Tag: ecological transformation

Be more agile! How to anticipate a transforming risk landscape

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An effective risk management process is a basic requirement for tackling transformation risks. In most cases, the risk analysis that goes with identifying risks focuses on actual risks. Abstract risks, which are currently hard to assess and thus difficult to evaluate, yet which in essence derive from systemic change or resultant strategic decisions, are often overlooked. However, to master the ever-increasing speed of change we are challenged to adjust the pace with which we tackle the associated risks. Agile risk management plays a decisive role in this process.

My first article of the current HORIZON series introduced our 4 Risk Changers model and put the spotlight on the multiple challenges faced by companies. In the light of ongoing and rapid change, these challenges are to date omnipresent.
 
Based on our vast experience and extensive expertise in corporate risks, I consider these complex changes as systemic risks. I have categorised them as ecological, geopolitical, technological, and social transformation risks.

The 4 Risk Changers

Unlike the tangible assets in former years, it is now the intangible assets which increasingly influence the transformation of companies’ risk environment. The major challenges for a forward-looking risk management are posed less by the concrete individual risks at an operating level but more by the abstract systemic risks which are caused by global events and external developments.
 
Central to my view are the effects of this systemic change on the risk situation of companies. Also, I differentiate between primary and secondary transformation risks.

  • Primary transformation risks derive directly from the risks associated with systemic change. For example, the impact of the war in Ukraine on the supply of energy and the development of prices in Europe are a result of geopolitical transformation.
  • Secondary transformation risks are typically speculative. They include both risks and opportunities and derive from the metamorphosis which companies have undergone because of systemic change. The aim is to emerge from the crisis stronger than before and/or take advantage of the new opportunities presented by this change. The resultant new risks – despite being abstract – are of great significance and cannot be ignored. They must be viewed from a holistic perspective.

How systemic change affects insurance

Primary and secondary risks tend to increase during a transformation process. They evolve over time. At the beginning, these transformation risks can only be identified with great difficulty. Most of the time we tend to pay less attention to them. Only when they reach a specific threshold, when we become aware of “soft signals”, can they be identified as such and dealt with by risk management.
 
As is the case with conventional “emerging risks”, the required risk assessment, however, lacks experience, i.e. it lacks historical data and information, presenting an obstacle for analysing transformation risks.
 
When developing suitable risk management strategies, the attempt to transfer these risks to the insurance market as part of the development of suitable risk management strategies is bound to fail in most cases. The principle of insurability applies. This means, a risk must be measurable for the insurance market to secure adequate capacities. If there is no measurability – as opposed to the maximum loss calculation in the case of fire risks, where the possible maximum loss (PML) represents the maximum expected damage caused – it will be determined based on data modelling of historical risk and claims as well as on actuarial assumptions.

Transforming risk landscape affects insurability

Since new risks and transformation risks lack the required historical data, there is usually also a lack of availability of insurance capacities, especially in their uncertain early stages of development. Adequate insurance solutions (can) only come into being over time.
 
The current systemic transformation leads to numerous new and changing risks which cause companies’ risk landscapes to change permanently and at an increasingly rapid pace. These dynamics now result in less and less insurance for operational risks, which in the past were adequately and successfully insured.
 
Thus, as the gap between the lack of insurability and company risks continues to widen, there is an urgent need for the implementation of new methods in risk management.

A transforming risk landscape is often ignored

In practice, many risk management systems that have been implemented only manage concrete risks which already exist. Due to a lack of both early-warning mechanisms and the outside perspective on systemic change and its global events, the risk analysis focus is still on the known and assessable risks. The attention is on the actual situation of the risk environment.
 
Today’s abstract risks, i.e. risks which still evolve as a result of the changing business environment and have therefore not yet occurred or new risks arising from strategic changes in the business model that aim at seizing new opportunities, are often ignored. In practice, the resultant transformation of the risk landscape is hardly ever anticipated. It is only dealt with once risks manifest themselves because that is when they can be identified and assessed accordingly.
 
So, how can risk management help to tackle increasing volatility, uncertainty, complexity, and ambiguity and, in turn, boost the resilience of companies? An effective approach that facilitates an agile management of abstract transformation risks needs to be implemented. Existing risk management processes must widen their scope and perspective with some type of risk forecasts, enabling risk managers to anticipate risks at an early stage and allowing them to better prepare themselves.

Agile approach to anticipate transformation

Quite often, we encounter situations where a company’s risk management is organised in closed administrative departments which function like silos that were put in place to comply with legal requirements. Because such risk management deals with risks at an individual level only, its benefit as a company-wide tool to effectively manage risks often fails to achieve its full value.

Systemic change - Primary and secondary risks

The agile management of risks and opportunities is based on a corporate culture that is open-minded towards such risks and opportunities and is organised around transparency, dialogue, trust, and constant feedback cycles.
 
It comprises interdisciplinary teams whose members act with utmost flexibility as and when needed and who are an integral part of strategic and operative decision-making processes.
 
That way, transformation risks can be anticipated and acted upon at an early stage. This boosts the resilience of companies, enabling them to make the most out of future opportunities.
 
