Insurance
Insurance solutions are crucial to scaling capital-intensive, emerging climate technologies and in mitigating key risks related to the purchase of the outputs of these technologies.
How it works:
The insurance market faces unprecedented pressures, with $19 trillion in investment set to accelerate the decarbonisation of the energy, built environment, transport and mobility sectors by 2030. x Research by Howden and BCG forecasts that global insurance coverage will be required for up to $10 trillion of this investment.xi Both traditional and innovative insurance solutions will be needed to underpin the scale of these investments and meet the needs of decarbonisation projects.xii As such, additional emerging insurance products are likely to emerge that may further remove more bottlenecks that presently constrain offtake.
Prospective offtakers of low- and zero- emissions products experience several risks owing to the nascency of these technologies. These risks include, the lack of a track record for product delivery, technology performance at scale and the financial strength of suppliers. The insurance industry offers solutions to mitigate these concerns, managing key offtake risks and providing confidence to buyers to support green purchases.
Early engagement between companies and insurers is essential to understanding how insurance can help to manage risk and support offtake.xiii Early engagement may also minimise the due diligence required to obtain insurance. Key insurance products in the space include:
- Technology underperformance: This provides protection to buyers should low-carbon technologies underperform against agreed expectations.
- Parametric insurance: This insurance is triggered by an 'index’ being met. Typically used for weather or natural catastrophes, this type of coverage gives companies confidence when it comes to liquidity and speed of payout.xiv It both provides protection against physical damage and can be used to manage revenue volatility where revenue is dependent on weather availability (e.g., wind) or other specific, measurable events.
- Counterparty credit insurance: This protects against the risk of the supplier defaulting on its obligations under the offtake agreement. This typically covers non-payment, insolvency or contract breach.
- Delay in start-up insurance: This protects buyers against the financial fallout from a delay in project completion due to an insured physical damage occurrence.xv
- Cyber risk insurance: This solution can cover catastrophic cyber risks that directly or indirectly damage digital systems, such as data leaks.
- Carbon credits warranty and indemnity (W&I) insurance: This provides buyers of green products assurance in the methodology and implementation of carbon credit projects. It addresses the lack of transparency and trust by improving confidence in the legitimate and verified delivery of actual emissions removals.
What sectors can leverage this mechanism?
What challenges does it solve?
Duration
Offtake duration is defined by the supplier and offtaker with insurance playing a limited role.
Volume
Technology performance guarantees can be transferred to an offtaker under the contractual terms of an offtake agreement to mitigate a buyer’s downside risk of technology underperformance impacting the volume of green product supply.
Price
Insurance can lower the cost of capital for developers of green products, which may reduce the green premium for buyers. However, insurance cannot facilitate price discovery in nascent markets for the offtaker.
Delivery terms
Delay in start-up insurance, counterparty credit risk insurance and technology performance risk insurance all contribute towards reducing delivery risk for buyers of green products.
Technical definition
Product guarantee insurance could be purchased to cover a product’s specifications in circumstances where the technical definition of the delivered product does not meet the agreed contractual requirements. Carbon credit warranty and indemnity (W&I) insurance is also available and supports the definition of the environmental attribute purchased. Additionally, cyber risk insurance is a valuable consideration for offtakers as verification of the provenance of green products becomes increasingly digitalised.
Enabling infrastructure
A combination of insurance products can reduce the financial risk of low-carbon projects, increasing confidence and lowering the cost of capital for infrastructure investments across both public and private sectors.
Regulatory uncertainty
Insurance may mitigate certain outcomes, such as change-in-law exposure, yet insurance alone cannot overcome regulatory uncertainty for green product offtake.
Trust
Counterparty credit risk makes the insurer an alternative counterparty to the warrantor, therefore guaranteeing counterparty strength in the longer term (10+ years).
C-Suite and board buy-in
Early collaboration with insurers is likely to instil confidence in the C-suite and board that the key risks have been recognised and mitigated.
Procurement capability
Not deemed relevant.
Mechanism challenges
These new technologies and clean industrial processes carry uncertainties and risks that pose challenges to the affordability of insurance.xvi While these challenges do exist, the insurance industry is developing innovative solutions to overcome hurdles. However, specific risks may not be insurable through the commercial insurance market, necessitating other solutions. If not resolved, such risks could stall growth and prevent the technology from scaling.xvii