressure to incorporate climate risk into regulatory reporting, and carriers are scrutinising the environmental credentials of prospective insureds more carefully.

“Insurers have a central role to play in enabling the wider energy transition, as well as supporting clients with their own transition,” she explained. “By making more insurance capacity available to renewable energy projects and carbon capture and storage facilities, the industry can help to make green energy and carbon reduction initiatives more sustainable and profitable.

“There is also the need for a coherent, industry-wide set of underwriting questions that will enable insurers to assess the energy transition risk presented by companies, so that they can better understand how clients are managing the transition and assess which insureds present the best risks.”

Turk added Beazley is keen to support the energy transition, and will “increasingly favour companies that effectively transition, offering additional insurance capacity to businesses that perform well against ESG metrics”.

“However, we won’t be walking away from those who are finding energy transition a challenge,” she concluded.

Clients can expect insurers to ask more questions in 2023 about their carbon emissions but, armed with this knowledge, carriers will be better able to support clients’ energy transition, while providing more risk financing for renewables and encouraging green energy use across all classes of business through our underwriting policies.

“The move away from reliance on Russian gas by European countries has been enabled in part by liquefied natural gas imports from the United States, but countries are now tapping into reserves built up over this year as winter temperatures take hold.”

Rachel Turk, Beazley