Anticipating transformation risks at an early stage means viewing the world from a future perspective and interpreting the inherent risk situation in the best possible way. Paying attention to soft signals, like new and shifting trends, as well as an open-minded attitude towards strategic considerations helps the establishment of effective early-warning indicators to manage risks.

Agility drives insurability and strengthens resilience

As a risk specialist, it is our vision to manage the risks of our clients in such way that they can rest assured and focus on their core business.
 
As a loyal and trustworthy partner, we work for and with our clients in flexible, interdisciplinary teams where we prove our transparent, dialogue-driven culture every day.
 
We anticipate systemic change and proactively direct our organisation towards the future needs of our clients. Agile risk management plays a key role for us.
 
In future, our progressive service approach will focus even more strongly on anticipating any change and resultant risks at an early stage.
 
HORIZON – “Risk Thought » Fast Forward” is our platform for risk-thought leadership. It follows our ambition to anticipate systemic change at an early stage, drive the insurability of a transforming risk landscape and create value through tailored solutions that strengthen our clients’ resilience and protect their future ventures.
 
 
GrECo, matter of trust.

Georg Winter

CEO

T +43 664 962 39 06

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Be more agile! How to anticipate a transforming risk landscape

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”The World Is in Big Trouble.“

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Our CEO Georg Winter shares his views on why geopolitical transformation is our focus this year and why it exacerbates existing risks and causes new risks to emerge.

Secretary-General António Guterres made this statement at the General Assembly of the United Nations on 20th September 2022 in New York.

We are undergoing times of permanent change, which many refer to as systemic transformation or multiple crises strung together. This change takes place in different fields and segments. They, in turn, are interlinked at various levels. HORIZON’s risk-oriented approach aims to define and outline the key areas of change affecting your company. In doing so, we take a close look at the systemic influences of ecological, geopolitical, technological and social transformation on your company’s risk landscape.

The 4 Risk Changers

The 4 Risk Changers

These transformation processes are very dynamic, they are often interdependent and thus characterised as complex processes. They also result in systemic risks. Managing them requires much more than traditional methods of risk management.

In terms of risk management, we refer to these systemic risks as “risk changers” that directly affect companies and categorise them as follows:

  • “Environment in danger” for ecological,
  • “Beyond globalisation” for geopolitical,
  • “Digital transition” for technological and
  • “Social disruption” for social transformation.

HORIZON – “Risk Thought » Fast Forward” is our platform for so-called risk thought leadership. It is based on our vision to detect the impact of these risk changers at an early stage and introduce risk management solutions that boost our clients’ resilience.

How do the 4 Risk Changers affect companies?

Companies are exposed to various kinds of risks. At the same time, systemic transformation exacerbates existing risks and causes new risks to emerge. These primary risks have a direct bearing on companies.

 How do the 4 Risk Changers affect companies?

Primary risks – Transformation leads to direct exposure

Ecological risks
When we look at climate change, we refer to climate risks. They are apparent in form of a changed or an increased exposure to natural disasters, such as floods, storms, hail as well as heat, drought or a rising sea level. As far as companies are concerned, these risks can cause anything from material damages to disruptions of transport routes, in energy, or raw material supplies.
 
Geopolitical risks
Geopolitical change, characterised by an economic bloc having been established between the USA and China, has put free world trade to the test. It also shows, by looking at Russia’s invasion of Ukraine, just how quickly a system conflict, which we thought had been settled between the democratic and autocratic world, can be reignited. All that, exacerbated by global events, like the Covid-19 pandemic, puts pressure on the availability of energy resources, disrupts supply chains and leads to a global wave of price hikes that challenge governments, businesses, and the civilian population alike.
 
Technological risks
Technological change has resulted in an over-dependence on data, software and IT infrastructure. All are targets of a rapid increase of cyber threats all over the world and are thus one of the biggest threats of the 21st century.
 
Social risks
The growing divide between rich and poor, the lack of equal opportunities regarding age, ethnic background and nationality, gender and gender identity, physical and mental abilities, religion and ideology, sexual orientation and identity as well as social backgrounds increases social tensions. The Club of Rome deems equality and justice as part of the ideal solution for a liveable future.

Companies cannot shirk their responsibility in this regard. For instance, social issues are becoming more and more important as we are facing an inevitable demographic change that has already resulted in a systemic shortages on the job market.
 
Correlation
The interdependency of these systemic risks is best demonstrated by the war in Ukraine: From a geopolitical point of view, it has led to an energy crisis. In terms of technology, it has led to an increasing number of cyber threats. On top of that, well-targeted campaigns are aimed at splitting society and disturbing social peace in our Western world. From an ecological perspective, however, there is hope that our efforts to reduce carbon dioxide emissions can finally be carried through.
 
Systemic change – Primary and secondary risks

Systemic change - Primary and secondary risks

Secondary risks – Adaption creates new chances and challenges

Besides these primary transformation risks, which affect companies as “pure risks” from the outside, systemic change leads to secondary transformation risks that are “speculative”. They derive from companies’ adapted business models that were developed in response to the systemic change and comprise both risks and opportunities.
 
Ecological adaption
In the fight against climate change, many companies have decarbonised their processes or have developed sustainable products. Saving resources and taking advantage of new opportunities are key focal points. However, new products and processes lead to new risks that must be identified at an early stage.
 
