BY TOM JOHANSMEYER
Tom Johansmeyer is head of PCS, a Verisk business. He regularly contributes to a wide range of global re/insurance publications, as well as the World Economic Forum Agenda and Harvard Business Review.
The tension between long-term economic benefits and near-term profit objectives has long been one of the most challenging barriers to the broad adoption of environmental, social, and governance (ESG) practices. And those impediments could impact community resilience now and for years to come. The closer ESG practices can come to contributing to short-term financial success, the easier it is for companies to get the quick wins they need to justify longer commitments. Sounds easy, right?
Evaluating, making, and justifying ESG-related decisions can be frustrated by the paucity of available data, especially as you dive deeper into the inner workings of specific sectors. In the end, it can be hard to discern between truly strategic opportunities and headline grabs short on substance. As a result, it’s been a bit too easy to dismiss as mere propaganda announcements such as Lloyd’s of London’s plan to stop selling cover for certain fossil fuels by 2030 . Recent research conducted by PCS, the team I lead at data analytics firm Verisk, shows the genuine substance involved in that decision—and potentially others like it.
We’ve found roughly 30 years of large insurance industry losses suggest that the move away from fossil fuels could be just as good for business as it is for the resilience of communities, municipalities, and nations. The key will be to address and overcome data shortages in newer renewable energy classes, such as solar.
PCS has collected data on 205 large insured individual losses going back to 1987 (194 of them with insured loss estimates). The event set includes worldwide ocean marine, offshore energy, and large onshore property insured losses generally of at least $100 million (although some smaller events are in there). Most of the events we have tracked are onshore losses (75 percent), with the balance covering ocean marine and offshore energy.
We found that 113 of the 194 events for which PCS has insured loss estimates involved companies in the fossil fuel industry (by which we mean mining/extraction, transportation of fossil fuel materials, or production). Those events account for aggregate insured losses of $61 billion dollars (out of nearly $93 billion). Sixty-two percent of the insured loss amount has materialized within the past ten years—and 26 percent in the last five. Since 2011, we’ve seen an average of six large insured losses from fossil fuel companies per year, with an average industrywide insured loss of nearly $4 billion per year and a per-event average of $500 million.
Source: PCS Global Large Loss
Clearly, the evolving loss situation for the insurance industry is a growing problem. Even with decades of significant and increasing losses, it’s difficult to expect the global insurance industry to pivot quickly without a new source of income. So, if not fossil fuels, then what?
Utilizing renewable energy solutions as replacement revenue has plenty of potential, as evidenced by rosy predictions of 42 million new jobs and a 38 percent increase in utility-scale solar markets in 2019 . However, there are still some barriers to be overcome.
In recent client and market participant interviews, PCS has found that solar facilities, in particular, can struggle to gain access to sufficient insurance protection for some natural perils. The bulk of such installations in the United States are found in the states of Texas, California, and Florida—all of which have experienced either plenty of hail, wildfire, or tropical storm activity, respectively, over the past three years. As a result, premiums for solar facilities have soared as much as 400 percent since 2018 — for those who can secure any insurance at all.
The frequency and severity of such natural catastrophes in places with above-average annual sunshine hours don’t have to result in such sharply reduced insurance supply, however. In the near term, data could go a long way to improving how insurers underwrite solar and subsequently manage risk and capital. Although the sector is still small—with even the most optimistic of industrywide premium estimates under $500 million annually, based on discussions with market stakeholders—the use of existing insurance industry data for solar in conjunction with a more rigorous review of how the technology is evolving could enable market expansion. That in turn could provide improved resilience opportunities worldwide.
As insurers seek to combat the stasis of maturity with new forms of profitable growth, the need for alternatives to fossil fuel-related revenue streams has never been clearer. The pivot to renewables won’t come without effort. If the decline of the fossil fuel sector will indeed proceed slowly, then there’s ample time to develop the data sets, analytics, and market perspectives necessary to support the profitable growth of insurance for solar and other renewables. Transition and opportunity require effort, whether for markets or communities. And there’s just no substitute for putting the work in.
PHOTO CREDIT: Free use image from Canva Pro.