Insurers have a responsibility to offer long-term solutions     

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

Twelve-month solutions to 25-year problems will simply not cut it anymore

When you think of insurance, you think of 12-month annually renewed contracts; the two go hand-in-hand. This used to be pragmatic for clients and carriers, enforcing competition in the market and helping insurers effectively manage their regulatory capital obligations.

However, the world is changing. The world’s energy transition—widely described as the greatest reallocation of capital in human history—needs a new approach from insurance.

Traditionally an exercise in procurement, insurance needs to become a collaborative, long-term solution, to effectively manage emerging risks. Something that better reflects the nature of green and low-carbon energy projects and the associated investment hurdles.

FAR HORIZONS

In the UK offshore renewables space, nationally regulated Offshore Electricity Transmission (OFTO) licences are issued over a 25-year term. In contrast, the assets are largely insured one year at a time.

Insurance is one of the biggest costs borne by projects, and depending on insurance market cycles, it can have marked changes in price. This makes financial planning and prudent allocation of capital incredibly difficult.

In many cases, clean energy technologies will be new and largely untested, and developers will require committed capital for many years. Returns will not be realised overnight and quite possibly not even within the current board’s tenure, with the average CEO now serving just 48 months.

Many organisations are comparatively loyal to their insurance partners with relationships that span many years—albeit on a seemingly insecure, one-year rolling contract.

Loans, bonds and other financial products all have long-term tenors, so why not insurance?

PLAN FURTHER AHEAD

From the insurer’s perspective, one-year contracts are tempting. This is especially the case in a changing world where the losses of yesterday rarely equate to the losses of tomorrow. The annual policy standard provides huge flexibility for insurers, allowing them to simply pull out of areas of unattractive exposure with, in effect, 12 months’ notice.

In the past, this was also an opportunity for clients. But is this really adequate today in an increasingly volatile world where business is finding it increasingly difficult to predict their long-term exposures?

With uncertainty in consumer, business, government and global markets, buyers should be able to lock in rates to avoid dramatic swings in pricing or, more importantly, being left without any insurance at all.      

Such deals will cost more in the short term, akin to fixing a mortgage rate. If you lock in a rate for ten years, it costs more than fixing for two. But, your repayment costs become more predictable. It is time for insurance companies to discuss with their clients, the value of long-term guaranteed insurance capacity.

PREDICTABLE PAYMENTS

Everyone involved should welcome any solution that brings predictability to the costs and profitability of financing and developing sustainable energy projects and it is one way insurance can stay relevant in a rapidly evolving environment.

Aligning insurance solutions to how the capital markets work is an essential next step for the insurance industry. If capital is loaned over 25 years, the risk management planning must work within the same timeframe.

I believe that the insurance market has a responsibility to offer long-term solutions, to be the advocate of long-term planning and to help organisations understand what their risk profile looks like over the next decades.

Many organisations are not putting enough thought into what their assets will be worth in 20 years’ time or how they might be affected by climate change, where models that predict long-term exposures are becoming increasingly available. Insurance has a critical role to play in advising the board on how to de-risk and prepare for their future. A future beyond one year. •

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.