Energy

The changing speed of the energy transition and net zero underwriting

Martin Henderson 02 December 2024

The 1.5 degree of warming targeted at Paris in 2015 requires the global economy to achieve net zero emissions by 2050. However, there have been recent announcements by several energy majors which signal a reshaping of their energy transition plans. While an overall commitment to achieving net zero emissions remains, the speed of transition for these companies will now move at a slower pace. A more leisurely transition would pose a conundrum for insurers in the energy sector with their own targets to rapidly decarbonise underwriting portfolios.

Investments into clean energy projects are nearly double the combined amount spent on new oil, gas and coal*, yet more is needed to meet the target set in Paris. The jury is currently out on Trump’s second term and how this could alter dynamics further. The expected warming from current decarbonisation commitments is trending towards 2.4 degrees. Insurers who align their underwriting portfolios to a 1.5 degree pathway face difficult underwriting decisions within an economy that is, overall, transitioning slower than initially targeted in Paris.

*Source: IEA Global Energy Outlook 2024

Current status of net zero underwriting

Many leading insurers have committed to achieving Net Zero 2050 across three areas: 1.) decarbonising their own operations, 2.) decarbonising their investment portfolios, and 3.) decarbonising their underwriting book. Of these, insurers’ decisions to decarbonise their underwriting book have the most direct impact on our energy and power clients. The current status of underwriting methodologies involves simple 'category-based' restrictions.

The most common category restrictions include: thermal power generation from coal and lignite and their mining, oil sands extraction, new oil and gas developments within the Arctic, and, in some cases, oil and gas from oil shale/fracking. Underwriting approaches within these categories vary (e.g. definitions of Arctic Circle). Most insurers take a firmer stance on new construction within these categories whilst renewals to existing operations will usually be allowed within certain parameters (e.g. revenue from the restricted activity <30% of overall revenue), but on the understanding these risks are phased out of the underwriting book over time, with 2030 being a commonly quoted timeframe.

New year milestone

As we enter the new year, we face a milestone with the ratcheting up of underwriting restrictions. The following insurers have previously announced they would increase restrictions from 1 January 2025: Allianz will require a Net Zero commitment from the most prominent fossil producers, AXA will only cover new gas fields if the company is in transition, Munich Re will require a commitment to a Net Zero programme by 2050 on renewing oil and gas business with the highest emissions, Sompo will non-renew coal oil or gas risks without an emissions reduction plan, and Swiss Re will require half of the overall oil and gas premium to come from net zero-aligned companies by 2025, and they will have tighter restrictions on thermal coal. Whether these insurers will implement these commitments will become apparent in the coming weeks.

Available exemptions

The current category-based regime has led to some unusual decisions by insurers. A transitioning power company sought to insure a new wind farm development. However, it was declined by several leading insurers due to their existing high percentage of revenue derived from thermal coal generation. Recognising the potential weakness of category-based approaches, many insurers will entertain exemptions. The most common exemption available is for companies that can independently verify they are following a 1.5 degree decarbonisation pathway as approved by the science-based targets initiative (SBTI), or an equivalent organisation. A further common exemption is for Arctic Circle drilling on the Norwegian Shelf within the Barent’s Sea, in areas deemed free of sea ice.

Emissions based underwriting

The most accurate way to address net zero targets would be for insurers to make decisions based on actual emissions, not simple categories of activity. However, emissions-based underwriting is proving extremely complex to put into practice. The Net Zero Insurance Alliance (NZIA) was established to find answers to common challenges. However, due to legal challenges and other reasons, many founding participants opted to leave NZIA and the group was ultimately discontinued in April 2024. It is unclear on what timeline (if at all) the market will move towards emissions-based decision-making. If emissions-based methodologies can be developed post-NZIA, the challenge of obtaining emissions data from clients will remain. Most clients do not currently have a clear picture of their overall emissions, whether Scope 1 (within their own operations), Scope 2 (within their power sources), or Scope 3 (within their supply chain and products). Assessing insured emissions based on Scope 3 is a particular challenge for energy clients due to the emissions contained within the oil and gas they produce.

Recent announcements

Fresh announcements on net zero underwriting have been thin on the ground during 2024. An expected rush of target-setting from NZIA members did not materialise. Chubb has issued new guidelines on methane intensity requirements, and Generali has recently announced a broadening of restrictions to include new LNG and Midstream developments where companies are not on a 2050 programme pathway.

An uncertain future

While the energy market currently appears settled on its category exemption path, there is a danger that this blunt approach will prove unfit for purpose in the long run. The effects of climate change are only set to become more visible in the future, and stakeholder pressure is likely to increase. Without emissions-based underwriting methodologies, insurers may choose to withdraw their capacity. This risk is amplified if the energy market were to enter a period of unprofitability.

Actions for risk managers

Category restrictions remain the underwriting approach for the near future, with emissions-based approaches appearing delayed. Risk managers in the energy and power sectors need to be aware of any difficult-to-underwrite activities that may impact the available capacity for their programs and hence, increase pricing. Key corporate relationships, such as lead underwriters should proactively align with corporate strategy. Due to the phasing-in of restrictions, key milestone dates can adjust underwriting criteria and lead to certain clients falling out of scope for renewal over time. Energy companies with a Net Zero commitment and following a 1.5 degree pathway will have the least difficulty obtaining coverage. Whether a client is transitioning or not, the risk manager should be ready for insurer questions and comfortable articulating the company strategy on decarbonisation and broader ESG concerns.

Where does Miller stand?

We are committed to supporting our clients through the energy transition at Miller. We provide quarterly updates on market decarbonisation commitments and can advise on potential changes to underwriting restrictions. Our Renewable Energy & Environmental Technology (REET) team is ready to help clients who are transitioning to renewable energy sources, with expertise in various areas such as carbon capture and storage

(CCS), solar PV, wind, hydro, biofuels, and others. We stand ready to advise on captive and mutual capacity options, as well as the optimal selection of partners for energy clients looking to future-proof their programs. We are reviewing our stance on climate-related risks and opportunities as it is crucial to reach our targets and help our clients succeed throughout the transition.

*Source: IEA Global Energy Outlook 2024