FERMA warns of insurance gaps in net-zero transition
Critical gaps persist in the availability and suitability of insurance coverage to support the transition to net zero, according to a new report from FERMA, which calls upon the (re)insurance industry to recognise its role as a vital enabler of the transition of the European economy.
The new report, Insuring the Transition – The Issues Confronting Risk Managers, follows on from FERMA’s 2022 white paper Insuring the Transition. It finds the landscape largely unchanged since that time and emphasises the urgent need for action.
European companies are increasingly under pressure to transition towards net-zero but are being hampered by a lack of adequate and accessible insurance that creates uncertainty and financial barriers that could delay or derail investments in climate technologies and sustainable business models.
The report identifies the causative factors, including underwriting activities guided by pressure from regulations and/or civil society rather than clients’ needs, and a lack of capacity for specific “new” technologies, material or methods. These include (offshore) solar panels and wind farms, lithium batteries, and hydrogen fuels. Insurers continue to cite a lack of data as an obstacle to insuring the newer transition-related risks.
Valentina Paduano, FERMA Vice President and chairperson of the Sustainability Committee, said: “European companies are scaling up their efforts to transition to more sustainable business models, but without the safety net provided by insurance coverage, this virtuous dynamic is under threat. Businesses need to know that their transition risks can be transferred at a fair price in order to confidently go forward on their path to net-zero.”
Indiscriminate industry-wide exclusions, with little consideration for the specific risk profile of a particular company, exacerbate the problem. One example FERMA highlights is the recycling industry, where fire hazards increase as more lithium battery-powered devices end up in recycling plants.
The risk prevention and mitigation measures of these plants are insufficiently considered in insurers’ risk assessments, meaning that only the largest and more risk-mature businesses can find insurance coverage – and this comes at an inflated price due to a lack of competition in the market. This is especially problematic for a sector so integral to the transition towards a more sustainable circular economy.
Data scarcity is another issue: the industry assesses future risks by examining past loss events, so there is a lack of data for new, relatively untested technologies that are vital to the net-zero transition. As a result, capacity to insure such innovation risks is low.
To address this, FERMA calls for a comprehensive approach focused on two key pillars.
FERMA urges insurers, brokers, and corporate clients to collaborate early in project development to gather transition risk data. This data then needs to be aggregated and made more readily available – for example, through industry-specific information sharing schemes. Insurers must also invest in the technical talent necessary to assess these new risks.
FERMA calls upon the industry to reconsider its approach to transition risks, and encourages the insurance industry to change its paradigm and adopt a more forward-looking and constructive approach to insurance.
The report proposes that insurers develop broader technical and engineering capabilities to be able to assess transition risks before they materialize, in cooperation with their corporate clients. Further it recommends that insurers refrain from imposing blanket exclusions or one-size-fits-all pricing, as risk exposure can vary considerably between different companies and projects, to instead acknowledge and incentivise the implementation of risk prevention and mitigation measures.
Charlotte Hedemark, president of FERMA, said: “Addressing transition-risk insurance protection gaps is essential to unlocking the full potential of the net-zero transition. FERMA remains committed to fostering collaboration among insurers, brokers, corporates, and public authorities to make transition risks more insurable and to ensure that the insurance sector becomes a catalyst rather than a barrier to sustainable progress.”
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