New report explores the insurance market challenges and opportunities arising from the transition to a low carbon economy
UMAS contributed to the deep dive report by supporting the review of the effects of decarbonisation scenarios on the shipping sector. The report shows that most sectors, including shipping, are overlooking the risks and opportunities associated with climate change.
The consequences of the transition to a low carbon economy are expected to be particularly pronounced in various business sectors, including shipping, where there is a particular shift in risk due to changes in the composition of cargo demand, as fossil fuel trade declines, leading to cargo insurance of fossil fuels to shrink over time. The transition towards new fuels in shipping would also create a new set of litigation and compliance risks. Both, the direct and indirect impacts of the low carbon transition on the shipping sector could therefore have significant implications for insurers.
The report identifies other areas of risks that would arise as we move towards a low carbon economy this includes in the areas of litigation where for example due to trends towards climate-related disclosure and target setting in the marine sector could result in future disclosure regulation for which companies may be interested in purchasing liability insurance in the form of D&O (Director & Officer) insurance against directors and officers setting climate-related targets. Nonetheless, in comparison to other business sectors such as the power sector, the litigation risk is not significantly increasing.
Another challenge faced by the insurance sector in enabling the low carbon transition is the issue of misaligned horizons. Insurance policies are typically 12-36 months long; strategy and capitalisation decisions are therefore often relatively short-sighted, while climate change impacts and mitigation/adaptations will materialise over a longer period of time. This will require insurers’ to change the products they offer.
Opportunities relate to the adoption of low emissions technologies, with premium income expected to grow as insurable values of vessels increase and the set of insured risks, including risks on compliance with new regulations, broadens. There is a potential role for insurers in facilitating this investment by supporting more effective risk sharing between vessel owners and charterers. Insurable values of vessels are also set to rise from implementation of retrofits and the implementation of costly new technologies in newbuilds, which would increase hull insurance premiums. Other long-term low and zero emission technologies also offer a range of opportunities for insurance provision, such as against wind propulsion technology corrosion and safety risks associated with hydrogen as marine fuel, for example.
Continuing on the alternative fuels risks, the transition towards biofuels exposes aviation and shipping companies to a new set of litigation and compliance risks. Unlike conventional jet fuels, lifecycle emissions of biofuels can vary substantially, and whilst one would typically expect regulators to define standards, any ambiguity could lead to compliance risks for companies in the sector.
The full report and the sectoral deep dives can be downloaded here