Geopolitical adaption
As a result of the geopolitical change, companies had to explore new markets and new sources for raw materials and find new ways of attracting both customers and suppliers, while keeping a watchful eye on possible dangers. Although the currently rising energy prices still paint a different picture, supply chains can be shortened through nearshoring. This could very well result in a wave of reindustrialisation in Europe.  
 
Technological adaption
Technological change enables us to pursue totally new paths. While the automation and digitisation of value chains is gaining importance, the full potential of mergers, transparency, big data, and metadata remains to be exploited. Manufacturers of previously traditional products and services are becoming system providers, goods are being replaced by data, and machines by platforms.
 
Social adaption
In the past, humans used to be regarded as resources. Now, humans with all their resources take centre stage. The concept of Industry 5.0. does exactly that. It places the human being at the centre to promote and foster diversity, different talents, and activities. Many companies have already initiated a transformation process because employees nowadays attach more importance on meaningful work. They believe that they can make a difference when it comes to resilience and sustainability.

Beyond globalisation – Geopolitical transformation in the spotlight

The upcoming release of HORIZON will concentrate on the geopolitical transformation and therefore looks at all its challenges from various angles.
 
New political world order
Does the war in Ukraine show us the dramatic face of a new political world order and how does this conflict at the very centre of Eastern Europe disrupt our economic basis?
How will the global trend of bloc formation between democratic and autocratic countries influence companies’ global business activities in the future?
What is the risk of technology being abused as an instrument of power and how could this affect companies?
How will the increasing conflict between the USA and China influence global economic relations?

Energy crisis
Blackout and a cold winter – how can we prepare for a total outage?
Will the current shortage of natural resources ruin Europe’s industry or will an ambitious energy transition turn Europe into a role model for a green global economy?

Supply chain dilemma
Will the geopolitical transformation result in a new era of offshoring, or will regional supply chains and increasing investments in circular economy boost independence and resilience?
How will China´s rise continue – considering its growing regional influence along the new silk road – and what will be the effect of its strategy of isolation as a result of its zero-tolerance pandemic policy?
Is the conflict over Taiwan’s independence a ticking time bomb for the global economy?

Loss of wealth
Will double-digit price increases lead to a decreased standard of living over the long term?
Does high inflation increase the risk of social riots in Europe?
How do these circumstances influence people’s work-life balance and their work attitude?
What does a new wave of migration mean for European companies and their DE&I (Diversity, Equity, and Inclusion) agenda?
 
It is indeed a difficult and challenging situation that raises many most pressing questions. We need to discuss them, their impact on the transformation of the risk landscape as well as possible solution scenarios.
 
Stay tuned!

Georg Winter

CEO

T +43 664 962 39 06

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Be more agile! How to anticipate a transforming risk landscape

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Continue reading “”The World Is in Big Trouble.“”

Rethinking the Energy of the Future

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Rethinking the energy of the future

Insurers are faced with a big challenge during the energy transition: The past loss experience on which they have based their forecast models can no longer be used for predictive future scenarios. On top of that, new risks will emerge.

We are at the crossroads of the fastest and most profound disruption the energy sector has seen since the beginning of the indus- trial revolution. It is an irreversible process driven by key technologies: solar power, wind power and battery storage systems. Hydrogen and bioenergy are still underrepresented because their technological progress is only in its infancy. We yet have a long way to go because a successful energy transition, i.e. a 100% substitution of fossil fuels with renewable energy, including green hydrogen, hydropower and biomass, might only be reached by 2050.

An analysis conducted by RethinkX, an independent think tank, has shown that 100% clean energy from a combination of the above-mentioned sources is both physically possible and economically affordable. And this is just the beginning. Coal, gas, petroleum and nuclear assets will become stranded during the 2020s because investing in these technologies will no longer be rational.

The role of insurance

Insurers are faced with a big challenge during the energy transition: The past loss experience on which they have based their forecast models can no longer be used for predictive future scenarios. On top of that, new risks will emerge as technological developments associated with solar, wind and battery storage infrastructure advance even more rapidly.
 
It may become more difficult to put a price tag on physical risks because the transformation from hazard to exposure to damage and its manifestation in cash flows will be hard to model. According to a Harvard Business Review research, onshore and offshore large risk losses amounted to 60 billion USD in the last 30 years.
 
Insuring renewable energy should present an intuitive alternative to fossil fuels. Indeed, prospects for insurers look very promising. However, the renewable energy sector must still grow considerably to replace the revenue generated by the fossil fuels sector. To date, renewables still play a minor role in the worldwide energy insurance sector, which generates roughly 14 billion USD in premiums each year. Renewable energy insurance only generates an estimated 500 million USD in premiums per year.
 
Insurers are in the business of taking risks, yet they also need to make a profit. They allocate capital, using historical data and other factors to calculate the right mix of aggressive and conservative risks, and tend to balance both frequency and severity. This does not mean that solar power and other renewables are unattractive to the insurance industry. On the contrary, renewables are the future of insurance just like they are the future of energy. Insurers are therefore challenged to understand, model, and price policies more effectively, especially as alternative energy continues to evolve.
 

