However, our experience supporting Cleantech clients reveals a disconnect between the investment community’s desire to support the sector and the insurance industry’s appetite to accept cleantech risks. This is leading to a risk protection gap that could limit the success of the sector and our ability to meet our net zero targets.  This article takes a closer look at how we got here and how the sector can better enable cleantech innovation.

‍

What is cleantech?

‍

Cleantech is a blanket term used to encompass technologies that optimise the use of natural resources and reduce the negative environmental impact on the planet. Think clean and renewable energy, environmentally sustainable products, processes, and services. The term applies to a range of technologies and innovations across a broad array of industries from energy, natural resources, recycling, transportation, agriculture, manufacturing, and construction to retail, finance, and traditional information technology. The terms cleantech and climate tech are sometimes used interchangeably. The difference is that climate tech relates more to technologies seeking to combat climate change and reduce greenhouse gas emissions such as pollution reduction technologies.

‍

Why do cleantech innovations pose challenges for insurers?

‍

Through experience supporting cleantech clients, we clearly see insurers struggling to understand, underwrite, accept, and price such that the premium cost is not so prohibitive that it discourages innovation and success in these industries. Here are some of the key challenges in more detail:

‍

• History repeating: Insurers use historical data to assess future risks. Looking back, investment in cleantech gained traction in the early 2000s thanks to the US venture capital community. However, the global financial crisis hit the sector hard, drying up capital and leading to business failures and large losses for venture capitalists. It’s only in the last five years that we have seen investment return to the sector, which is now facing another boom period. The insurance market is now taking a more conservative approach when assessing emerging cleantech risks because business failures can lead to a higher percentage of claims, especially for operational risks (i.e. D&O Liability).

‍

• Convergence of new technologies: A large part of the challenge for the insurance market is that cleantech encompasses a wide range of technologies, products, and services across numerous industries. The convergence of new technologies into existing industries creates hybrid risk profiles that take time for the insurance market to understand, accept, and develop suitable products to address.

‍

• Multifaceted risk profiles: Hybrid risk profiles have emerged where existing or more traditional information technologies have been introduced within a specific industry (e.g., FinTech, MedTech, Agri and Food Tech). The insurance market has, for the most part, adapted well to these hybrids.  Cleantech is a little different because the technologies are developed and integrated across existing industries and the hybrid risk profiles this creates are complex and often highly challenging for insurers to understand. A lack of understanding breeds uncertainty, which can reduce the available insurance markets and increase the premium entry point.

‍

What are the solutions?

‍

Some pockets in the cleantech sector, such as large-scale renewables projects continue to find support from select insurers who have developed specialist teams and products for these risks. Large risks attract large premiums, which provides an incentive for insurers. These clients often have significant investment support and can afford the costs of insurance. Start-ups and smaller scale operations, which make up a large portion of the sector, typically won’t have sufficient capital for large premiums and/or allocating large portions of cash to insurance places increased pressures on the business.

The key to a successful insurance outcome is effectively presenting and communicating a risk profile to the insurance market, managing insurer uncertainty, and tailoring solutions for hybrid risks. At Honan, we have expertise in energy/power, construction, engineering, advanced manufacturing, technology and financial risks, enabling us to support clients from start-up to large scale. We work in partnership to deeply understand our client’s business and risk profile to give insurers clarity and reduce uncertainties.

‍

What is the insurance industry doing about climate change?

‍

The short answer is plenty! In the last few years, insurers revised their portfolios to phase out underwriting fossil fuel risks. New thermal coal assets are virtually uninsurable with new oil and gas projects set to drastically decline.

The Insurance Council of Australia recently released their climate change roadmap, outlining how insurers can achieve net zero emissions for their operations by 2030 and across the entirety of insurers’ activities by 2050. This report was well received and demonstrates progress, which is great to see as the industry has a significant role to play.

Insurers are in the business of insuring damages from weather and environment related natural perils. It stands to reason that taking action to mitigate the impacts of extreme weather is in the best interests of insurers and the profitability of their underwriting portfolios.

‍

What’s next?

‍

We consider the role of insurance to be an enabler in the face of uncertainty, and we are working closely with insurers to assist their understanding of hybrid risks, lobbying for support of cleantech and working in consultation with insurers and clients to develop solutions.

As the market conditions evolve, we will continue to keep you informed.

‍

Dominic Brettell

Head of Client Service (Newcastle/Hunter)

Dominic.brettell@honan.com.au

‍

‍