Three ways insurers can support the renewable energy transition

Global renewable energy capacity is expected to jump by a third this year – a hugely important step forward in the green transition. Largely precipitated by energy security concerns and higher fuel prices, policy measures in the United States, EU and India are also playing an important role, supporting initiatives to cut energy-related emissions.

While it is encouraging to see solar PV and wind power projects gaining momentum, there remains a lot of work to be done to meet net-zero ambitions. Most energy companies today still have many traditional hydrocarbon-based assets, and the re/insurance sector has a vital role to play in facilitating a shift to renewable energy sources.

At a broader level, our own analysis reveals a green financing gap in the trillions of dollars – and this needs to be closed in order to make more meaningful progress.

Renewables projects present a number of challenges for investors – not least a need for high up-front investment and uncertain returns which can take a long time to realise. Novel technologies can also add to the risks and unknowns.

And while there are undoubtedly some elements in common, each project comes with a different set of risks uniquely influenced by factors such as location and technology.

On top of all of this looms the growing risks associated with climate change. More severe weather conditions like floods, convective storms and hail events add to the potential hazards associated with renewables projects.

All of this combined can deter investors and has contributed to the financing gap.

From risk mitigation through to helping identify climate-related exposures, there are three key actions re/insurers should be prioritising right now.

An innovative approach to risk management and product development from the sector can unlock the necessary capital and give further momentum to the green transition.

This includes underwriting risks during the construction phase, leaning on insights and data gathered from previous experience to help balance out uncertainties. It also involves facilitating output guarantees which ensure a base level of returns to investors and operators.

By leveraging data analytics and AI, the sector can develop innovative insurance solutions that address the unique risks faced by green energy projects. Part of this solution will come in the form of parametric offerings, which will pay out claims based on bespoke thresholds.

Given the scale of the transition needed, and the speed at which it has to happen, the re/insurance industry needs to prioritise creating and exchanging data to inform risk insights and improve understanding across the sector.

The insurance industry also has a role to play in encouraging innovation and supporting the adoption of new technologies.

With a unique perspective on the risks involved, it can share insights to inform new projects, helping address risks and volatility without sharing proprietary information. This is particularly relevant given the talent gap in the renewables sector in some markets.

For our own part, Swiss Re set up the Centre of Competence for Renewable Energy, which aims to help address the data and knowledge gaps in frontier markets, as well as draw on existing relationships and partnerships to support projects. By utilising insights unique to each region, incorporating data such as local weather conditions, insurers can obtain a ‘big picture’ view of their projects in their own language.

Alongside this, insurers can use their own assets to invest in renewable projects. Specialists such as Climeworks allow insurers to enter long-term purchase agreements for direct air capture and storage of carbon dioxide.

Strategic partnerships underpin all of this work. Much of this activity – and our ability to mobilise sustainable finance – relies on goodwill and collaboration between insurers, governments and financial institutions.

A good example of this is the green bond market, which is less than 2% of the overall global bond market. Together we need to take stronger action to reduce barriers to investment in this way.

As we work towards meeting the carbon-curbing targets set out in the Paris Agreement, the renewable energy transition is fundamental. And insurers play a role in managing the far-reaching systemic change that’s needed to make this a reality. By boosting access to finance, helping manage risks and supporting innovation, the sector can help drive further momentum in adding renewable capacity.