Rocky road

If energy transition is to succeed in the next 32 years, two goals will have to be reached:

  • The renewable share of electric power would have to increase from currently 15%-20% to 100%
  • The share of electricity in the global energy mix would have to increase from currently 18% to 100%;

This means that the current renewable production would have to increase by a factor of 60!

The American climatologist Ken Caldeira has estimated that we would need to develop the equivalent of the energy produced by a nuclear power plant every day in a fifty-year time span. At the current rate however, the energy transition will take 363 years.

Although renewable energy has clear benefits with respect to reducing greenhouse gas emissions, it has some inherent limits. Five major obstacles would have to be overcome on the road to energy transition:

  • Space: Regardless of wind, solar or battery storage, these facilities require large areas of land. Solar parks and wind farms are usually placed on agricultural land and therefore can cause land shortages, a displacement of the population, and they have a negative impact on biodiversity.
  • Resources: The dependency on huge amounts of material and natural resources such as steel, concrete or rare natural metals accelerates the rapid depletion of our planet’s resources. Economics teach us that these supplies will not be depleted because prices increase, and technological innovation will enable the use of poorer quality ore to maintain production levels. However, obtaining poorer quality ore means more invasive and energy-intensive methods. The outcome is a vicious cycle: to produce more energy, more metals are necessary, and to produce more metals from low-grade ore requires more energy. Already there are bottlenecks in the production facilities for solar modules, wind turbines, blades, transmission and distribution lines.
  • Transmission: We are used to having electricity when we need it. Since it cannot be stored, it must be consumed when it is produced. Wind and solar energy, which are available when the wind blows, and the sun shines cannot meet these two conflicting demands.
  • Non-substitutability: Renewable electricity cannot replace all the benefits of liquid fuels. For example, batteries simply cannot meet the energy needs of heavy machinery, aircraft or merchant ships. Certain industrial processes simply require liquid fuels, e.g. the manufacture of steel, plastics and fertilisers. For other industries that rely just as heavily on uninterrupted, smooth production processes, such as aluminium and cement production, intermittency is a serious stumbling block because stoppages damage the infrastructure.
  • Financing: Given the poor financial returns and major risks associated with renewables, the energy sector remains cautious. For a successful transition to occur, about 14 trillion USD in investments in solar and wind energy would be needed by 2030. But spending in the battery sector will not exceed 10 billion USD, including research and development.

We are dealing with the “known unknown” phenomena, as the new energy system that emerges will be much larger. Its architecture will be completely different and will operate in a yet unknown way. One of the most unique characteristics of the new system will be its ability to produce much larger amounts of energy – a superabundance of clean energy.

This energy will be available at near-zero marginal cost throughout the year for nearly all populated areas of the world. Computers and the internet serve as an example. The marginal cost of information has been slashed and hundreds of new business models were created only to transform the core of the global economy

There’s a need for Risk Management 4.0 

Businesses are cautioned to not only rely on industrial insurers as some, to date insurable risks, could suffer the same fate as cyber insurance. Just think about climate change or coverage against natural disasters. Besides, there are many – often new – risks which cannot be insured and which change just as rapidly.

Industrial companies must increasingly come to grips with future risks, strengthen their risk management in the process and place it at the top of their agenda. This, however, means more than just implementing the risk improvement measures which insurers impose upon them – something which almost all market players have propagated at an inflationary level, and which only addresses the past. It is rather a matter of defining future risk changes, determining their possible consequences for one’s company and preparing accordingly – a forward-looking risk management 4.0, so to speak.

A partner who not only focuses on mere risk transfers but acts as a risk adviser, who sends out the right signals and provides expertise through a know-how pool can create real added value for industrial companies. By working in tandem with clients the insurance partner can help to meaningfully shape the future in an ever more complex, interconnected, and fast-moving world.

Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

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Be more agile! How to anticipate a transforming risk landscape

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Czytaj dalej …

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Continue reading “Rethinking the Energy of the Future”

Green Responsibilities on the Rise

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Green responsibilities on the rise

The upcoming renewals will continue to be driven by a highly competitive insurance market under pressure. Comprehensive risk analyses combined with a presentation of the risks will be necessary for a successful renewal.

It is common knowledge that the insurance market is navigating through a difficult period. A lot has been said about increasing premiums and decreasing limits. However, little attention has been paid to the changing risk landscape and the impact that these changes could have on insurance contracts.
 
“Bricks are turned into batteries“, “WE CARE. For PEOPLE the PLANET and the FUTURE“, “Adding the Extra to the Ordinary” are examples of corporate vision statements and headlines of articles that are published on the internet, in print media, company reports and on websites.
 
Among other things, these statements mirror the ability of innovation and sustainability and offer a glimpse into the future development of companies. At first glance these statements have absolutely nothing to do with changes in the risk landscape. Bricks have been used as a building material for thousands of years, sustainability is an age-old principle in many business sectors, and machine-driven products such as elevators have been produced and serviced for decades.

ESG efforts change liabilities

Looking deeper, however, it quickly becomes clear that these statements also contain significant changes in risks and show similarities. A brick that is not only used as a building material, it also provides the storage space for electricity, representing at least another, if not higher, product liability risk.
 
