Rob Bates, Partner and Head of Claims, Discusses What the Insurance Market Should Focus on in
One of the key goals of the UN’s COP26 conference last year was to obtain more support from developed countries to help emerging markets decarbonise. Emerging markets account for two-thirds of the world’s population, but only one-fifth of investment in clean energy, and just one-tenth of global wealth. The IEA released a report highlighting what developed economies can do to help emerging markets hit decarbonisation targets. They found that annual clean energy investment in emerging economies needs to increase by more than seven times by 2030. In addition to mobilizing finance, the IEA recommended supporting local supply chains and de-risking renewable energy projects. And while the conference fell short of some ambitions, there were some definite wins. The United Kingdom, for example, announced they will double their commitment to help developing nations with £11.6 billion over the next five years. But what about supply chains and risk? And what role can – and should – insurers and brokers play as more renewable energy projects seek coverage from the international (re)insurance market?
One of the biggest factors limiting the growth of renewables in emerging markets is the lack of an established supply chain. Most equipment must be imported, from either Europe (for wind turbines) or China and Southeast Asia (for solar). It’s over these long marine and inland transit routes that insurance claims often occur. For example, for a first in country project, the stevedores at port are unlikely to have ever handled wind turbine blades before. Blades are significantly more fragile than the containerized loads crane operators will be used to. Then, roads and bridges might not be big enough to accommodate large and unwieldy components. Obstructions like street lamps may need to be temporarily removed. A thorough route survey is therefore crucial to determining the safest, least-risk route from port to site.
The broader topic of safety, and (lack of) maintenance, remains a major concern in emerging markets. In speaking to loss adjusters experienced in this space, human error was the most regularly cited cause of loss, which typically stems from a lack of training, preparation and experience. (Natural catastrophe – or NAT CAT – losses can be larger but are invariably less frequent.) Shift changes are a particularly common time for claims to occur. The outgoing shift manager might not have had the time to properly explain what’s happening to the incoming one, and areas of concern can be missed. Part of the problem is that ‘cultures of excellence’ around health & safety and maintenance take a long time to embed and institutionalise. Other developmental priorities – like roads, schools and hospitals – have taken precedence. Moreover, some countries are heavily reliant on the oil and gas sector for income, and renewables have been neglected. And it is certainly the case that regulation in most emerging markets lags behind that of developed countries. The UN’s International Labour Organisation (ILO) is disseminating know-how where it can, but there’s no reason why insurers couldn’t put their expertise to good use here. The interests of insurers and their clients are fundamentally aligned here: take a more active role in passing on risk mitigation advice, and the frequency and severity of claims will surely reduce.
The prevalence of human error, NAT CAT and transit losses – which are, of course, perils in addition to those the market is used to elsewhere – means insurance in emerging markets can sometimes be in short supply. Often, coverage is narrow, particularly as respects defects, (marine) cargo, (contingent) business interruption, and natural catastrophes. But if we’re to agree with Columbia University’s Professor Adam Tooze that the ‘message’ from COP26 is that ‘we are trusting big businesses, not states, to fix the climate crisis’, the insurance sector has an important role to play. Indeed, at the recent Energy Insurance London conference last October, there was a lot of talk of how focus on the ‘E’ in ‘ESG’ had been at the expense of the ‘SG’ (almost to the point of cliché). If the insurance sector is serious about redressing this imbalance, supporting emerging markets to build out renewable energy capacity is a great place to start – but they must do so with their eyes open if that support is to be sustainable.