From the April 2013 issue of Investment Advisor • Subscribe!

Energy Risk Equals Insurance Opportunity

Insurers could trailblaze the way to a cleaner energy future, says Swiss Re study

There’s a Chinese character that can be read as either risk or opportunity, and according to a report by global reinsurer Swiss Re, that’s exactly what the future in energy production presents for the insurance industry. What makes that character particularly apropos is the fact that the Asia-Pacific region is expected to account for half the energy financing globally in years to come.

Swiss Re believes insurers have a major role to play in the world of global energy, with risk presenting opportunity for new products. So says its report, “Building a Sustainable Energy Future,” which pointed out that changes in energy sources throughout the world not only present hazards as new, untried sources are developed, but also provide chances for the insurance sector to broaden its scope.

The Scenarios for Climate Change (SCC) project, as detailed in the report, took a look at probable future situations to see how things might play out for the world’s power supply in 2050. According to the report, “[The scenarios] highlight investment potential and risks which, if adequately addressed, could lead to cleaner growth and create long-term win-win situations both for our climate and our economy.”

The report cited five drivers of energy and climate markets: economic growth, energy technology, fossil fuel prices, global and national climate policy and public perception of climate change. Any of these could compel rapid action toward green policies or act as a hindrance to action and mitigation.

It also set out six climate change scenarios “based on the expert judgments of SCC consortium members [… that] serve as illustrations of how the most important forces at work might play out.” None of those scenarios, however, “reaches the 450 parts [of carbon] per million (ppm) path, which climate scientists say is needed to keep global warming at 2°C [3.6°F] or less,” Swiss Re said, and therefore “adaptation will become even more important to soften the impact of a changing climate.”

Adaptation to a climate that could be 5.4°–9°F higher by the end of the century will require considerable action, since that kind of an increase “would have very severe environmental and social consequences.” The earlier action to reduce greenhouse gas (GHG) is taken, the less costly it will be, but as the report said, “even if all emissions were stopped immediately, the climate would continue to change in coming decades.”

Andreas Spiegel, head of sustainability and political risk at Swiss Re, who authored the report, said in a statement, “This study clearly shows that renewable energy will play an important role in the global power mix of the future.” He added, “At the same time it shows that adaptation to climate change will increase in importance because the window of opportunity for mitigating climate change is getting much narrower.”

According to the report, in each of the six scenarios—which range from not pursuing a reduction in GHG emissions at all to a global consensus on climate change—the energy sector is in for increased future losses. By 2030, losses will escalate along with higher investment in renewable energy and abatement technology. This presents an opportunity for the insurance sector—most evident in the Asia-Pacific region, where there is “enormous investment potential.”

Mitigation is cheaper than adaptation—the former estimated at about 1% to 2% of global GDP and the latter “estimated to be in the 5% to 10% of global GDP range until 2050”—but the likelihood of swift change in the former category is considered low, unless something drastic intervenes: high fossil fuel costs, for instance, or a breakthrough in energy technology.

With that much money at stake, said the report, there are plenty of opportunities for the insurance sector to step in with new products and with more direct involvement in the process. Agostino Galvagni, CEO of Swiss Re Corporate Solutions, said in a statement, “Insurers should support the further development of low carbon-intensive power production.”

Galvagni added, “They need to be innovative and provide solutions along the whole value chain. For example, insurers can enable project financing through construction insurance and reduce cash flow volatility of intermittent energy production through weather risk transfer solutions.”

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