How insurers can protect and nurture innovative low-carbon energy projects

Before the devastating wildfires that struck the US state of California earlier this year, the growing insurability problem facing climate-impacted properties was already concerning home- and business-owners globally.

State-created "insurers of last resort", though flawed in design, have stepped in to underwrite US homes in Florida and California, where the private market is fleeing. In Italy, new legislation demanding that business owners take out climate-risk insurance cover has stirred debate.

Global warming is a primary driver behind the increase in weather-related property damage. And so swift transition to cleaner energy sources is imperative. But when it comes to mitigating risks and adapting to a climate-vulnerable world, another insurance story deserves just as much attention: Many insurance carriers don't offer consistent, affordable and robust coverage for innovative low-carbon energy projects.

The renewable energy insurance market remains stubbornly under 30% of the size of the fossil fuel insurance market. AXIS Capital, Aviva and Munich Re are reportedly the only major insurers that write more direct premiums for renewable energy than fossil fuels. The lack of cost-effective, globally available cover could throttle renewable energy investments, which are as critical to energy security as they are to decarbonisation.

Renewables underwriting is not an ESG tickbox exercise. Swiss Re Institute estimates that, if countries deliver on their current renewable energy targets, the related investments would generate additional premiums from the energy sector of $237 billion by 2035, compared to $22 billion in premiums from oil, gas and coal insurance paid in 2022. Even with more sluggish progress, potential premiums remain vast.

Renewables underwriting could also help to lower losses from costly climate-related risks. One study found that the estimated climate-attributed losses of 28 top property and casualty insurers totalled $10.6 billion, close to the $11.3 billion in fossil fuel-related premiums insurers collected in 2023. For more than half of these companies, climate-attributed losses exceeded fossil fuel-related premiums.

As insurers weather complex, emerging risks, finding ways to write emerging renewables’ business accurately and quickly should be a cornerstone of resilience-building for the insurance industry itself.

Insurers may fear that scant historical data on vulnerabilities and losses for new technologies and processes, colliding with an uncertain regulatory environment and erratic climate patterns, is leading to mispricing of risk and could generate outsized claims.

To allay these concerns and catalyse change at the speed and scale required, insurers must undertake three immediate actions:

Insurance executives must engage more closely with financiers across the capital stack, understanding the risk transfer needs of governments and other project backers.

Banks and project financiers often require insurance as a prerequisite for lending or investing. Even where other capital has been committed, lack of affordable or appropriate insurance cover can effectively block the development and execution of projects that exceed the risk tolerance of investors and creditors.

Insurers must proactively engage with other financial actors – both public and private – and project developers to co-design appropriate coverage. Output guarantees that ensure a base level of return for investors and operators are one example of such product innovation.

A shift is needed from a reliance on historical pattern recognition to inform pricing and underwriting decisions to engagement with real-time data analytics and technology-based risk assessment instead.

Insurers often lack precise, location-specific data on climate impacts and terrain characteristics. This deficit is particularly pronounced for rural and remote areas, where large-scale solar projects are often located due to the expansive space on offer. Underwriters also need data to assess the vulnerabilities of technologies deployed on renewables sites – from solar photovoltaic (PV) panels to artificial intelligence management systems – as well as the policy and regulatory environments.

Fortunately, several technologies can support this kind of risk assessment. Remote-sensing applications can help identify risks from natural hazards like fires, floods and land subsidence. Satellite imagery can assess and monitor vegetation growth around energy infrastructure, which is particularly important for solar farms and transmission lines. Digital twins – virtual replicas of renewable energy assets – allow for continuous monitoring of asset performance and condition. This enables predictive maintenance and reduces the risk of unscheduled outages and equipment failures.

Technology-based risk assessment could add particular value in countries where there is strong potential for renewable energy adoption but where global insurers have less experience. For example, by 2050, solar PV could account for more than half of Middle Eastern countries' power supply. But existing PV technology can be vulnerable to environmental factors including sand and dust storms and extreme heat, all of which can damage panels and reduce production capacity.

Understanding the impacts of these factors on solar facilities would support underwriting and unlock more robust risk mitigation. It could also help to enable insurance-informed design and construction.

Technology is never a catch-all solution, so the third step insurers should take is to integrate more qualitative information into underwriting decision-making. This is particularly important as renewable energy technologies and processes – from solid-state batteries to green hydrogen production – evolve against a backdrop of a shortage of risk engineers equipped to assess projects employing these innovations. Projects employing state-of-the-art innovations present particular challenges.

Only a few subject matter specialists may possess cutting-edge expertise for any one new energy technology or process. Accessing and incorporating this expertise will give insurers a more nuanced profile of the risk of an innovative renewable energy project.

The insurance industry has already played the role of a “dewilder” by underwriting the risks associated with fossil fuels, as author and entrepreneur John Elkington has pointed out. Were insurers to accurately and swiftly underwrite emerging renewable energy projects, the industry could shape-shift into a rewilder, while also making an outsized contribution to securing energy and building economic prosperity.