Less obvious is the fact that companies’ sustainability statements may result in new liabilities. ESG is a voluntary contribution by businesses to sustainable development that has been increasingly codified in laws. A violation therefore no longer remains without sanctions but comes with enormous penalties and might lead to claims for damages.
 
For example: In Italy, ENI was sentenced to a fine of 5 million EUR for describing a diesel product as “green” and thus deceiving consumers. In the Netherlands, a ruling by a civil court required Shell to change its guidelines and requirements to ensure that the Shell Group’s CO2 emissions in 2030 would be 45% lower than in 2019.
 
ENI’s “green” diesel was probably more expensive than “normal” diesel. Consumers could claim for damages because they had trusted the environmental friendliness of the green diesel, refuelled their cars with it, and then sued ENI for the additional expenses they had. Looking at the judgement against Shell, a similar situation might arise. If Shell does not achieve the target set out in the court decision by 2030, and if, for example, harvests fail due to environmental influences that can be traced back to climate change, farmers affected by crop losses might sue Shell for damages as a contributor to the climate change.
 
Not only product changes, but also changes in the company’s offerings may lead to new risks. The statement “Adding the Extra to the Ordinary” is just one of many examples that clearly shows that more and more manufacturing companies are evolving into system providers. Over and above typical maintenance services, companies have added a wide range of services to their portfolios, including software solutions or product trainings. Manufacturers therefore not only have to consider production risks but also risks associated with the provision of services.
 

EU Interests: Consumer Protection

These developments are accompanied by the EU paying more and more attention to consumer protection. From today’s perspective, the exemplary claims for damages against ENI and Shell are rather unlikely in most European legal systems, since class actions, common in the USA, are not possible in most European countries. However, the recent diesel scandal has shown that such claims could in principle also be raised in Europe.
 
Unlike in the USA though, far more stringent legal conditions would apply. This current lack of class actions can be seen as a kind of protection of European companies against the risk of extremely high consumer compensation claims.
 
This protective cloak might soon be lifted. In November 2020, the European Parliament passed the “Directive on representative actions for the protection of the collective interests of consumers” to protect collective consumer interests from breaches by companies under EU law. The directive is to be implemented in national legal systems by 31 December 2022. This new guideline will not only lead to changes in the basic liability of companies but will greatly increase their risk of being faced with extremely high compensation claims.
 

“We are well insured in any case”

This statement is often heard in connection with claims. In view of the changing risk landscape, however, the question arises whether the existing insurance solutions also offer the expected and necessary protection. Claims for damages from services generally comprise financial losses that are not derived from personal injury or damage to property (so- called “pure financial losses”). A violation of ESG rules can also result in property damage or personal injury, but the greater number of possible damages will be associated with pure financial losses.
 
In contrast, covers from traditional business and product liability insurances are specifically geared towards property damage and personal injury. Including pure financial losses is only possible to a limited extent. Even if so-called “open pure financial losses” are included in a liability contract, the limits agreed for this extension will not be enough to cover the sums claimed in the event of a violation of ESG rules.

Corporate financial loss coverage

D&O insurance usually offers managers protection against ESG claims. But what about the companies, are they adequately protected? In most European legal systems, third parties cannot directly claim damages from managers, only from companies. Should they be found liable for that damage, they can take recourse to managers for compensation payments. The insured event according to D&O is only triggered when the company claims compensation from the manager. To insure this recourse, companies bear the burden of enormous advance payments when it comes to ESG claims. Whether the D&O insurer pays the damage at the end of the day or whether the D&O insurer’s services are limited to defending the manager depends on each individual case and cannot be foreseen. Adequate insurance protection for the company itself can only be built up by means of appropriate financial loss coverage. Currently available insurance products, like the employer’s practice liability, provide only partial protection against ESG risks. Notwithstanding that, the insurance market is increasingly under pressure to insure companies against ESG losses in their entirety. To better address this need, insurers will have to come up with appropriate product innovations.
 
Already, the market is reacting to the changing risks of manufacturing companies that are evolving
into service-led businesses. Various insurers offer products that specifically address the risk of pure financial losses for companies offering software solutions in addition to their products.
 
The upcoming renewals will continue to be driven by a highly competitive insurance market under pressure. Comprehensive risk analyses combined with a presentation of the risks will be necessary for a successful renewal. The related work should be used to check the extent to which individual companies’ risks have changed and whether existing insurance policies still offer sufficient protection.

Thomas Herndlhofer

Practice Leader Liability

T +43 664 822 20 59

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Be more agile! How to anticipate a transforming risk landscape

An effective risk management process is a basic requirement for tackling transformation risks. In most cases, the risk analysis that goes with identifying risks focuses on actual risks. Abstract risks, which are currently hard to assess and thus difficult to evaluate, yet which in essence derive from systemic change…

Czytaj dalej …

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Continue reading “Green Responsibilities on the Rise”

Decarbonisation takes its toll

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Decarbonisation takes its toll

It is no surprise that the industry, prompted by progressive political and environmental activists and industry regulators has taken action and encouraged some of the major polluting industries to transform their processes so that they produce lower or no greenhouse gas emissions.

