Navigating transition risks in insurance: the true costs of shifting from non-renewables to renewables 

June 5, 2024

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By Duane Pretorius, Environmental Manager, Australia

In the dynamic landscape of insurance, transition risks loom large, particularly amidst the global push towards renewable energy and sustainable practices. As industries grapple with the imperative to shift from non-renewable to renewable resources, it’s crucial to unpack the complexities of this transition, including its inherent risks, deadlines and the tangible costs involved.

There is a direct link between climate change and catastrophic events around the world, so it is in our interest to make a change and act now. Globally, more than 300 natural disasters are caused yearly by climate change — impacting on millions of people and leading to significant economic losses as a result of storms, wildfires, floods and droughts.

Some changes in temperature and weather patterns occur naturally over time, but one of the main drivers is due to human activities, such as burning fossil fuels (oil, coal and natural gas) to produce electricity — releasing large amounts of carbon dioxide (a greenhouses gas) into the air. The increase in greenhouse gas emissions into the environment lead to increased temperatures, extreme winds, rising sea levels, and decreased precipitation, to name a few examples. 

Understanding transition risks in insurance and loss adjusting

Understanding transition risks in insurance and loss adjusting is challenging, as these risks are currently speculative and based on assumptions, predictions and forecasts. While we could revert to the traditional risk assessment matrix, which evaluates risks based on severity and likelihood/probability, this approach may not be comprehensive. Given the uncertainties and potential impacts of transition risks, alternative models may need to be developed.

Transition risks refer to the financial risks associated with the transition to a low-carbon economy, including regulatory, technological, market, liability and reputational risks. In the context of insurance and loss adjusting, these risks manifest in various ways:

  1. Regulatory risks: Shifting regulatory landscapes can impact insurance coverage requirements, affecting premiums, liabilities and the insurability of certain assets. For instance, stricter emissions regulations or renewable energy mandates may necessitate adjustments in insurance policies.
  2. Technological risks: The transition to renewable energy involves adopting new technologies, such as solar energy, hydrogen energy or wind turbines. Technological advancements can introduce uncertainties regarding the performance, maintenance and insurability of these technologies. Technological risks include waste disposal or recycling options of renewable energy waste.
  3. Market risks: Fluctuations in market demand for renewable energy sources and the decline of non-renewable industries can disrupt insurance portfolios heavily invested in traditional energy sectors.
  4. Reputational risks: As societal and environmental awareness grows, insurers and loss adjusters face reputational risks if they fail to align with sustainable practices or adequately address climate-related concerns.
  5. Liability risk: There is also climate and environmental litigation related to greenwashing (misrepresenting credentials) to consider.

The true costs of transitioning from non-renewables to renewables: a waste management approach

Transitioning from non-renewables to renewables entails more than just financial costs, it requires a holistic understanding of the environmental, social, moral and economic implications. Adopting a responsible waste management approach, includes advanced recycling techniques or innovative upcycling ideas, that allows us to assess and mitigate these costs effectively and reduce risks.

The waste generated from insurance claims predominantly depends on the nature, location and impact of the claim. In most cases, environmental and waste cover is excluded from policies in Australia. To tackle the challenges and the proposed deadlines for waste reduction and circular economy, all stakeholders within the insurance cycle should be involved and be responsible for the strategic implementation and execution.

Environmental costs

Non-renewable energy sources, especially the mining, extraction, refining and transport of fossil fuels contribute significantly to environmental degradation through air, land and water pollution, habitat destruction and greenhouse gas emissions. Transitioning to renewables minimises costs, reduces carbon emissions and promotes cleaner energy production. The transition process will take decades to change and will only be a smooth transition if managed, enforced and supported by all stakeholders and leaders of countries, private businesses and public institutions.

Social costs

The social costs of relying on non-renewables are often overlooked but are substantial. From health impacts due to pollution to community displacement from resource extraction activities, non-renewable energy production can harm communities disproportionately. Transitioning to renewables can alleviate these social burdens by promoting cleaner, safer energy sources and fostering community engagement in sustainable practices.

Moral costs

The transition to renewable energy sources must be done in an equitable manner that does not disproportionately harm marginalised communities and the environment around them. People have moral values that typically remain stable unless they perceive significant changes in views or opinions. Similarly, companies need to maintain a social license to earn and retain public trust.

Economic costs

Renewable energy sources play a crucial role in achieving carbon neutrality, reducing global warming and climate change, and meeting the Paris Agreements’ 2 degrees Celsius target. Renewable energy sources are considered to be affordable, sustainable and/or free (such as wind, water and sun). While there are upfront costs associated with transitioning to renewables, such as investment in infrastructure and technology, the long-term economic benefits often outweigh these expenses. Renewable energy sources offer greater resilience to price volatility, reduce reliance on imported fuels, and create new job opportunities in the green economy.

Opportunity costs

Failing to transition to renewables carries its own set of opportunity costs, including missed opportunities for innovation, economic growth and global leadership in sustainable practices. By embracing renewables, insurers can position themselves as leaders in climate resiliency and sustainability, gaining a competitive edge in an increasingly conscious market. By 2030, renewable energy sources could provide 65% of the world’s total electricity supply, and by 2050, they could decarbonize 90% of the electricity industry, significantly reducing carbon emissions and assisting in climate change mitigation.

Strategies for insurers 

To effectively manage and mitigate transition risks and navigate the shift towards renewables, insurers can implement the following strategies:

  • Diversification of portfolios: Diversifying insurance portfolios to include renewable energy projects and sustainable initiatives can mitigate exposure to risks associated with non-renewables. 
  • Scenario analysis and stress testing: Conducting scenario analysis and stress testing allows insurers to assess the potential impacts of transition risks and develop proactive risk management strategies.
  • Engagement with stakeholders: Collaborating with regulators, industry partners and communities enables insurers to stay informed about regulatory changes, market trends and social expectations related to the transition to renewables.
  • Developing new insurance products: Consider new risk products that are specifically designed to support/promote renewable initiatives, recycling technologies and carbon reduction technologies.
  • Promote environmental pollution insurance: Incentivise clients with low carbon footprint and zero pollution records.
  • Investment in sustainable practices: Investing in sustainable practices within their own operations, such as reducing carbon emissions and promoting eco-friendly initiatives, strengthens the credibility and resilience of insurers in the face of transition risks.

Moving forward

At Sedgwick, we care greatly about our impact on the environment and have a team focused on not only minimising our output but partnering with our clients to help them do the same. Recognising the impact that our activities, operations and those of our service providers have on the environment related to the use of raw materials, emissions to air, land and water and responsible waste management of waste generated from insurance claims is critical. In addition, assisting the insured with solutions to manage the claim with suitable systems, processes and resources to obtain a favourable outcome for all stakeholders and still reach sustainable targets. 

Transitioning from non-renewables to renewables in insurance involves navigating multifaceted risks and assessing the true costs of this transition. By adopting a waste management approach and considering the environmental, social, moral and economic implications, insurers can mitigate transition risks effectively while contributing to a more sustainable future. Embracing renewables isn’t just a financial imperative — it’s a moral imperative that demands our collective commitment to building a resilient, equitable and environmentally conscious society.

Learn more > our environmental services offering or contact Duane Pretorius at [email protected]

Tags: aus, Australia, Energy, environment, environmental, Environmental impact, Insurance, Insurers, Loss adjusting, renewable, renewable energy, sustainability, sustainable