Opinion - 25/January/2023

Insurance’s unspoken role in the transition to net-zero

Following COP27, the climate conversation is very much turning towards implementation. Insurance markets have a double role to play here, says Charlie Langdale from international insurance broker Howden

The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy

Insurance should do much more than pick up the pieces

There are two key ways insurance can contribute to the climate challenge. One you will have heard of, the other you might not have.

This is partly because the insurance element of the deal is often actioned under the shroud of a confidentiality clause. But the following examples go to show you what is possible when you start to think of financial innovation and how insurance can grease the economic wheels to get capital moving to serve the greater good.

Much of the conversation around insurance’s role in the fight against climate change focused on the need to adapt in order to manage the increasing number of extreme weather events. People are rightly asking, how can traditional insurance be reliable and responsive enough to stay relevant in the face of such huge challenges?

There is a good deal of innovation in this area. COP27 saw lively discussions around the future role of “parametric” insurance products. This means designing insurance to pay pre-ordained sums at pre-agreed data-driven triggers, completely bypassing the traditional route of protracted claims assessment and a requirement to prove the loss.

Examples of these triggers include excessive rainfall or wind, drought or the height of a volcanic ash cloud.

In this way, “parametric triggers” make it possible to immediately get much-needed capital into disaster zones. This can make a real difference in how humanitarian organisations and small-holder farmers on island nations are able to manage the impact of natural disasters.



But to focus the conversation entirely around picking up the pieces after disasters misses a key point: the other half of insurance’s role in the climate response.

The investment needed for a global transition to net-zero emissions represents the biggest reallocation of capital in human history. There will be huge advances in energy technology. Innovative products will need to be developed and scaled up very quickly, which can amplify the financial risks.

This means investors are being asked to back things that are beyond the scope of their usual risk appetite. Banks usually have credit appetite models that large, technology-centric clean energy projects often do not fit in to.

But with intelligent use of credit insurance, it is possible to design policies to cover the repayments on a multi-year, uncancellable basis. This guarantees that they will be met throughout the project finance period.

In this way, banks are comfortable lending more, for longer, so key environmental projects can get off the ground.




We are entering a period of unprecedented investment in essential technology and infrastructure projects. McKinsey, the US market analysis firm, estimates the figure to be around $125 trillion between 2021 and 2050.

This essentially means we are standing on the precipice of another industrial revolution—and in such times, insurance plays a vital role in the liquidity of capital markets.

It is difficult to overstate the role of insurance in the first industrial revolution in the 1800s. With the new factories, fires were a huge risk. The property insurance market evolved in step with the growing need, giving capitalists the confidence to invest.

There is a similar situation today, with more variety. Speaking to clients, every organisation has a different take on things like ten-year transport strategies, future commodity exposures or their shift to renewable energy and more sustainable materials.

Often they do not realise the role insurance can play in de-risking their efforts towards net zero. For most people, insurance is just an annual compulsory purchase problem, often governed by regulation. It rarely comes to mind as a tool to deal with the volatility and risks of tomorrow, but the opportunity is there.



Insurance will have to evolve alongside every new technology or commodity. Sometimes the insurance products are not quite there yet, but conceptually insurance is incredibly flexible.

A good example is the voluntary carbon market, where a recent insurance innovation is making offsets more trustworthy and tradable by wrapping them with insurance.

Insurance greased the cogs of the industrial revolution—now it is time to be the wind in the sails of the clean energy revolution.


If you have a thoughtful response to the opinions expressed here or if you have an idea for a thought leadership article regarding an aspect of the global energy transition, please send a short pitch of 200 words outlining your thoughts and credentials to: opinion@foresightdk.com.


Leave a Reply

Your email address will not be published. Required fields are marked *

Related articles

Insuring a renewable future

As the clean energy industry forges ahead into new markets, sometimes with technologies yet to stand the test of time, conditions for obtaining insurance for renewable energy facilities have tightened significantly, particularly for the increasing number of projects built in areas susceptible to natural disasters

Read more

What voluntary carbon markets need to do next

A large, mature voluntary carbon market is urgently needed. To get there, it has some growing up to do, says Charlie Langdale, from international insurance broker Howden

Read more

Are COP talks really worthwhile?

Following yet another round of COP negotiations in Sharm El-Sheikh, Egypt, only limited progress again was made in the global effort to keep global warming limited to 1.5C. This week, the team discusses the value of these negotiations in the quest to avoid catastrophic climate change

Read more

Small-scale energy, development and what to expect from MDBs

Multilateral development banks have the unique ability to bring in innovative financing structures, mitigate risks, help the government to drive policy and institutional change, and bring in the knowledge and innovation needed in the market, says Annisa Sekaringtias at E3G

Read more

A ‘buildings breakthrough’ agenda at COP means heat pumps are in the limelight

Placing decarbonisation of buildings on the international agenda means heat pumps can finally have their moment in the spotlight, says Richard Lowes of the Regulatory Assistance Project (RAP)

Read more

Africa’s climate transition

This week, Policy Dispatch takes a look into Africa’s energy transition, the main hurdles that the continent’s 54 nations are facing, and its untapped renewable potential with Saliem Fakir, Executive Director at the African Climate Foundation

Read more