Although the topic of global warming sparks many controversies in the world’s media, political circles and everyday discussions, few people would deny that the climate patterns have recently been changing, bringing about an increasing number of natural catastrophes. Published in August 2021, the Sixth Assessment Report of the UN-backed Intergovernmental Panel of on Climate Change shows alarming trends affecting the global economy and the well-being of the world’s population.

Amongst those most affected is the financial services industry, such as equity investors, lenders and insurers. It is no surprise that the industry, prompted by progressive political and environmental activists and industry regulators has taken action and encouraged some of the major polluting industries to transform their processes so that they produce lower or no greenhouse gas emissions. This step has often taken an extreme form of providing reduced access – or no access at all – to risk capital, effectively cutting the worst offenders from access to equity and debt financing, and to insurance.

In many cases these policies prohibit the financing of the very projects that are aimed at transformation towards greener technologies, such as the development of renewable energy sources by incumbent thermal coal-fired power producers. Whether this dogmatic and inflexible approach will contribute to reaching desired goals or prove itself to be counterproductive, remains to be seen. The seemingly unlimited capital resources available worldwide may be channelled to new players and technologies on the power utility scene, effectively pushing the incumbents into extinction. It is worth noting that all  these woes do not only befall coal- fired power producers. Next in line are gas-fired power plant owners and operators as well as industries such as oil and gas, cement, steel, transport and others that contribute to greenhouse gas emissions.

Fate of the incumbent power suppliers

Although we cannot foresee which different scenarios the future may unveil, we believe that it is still possible to arrange insurance coverage for operations that produce power from fossil fuels, including thermal coal. However, increasingly this requires careful planning, a flexible and realistic approach to the scope of cover and, finally, competent execution. Companies need not (and often cannot) go this route alone. An insurance and risk consultant can help you through the transformation process despite the pressure from activists and other key stakeholders.

Tips for your risks

  • Improve the risk quality. As long as increasingly challenging economies allow it, invest in improving the risk management framework. Traditionally, insurance has been the cheapest form of risk capital. Certain operators have abused this by consciously not using good risk management practices, which may have been effective in the short term during the final stages of the soft market. Today’s hard market no longer tolerates such an approach. Underwriters who still write carbon-intensive business can choose from the entire range of clients. They will choose those who display the desired traits such as a proactive attitude to risk management.
  • Seek outside opinion. Hire a seasoned and respected engineer to survey the business and produce a risk engineering report. It will come with useful risk recommendations backed by years of experience as well as actual loss scenarios that happened around the globe. It will also provide realistic insights into the possible costs of catastrophic losses, which can be used as a basis for discussions on how to fund those costs (especially in tough times).
  • Be realistic about the coverage sought. Low deductibles and full value policies are becoming things of the past. Not only are insurances with higher deductibles and realistically set limits easier to place, they also demonstrate the client’s commitment to loss prevention and robust risk management. Capital requirements imposed on insurers and reinsurers by financial market regulators have reduced and will continue to reduce market capacity – perhaps as much as the pressure from activists and investors.
  • Companies that have an internal decarbonisation strategy are advised to communicate it effectively. The strategy must be credible, measurable, and supported by the company’s top management. Adhering to standard measurement and reporting rules will be helpful to integrate the decarbonisation strategy into the insurers’ internal reporting systems. In the future, markets may require the progress of the strategy’s implementation to be verified by an independent auditor or a similar body.
  • Companies lacking a decarbonisation strategy may still rely on using existing assets until the end of their technical lifecycle. However, they will have fewer options to choose from as time passes. There will still be certain risk financing tools available, such as industry mutuals, captives and other alternative risk transfer techniques, parametric insurance, and so forth. An experienced, creative and open-minded risk management consultant to structure and implement risk financing strategies in the ever changing financial and regulatory landscape.
  • Careful and skilled carrier management should be exercised to optimise coverage terms and pricing, find the right balance between the requirement for broad insurance panel diversification, differing risk appetites, portfolio and territorial considerations, varying credit rating, etc. We expect certain insurers to be pushed out of writing carbon-intensive risks by their stakeholders, whilst they may or may not be replaced with new entrants. That is why accessing worldwide insurance markets and understanding the individual market characteristics, business targets and constraints is an ever more important issue.
  • The market approach should be a mixture of nurturing long- term relations with key stakeholders and accessing opportunistic capacity as it becomes available. Unfortunately, today’s market environment for carbon-intensive risks is characterised by uncertainty. There is no guarantee that an insurer, declaring a long-term commitment in good faith, will not soon be forced out by investors at short notice. Therefore, while working towards the best-case scenario, one should be prepared for the worst.
  • Submission quality is just as important as risk quality. Information provided to insurance markets should be kept up-to-date, accurate, to the point and presented in a clear and attractive manner. Distressed risks with challenging loss histories will obviously be much more difficult to place in the current environment. However, the direct involvement of a senior risk manager giving account of lessons learned and improving the robustness of the asset and risk management framework may make all the difference between a challenging placement and a failed one.

The first focuses on infrastructure (office buildings, car parks) and digitisation (less office space and business travels, working from home, which may enhance social governance as well). The second will result in huge support for innovation projects and green measures taken by both public and private business as insurers have to invest their reserves to be able to pay future claims. The decision where to place this money has to be driven by security aspects (for this reason there is a relatively big share of public investment) and with a long-time perspective in mind.

