Insurers Grapple with Climate Tech Coverage

Source: The Geneva Association

Key Points: A Geneva Association conference highlighted the many challenges insurers perceive in supporting new climate technologies. Specific to geologic storage of carbon, it was noted that traditional coverage doesn’t fit well with the damages if the CO₂ were to leak. Progress may lie in more collaboration, shorter policy periods, and government backstopping.

The Geneva Association’s Climate Tech Conference. Earlier this week, the Sustainable Finance Lab attended a Geneva Association (GA) symposium to discuss how to spur more commercial insurance engagement with new climate-related technologies and climate mitigation activity. The event followed the GA’s publication by of two related reports, Climate Tech For Industrial Decarbonization: What role for insurers? (January, 2024) and Bringing Climate Tech to Market: The powerful role of insurance (April 2024). In the former, the GA described the climate tech landscape. In the latter, the GA introduced an Insurability Readiness Framework (IRF). The IRF is designed to help insurers evaluate a new technology from an insurability perspective by identifying the key issues/risks related to technology, project development, legal/compliance, location, business interruption, long-term and ESG. The GA is an international group comprised of insurers’ and reinsurers’ CEOs.

Cataloguing the challenges for insurance participation. The insurance industry understands it has a role to play in supporting the financing of climate technologies to aid in global decarbonization. Yet the two reports and conference participants compiled a daunting list of challenges for insurance industry participation. Among them:

• New technologies lack that (loss) data to perform effective risk engineering.
• Insurers are short-staffed of engineering expertise to evaluate new technologies.
• Insurers is less collaborative / more competitive than it used to be, which slows new product development.
• There is a lack of education/understanding among entrepreneurs about risk management in general, making it harder to communicate with insurers to address insurer concerns.
• Because of the large scale of certain climate tech investment, project finance is increasingly being used to fund early-deployment stages, which is earlier than insurers traditionally get involved.

Carbon storage in focus. One of the conference focus areas was the potential liabilities resulting from leaked CO₂ from geological carbon storage. Panelists offered another long list of the various challenges confronting re/insurers, including:

• The geology of storage conditions is heterogeneous and the time scales to consider are vast, complicating risk assessment.
• There is price risk for coverage of credit reversals (if CO₂ leaks), given general expectations that carbon prices will rise over time. At the same time, insurers think buffer pools, such as those used in the VCM, are a poor — and inefficient — risk management tool, in part because the value sits idle/isn’t investable and in part because appropriate amounts to reserve are very difficult to determine.
• Potential losses appear to take shapes that are inconsistent with typical insurance profiles. To wit, quantifying losses and damages from any leakage is difficult and leakage may be more likely to be gradual vs. a large one-time occurrence.
• Re/insurers are being asked to write much longer-term policies than normal, presumably at least in part because of the project finance influence.

Solutions sought in early engagement, collaboration, more government partnership, and a little creativity. Conference speakers opined that for the insurance industry to break through these varied challenges, insurers needed to engage relatively earlier in individual project lifecycles — to understand technologies and to offer risk management expertise that would ease the path to getting coverage later as the projects matured.

Other speakers noted that the industry had overcome the challenges of insuring new-to-the-world technologies in the past — satellites was cited as an example. The industry had done so in part through collaboration among insurers to share technical/risk engineering knowledge; collaboration could include with (or it could be facilitated by) third parties (like respected NGOs). It was noted that if “loss” data for a new industry is difficult to acquire (the chicken-and-egg problem for insurance), other data is available that can give confidence (e.g., geological data to anticipate CO₂ movement in a storage zone). Pooling of risks through wider participation was also encouraged.

It was offered that public-private partnerships (PPPs) could assist, with government acting as an insurer of last resort and capping the exposure to a project to be carried by the private sector. The symposium did prominently note the roles government has already played in climate tech development. Speakers highlighted, for example, the U.S. Department of Energy (DOE) and EU as funders of development projects and supporters of carbon credits, along with the DOE’s introduction of an Adoption Readiness Level framework to support commercialization of new technologies.

4/18/2024