Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
The writer is a member of the Jacobs Urban Tech Hub at Cornell Tech.
As natural disasters such as wildfires and hurricanes have proliferated, insurers have begun dropping coverage for homeowners in vulnerable cities. The root cause of increased climate-induced property damage is, of course, global warming, and to prevent the tragedy from spreading, we must quickly shift to alternative energy sources.
Although the charred houses have become the visible face of the climate insurance crisis, another invisible problem looms: Many insurers have been slow to offer coverage for the kinds of ambitious clean energy projects that will keep us off the climate cliff. And that coverage gap risks hampering investment in the energy transition. Without insurance, it is difficult to get financing to build clean energy projects.
There are some logical explanations for the industry’s hesitations. Insurers process large amounts of historical data to assess risk and write policies. Some are still learning how to price coverage for first-generation clean energy sources, such as solar and wind farms. Needless to say, there are few insurance options for the new technologies that climate entrepreneurs are trying to develop and deploy, such as clean hydrogen energy and long-duration energy storage.
In the United States, federal spending is currently footing the bill to make clean energy pilot projects are carried out. But to reach international scale quickly enough, project developers will have to persuade investors that the next generation of climate technologies are safe and reliable – the kind of guarantees typically offered through insurance policies. Developing these policies will require a rapid evolution of how the insurance industry operates and a healthy dose of creative thinking.
The modern sure The industry spends less on research and development than other similar industries, but this was not always the case. During the Industrial Revolution, the sector played a key role in developing the safety standards that enabled electrification. In 1893, a group of underwriters’ associations hired electrical engineer William Henry Merrill to inspect wiring at the Chicago World’s Fair. Merrill understood that electrical installations posed a fire risk, but that it could be mitigated with proper design, installation and testing. He opened Underwriters Electrical Bureau, which would later become Underwriters Laboratories, a testing facility that would certify products as safe. To this day, property and casualty insurers often insist that appliances be UL certified.
Similar collaborations between insurers, standards bodies and entrepreneurs are required for the new electric era. For example, as commercial electric vehicles, such as buses and trucks, hit the road, insurers will increasingly need to coordinate with manufacturers and fire marshals on the design of charging stations to reduce fire risk. . Some progressive insurers are beginning to leverage AI-based analytical techniques to predict battery health and condition, ensuring safety and reliability.
Much of the engineering talent needed to understand the risks of new energy products is likely to be found in legacy insurance companies. The risks associated with an offshore wind farm are somewhat similar to those of an offshore oil platform. The process of drilling a geothermal well is not that different from fracking for gas. Instead of continuing to finance fossil fuels, insurance companies should redirect their expertise toward understanding emerging clean energy technologies.
And to move even faster, traditional insurers can explore working with clean energy entrepreneurs to access the data they need. Again, there is a strong history: in the late 19th century, when insurers on the east coast of the United States wanted to expand westward but lacked the regional knowledge to underwrite effectively, they delegated their authority to small “new” companies, which were located on the east coast of the United States. border and I could see what was happening.
Today, a handful of startups (including kWh Analytics, New Energy Risk and Energetic Capital) specialize in aggregating information about energy assets for use in insurance policies. Combining real-time data with the predictive powers of machine learning could create a new paradigm for modeling risk.
McKinsey estimates that the insurance market for new energy infrastructure is likely to reach between $10 billion and $15 billion by 2030. Additionally, the auto and home insurance industries (which together drive more than $1 trillion of the global economy) will have to adapt to fully electric buildings and vehicles.
These figures show that insurers who manage to advance the energy transition are likely to reap financial rewards, as well as being on the right side of history. Instead of financing fossil fuels, proactive insurers should seize the clean energy opportunity.