Insureds facing an ever more difficult market environment that is likely to remain challenging in the years to come should accept the reality and maximise their efforts to prepare themselves and their companies for the future.

A competent, experienced and dedicated insurance broker and risk management consultant can assist in achieving the risk financing goals required by owners, lenders, government authorities, clients, and other key stakeholders whose well-being and prosperity depends on the successful operation and resilience of the business in question.

Pawel Kowalewski

Practice Leader Power & Renewables Division

T +48 507 085 066

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Delivered Duty Paid for a Green Future

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Delivered Duty Paid for a Green Future

Insurers have shifted their focus from topline premium and growth towards rate adequacy. New modelling and technical tools are being utilised more than ever as insurers want to understand the complex technicalities of cargo risks.

The major international cargo insurers are reconsidering the insurability of cargo of concern (for example thermal coal) in relation to zero emissions targets as companies dealing with such cargo, such as miners, traders or major users may have difficulties to secure the insurance they need in the future.

With regard to thermal coal it still seems that cargo insurers who do underwrite the commodity business tend to focus on those accounts where the volume of thermal coal provided is within a certain tolerance limit, i.e. below or about 20% of the total turnover or revenues. Discussions are rife, especially in the lead-up to the UN Climate Change Conference (COP26) being held in November 2021 in Glasgow, UK, and with the IEA Report on net-zero emissions by 2050 and the latest UN Report having recently been issued.

In December 2020, Lloyds issued their Environmental, Social and Governance Report which included various undertakings, the two most prominent being:

  • Lloyds managing agents will be asked to provide no new insurance cover in respect of thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities from 1 January 2022.
  • To support Lloyds customers through this transition, Lloyds managing agents will be asked not to renew insurance coverages for thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities after 1 January 2030. This also applies to companies with business models which derive at least 30% of their revenues from either thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities from 1 January 2030.

Furthermore, eight of the world’s leading insurers and reinsurers, working together with the UN Envi- ronment Programme Finance Initiative, are currently in the process of establishing a pioneering Net-Zero Insurance Alliance (NZIA).

Overview & Expectations

We expect the London and mainland European cargo markets to be pressing for some continued base rate increases where business warrants it and where they are able to do so. However, through the first half of 2021 we have begun to see some softening of general increases and with some insurers beginning to look quite aggressively for new business opportunities available to them. If this trend develops, we expect the renewal business with little or no adverse claims histories and the right profiles to be considered “as before” renewals as we reach the end of 2021 and the beginning of 2022.
 
Marine Cargo renewals have been subject to price increases of between 15% to 40%. Automotive, pharmaceutical, commodities and retail stock throughput accounts will continue to be the most affected.
 
Specific changes to the underwriters’ appetite include:

  • Excess stock – insurers have reduced the capacity in many market sectors, no longer willing to underwrite excess stock.
  • Many marine insurers are no longer underwrite distilleries or wineries.

Insurers have shifted their focus from topline premium and growth towards rate adequacy. New modelling and technical tools are being utilised more than ever as insurers want to understand the complex technicalities of cargo risks. As natural perils remain a key focal point globally, we expect longer turnaround times for quotes as well as significant rate changes for most exposures in the region. Good data quality, including surveys, COPE, risk management forms, and so on, will help us to provide our clients with more favourably rated insurance contracts.

Lead lines are expected to remain conservative, and the expected reduced capacities will come with the added difficulty of some insurers not wishing to reinsure their competitors.

We will continue to see a disconnection between the local Eastern European markets and international markets in terms of rates. However, this gap is slowly closing as most local insurers face an increase of reinsurance costs and are thus unable to sustain reduction demands

Kristo Ristikivi

Group Practice Leader Cargo

T+372 506 9809

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ESG Agenda Revolutionises Risk and Insurance Management

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Environment in danger

 The insurance sector has adopted the ESG targets with every company developing an ESG strategy. The sector is particularly affected by climate change, since a rise in temperature means more energy in the atmosphere and thus more natural catastrophes (Nat Cat) such as storms, tornadoes, and floods.

When the average baby boomers – now at around retirement age – look back on global threats that occurred during their lifetime, they will be happy to have survived the danger of mass extinction by nuclear warfare and nuclear catas­trophes, cancer and pulmonary diseases due to air pollution and acid rain or IT breakdowns or even mass diseases.

It is thanks to mankind’s spirit of invention and unwavering determination that these threats were overcome, challenges tackled, and problems solved. For the average baby boomer, the fear of global warming and population growth has been equally present during all this time. Still, there is no solution in sight yet, despite good intentions and declarations made at big conferences.

Global warming has already turned into climate change, accompanied by temperature increases and drastic events: atmospheric phenomena, windstorms, heavy rainfalls, snow blizzards, desertification, wildfires or the slow but steady rise of sea levels. Leading industrial nations, the EU, and even the USA now seem to be willing to act. According to the new Paris Agreement1, the global temperature shall be kept at 1.5° C above pre-industrial era levels. Better education and social perspectives are aimed at contributing to a slowdown in demographic growth and solutions to feed the world’s population in a healthier and more sustainable way.

