In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for Energy.
Key developments in 2021
In our last Annual Insurance Review, we predicted that 2021 would see a growing acceptance and drive for 'greener', more sustainable energy resources. This was evident throughout the year from campaigners, businesses, and governments alike, noting in particular the COP26 summit which took place in November.
The coal and oil and gas sectors have come under further pressure to take steps to minimise their contribution to climate change. 40 countries have signed the 'Coal Pledge' which aims to phase out the use of coal. China and the US, two of the world's largest coal-dependent countries, have separately announced that they would be working together to 'cut emissions'. Canada, the US and the UK are also among 20 countries who have signed a statement to halt the use of public funding for international unbated fossil fuel energy projects by the end of 2022. These are just a few examples of the many pledges which were agreed during the COP26 summit.
ESG continues to become an increasingly important subject for businesses. Lloyd's of London and a number of insurers announced climate change policies and 'Net Zero' targets. Eight major insurance and reinsurance carriers also founded the 'Net-Zero Insurance Alliance' which intends to "accelerate the transition to net-zero emissions economies".
The strategic shift in rebalancing risk portfolios has continued. Major carriers including AXA and Generali introduced renewed underwriting guidance and investment restrictions regarding oil and gas which echo the measures adopted in recent years in relation to coal. Many insurers have grown their capacity for renewables to provide for an increase in the number of renewables projects, including those owned by the traditional energy companies who have begun to turn their attention to 'greener' energy sources.
What to look out for in 2022
Expect much of the same in 2022. The transition to greener energy will continue to gather pace, as will the focus on ESG.
Insurers will continue to face increasing pressure to play their part in tackling climate change. Part of this is likely to involve aligning their underwriting portfolios with net zero targets in mind. As a result, we expect that more carriers will rebalance their exposures and the focus on renewables will increase. For those carriers who continue to write the more traditional downstream risks, there is likely to be further pressure not to underwrite certain new projects.
Fossil fuel companies will need to continue to access capital and insurance but may find there is less appetite across the market than had been the case previously. This is likely to result in higher premiums and more restrictive terms. Stricter terms may also lead to an increase in the number of coverage points that insurers are willing to take. We expect that this will align with the general trend across the industry towards a harder market.
Expect major oil and gas players to divest more into sustainable ventures, with a key focus on decarbonisation. This may be implemented by moving towards hydrogen production, or using greener feedstocks such as biomasses. The implementation of autonomous processes within downstream facilities is also expected to increase. With any new technology or process comes new risks. Rating is likely to be more difficult, particularly for projects where there is minimal data on similar risks / previous losses. The ESG profile of a company is also likely to become an important consideration for underwriters in line with renewed underwriting guidance.
Written by Leah Wood.
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