Power

In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for power.

Key developments in 2021

The last 12 months have seen an increased focus on the climate crisis leading up to the United Nations Climate Change Summit, COP26, at which some 200 countries aimed to state their plans to cut emissions by 2030 with a view to reaching net zero carbon emissions by 2050. 

There was some scepticism around the conference given that green-house gases in the atmosphere have continued to rise despite the various agreements and mandates dating back to Berlin 1995. Nonetheless, COP26 has seen the making of various pledges to phase out the use of coal and other fossil fuels within the next ten to twenty years. 

The insurance industry has also contributed to efforts in reaching net-zero. The Net-Zero Insurance Alliance ('NZIA') is one way the insurance industry is playing its part in the transition to a net-zero emissions economy. Members include Allianz, AXA, Aviva, Munich Re and Zurich. Using their underwriting, claims and risk management experiences, the members of NZIA will assist in the transition to net-zero by working towards decarbonising their investment portfolios. 

At the forefront of these initiatives, insurers each have their own environmental, social, and governance (‘ESG’) goals. With around two thirds of onshore and offshore large risk losses coming from companies involved in fossil fuels, arguably, the transition to net zero is not only environmentally responsible, it also has potential financial benefits. 

However, the world still needs energy. Since May 2021 the prices of oil and gas have soared by 95% due to shortages, which caused panic and reminded us that society needs an abundance of stable power sources.

What to look out for in 2022 

The transition to net-zero is set to continue through 2022 and beyond, but according to The Economist, investment is currently running at half the amount needed to meet the net-zero goals. In the years to come, following COP26, it is to be hoped investments in clean energy sources will increase significantly and aid their advancement. 

One of the greatest challenges with renewables is their instability, which means a continuing search for new technologies to find ways to deal with the issue of intermittency. Battery technology can be used as storage for solar power, allowing businesses to generate power at the most cost-effective times and providing an uninterruptible source. 

Currently solar and wind dominate the renewables industries, but new types of clean energy sources are set to become more promnent. Hydrogen is mooted as a clean energy source that could help curb emissions to net zero as it releases water instead of carbon. Toyota has already developed a bus that runs on hydrogen in Tokyo, and the use of hydrogen could be upscaled in the following years to be used in larger industries. 

While investors are keen to support climate friendly projects, there remains hesitation given that  we are dealing with new technologies and therefore new risks. Insurance services need to adapt by expanding coverage of such risks. The industry has already began facilitating the development of such schemes, for example by AXA XL creating the first mangrove insurance. In 2022, we should see the progression of changes in underwriting and investment to manage risks and support more ESG-friendly products.    

Written by Chris Burt.

Download our full Annual Insurance Review 2022 for more insights.