Green targets

These targets have been included in the scope of ESG measures introduced by both the European Union and the new Biden Administration. The EU has implemented the Taxonomy Regulation that demands a commitment and a special legislation to decarbonise and clean up Europe until 2050 from all member states based on the following objectives:

  • climate change mitigation
  • climate change adaptation
  • sustainable use and protection of water and marine resources
  • transition to a circular economy, waste prevention and recycling
  • pollution prevention and control
  • protection of healthy ecosystems

It is obvious that these targets can only be reached if everyone – citizens, enterprises, decision makers, and authorities – changes one´s behaviour. Whether this requires huge technical innovations or less consumerism remains to be seen. We will probably need both.

The role of the insurance sector

The insurance sector has adopted the ESG targets with every company developing an ESG strategy. The sector is particularly affected by climate change, since a rise in temperature means more energy in the atmosphere and thus more natural catastrophes (Nat Cat) such as storms, tornadoes, and floods. The average cost of insured claims due to Nat Cat currently amounts to about 70 billion USD per year, with peaks exceeding the 100 billion USD mark. Reinsurer Munich Re expects claims to soon reach the “mid-three-digit million Euro range”. The growing percentage of Nat Cat claims because of atmospheric events increasingly depletes the premium generated in the entire property insurance portfolio, leaving less room for paying classical fire and explosion claims. The answer may be to increase the total premium.
Nonetheless, once a certain point is reached, the risk becomes uninsurable – as we have seen with the pandemic risk. Another example are the wildfires, seen in many regions this summer and caused by another climatic scenario – drought due to stable high-pressure areas and a disturbance in the global wind circulation system.
 
Insurers are challenged to pursue their own sustainability policy, using three methods of leverage:

  • their own corporate behaviour,
  • their investment policy,
  • and their underwriting policy.

The first focuses on infrastructure (office buildings, car parks) and digitisation (less office space and business travels, working from home, which may enhance social governance as well). The second will result in huge support for innovation projects and green measures taken by both public and private business as insurers have to invest their reserves to be able to pay future claims. The decision where to place this money has to be driven by security aspects (for this reason there is a relatively big share of public investment) and with a long-time perspective in mind.

Added to this is the increasing focus put on sustainability and the ethical value of projects, measures taken, and targets set by companies or public entities for creating financial products for clients and for placing the insurer’s own assets.

Ecological underwriting

For the insurer as a risk carrier the underwriting policy plays a major role with regard to the sustainability strategy as mentioned above. In an effort to contribute to decarbonisation targets, major insurers have taken the first steps by deciding to stop the underwriting of coal risks in their entirety (production, refining, fuelling, transport). The newly founded Net-Zero Insurance Alliance will provide new industry leadership to carbon-neutral underwriting.
 
Besides the ban on coal, other bans, for example on excessive meat production, soya or palm oil farming, could follow suit. At the same time, green companies could be encouraged with a higher insurance capacity at a better price or a bonus for new installations that increase sustainability.

However, insurers as risk carriers always look at the so-called quality of the risk, i.e. at the (mathematical) probability of loss linked to the risk. For instance, when considering to offer a client a panels on the home´s roof, the insurer, although he may be happy that the client is taking this step, must calculate which one of the two heating methods would cause less claims.

This causes a dilemma because not all innovations will produce better results for the client’s risk portfolio. Statistics about fire claims caused by (bad quality) solar panels or by car batteries prove the point. The technical hull premium for a fully electrical vehicle must be higher than that of a traditional car of comparable size. Then there is the old underwriting principle: Do not insure prototypes! No one knows whether they are harmless or not. At this point in time, insurers face the predicament of either bad experiences or none at all with fires and Nat Cat risks of solar panels and windmills, new food production methods, crop Nat Cat exposure, and so forth.

Risk engineering is the key

The solution to overcome this dilemma and foster new, green industries and insure new risks at an acceptable price is called risk engineering and risk dialogue. A close investigation of new projects, technical procedures and industrial sites should enable insurers to find a good balance between the opportunities and risks presented by new technologies. The results may indeed be positive – for instance, when old coal furnaces are replaced with electricity generated by wind farms, when explosive chemical processes become obsolete and undesirable, or when human factor risks are reduced because excessive overtime working has been banned.

Finding the right balance between opportunities and risks will be the focus of new, so-called ecological underwriting. Purely price driven underwriting will cease to exist as better risk concepts, evaluations, and simulations mirror a company’s changing situation. By giving clients coverage for new risks, insurers will contribute to reaching the ESG targets set for the entire economy.

The broker’s role is changing as well. In the past, the broker was a service provider who advised clients about existing insurance solutions and negotiated the best cover and price. He is now increasingly involved as risk manager and risk engineer in his clients’ change management projects. More than ever, the broker will focus on mediating between his innovative clients and conservative insurers. They, however, are now more open-minded when it comes to contributing to the success of green progress.

Globally, the initiatives to prevent climate change present an opportunity to invest the money generated in the past few years. The outlook is optimistic as new and innovative industrial methods add tremendous value to finding new ways of tackling climate change.

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

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