Howden's Climate Risk and Resilience sparks innovative action at International Energy Week

Read the key highlights from Rowan's keynote below

Insurance and risk are upstream of investment and credit  

As the previous carbon markets discussion wrapped up, I realised that I’m the insurance layer before you come to the credit investment panel next. By de-risking projects, insurance facilitates the flow of capital, connecting investors and operators. In this sense, the insurance sector plays an upstream role, setting the stage for more significant financial movements downstream. 

A brief history: from industrial to energy transitions 

Reflecting on the last 30 years since I first stepped in the Lloyd’s of London as a reinsurance underwriter, the insurance industry has evolved from collapse after major natural and man-made catastrophes to a more resilient sector, despite increasing risks and uncertainty. This transformation shows how the combination of actuarial science, engineering expertise, and capital management allowed the market to overcome previous challenges. 

This historical change mirrors the industrial revolution’s rise. In the 1850s, the steam boiler was at the center of innovation. However, boilers became increasingly dangerous, and consequently they became uninvestable. In response, the insurance industry worked with engineers to create safety standards, leading to The Hartford Steam Boiler company. One now needed insurance to get credit or investment. This insurance breakthrough and governance spurred growth and ultimately enabled the industrial revolution. Insurance again played a critical role by de-risking capital investments. 

From de-risking financial mechanism to a powerful form of governance [standards] 

Fast forward to today, and we are once again at a critical point where insurance is necessary to unlock new energy innovations like solar, hydrogen, and battery storage. Recent technological studies are enabling our market to create "technology performance guarantees", which like steam boilers, enable investors and creditors of projects to de-risk and eliminate the risk associated with those chemical processes not performing as they would expect. Imagine the challenge of underwriting that. But also, the power if you do. 

Just as in the past, insurance is providing governance and safety mechanisms to allow capital to flow with confidence. 

Carbon markets and liability risks 

Insurance has also made strides in addressing the risks in the carbon markets. One example – brought to market by Howden - is the development of policies that cover carbon sequestration projects, like CCS, which are critical to meeting net-zero goals. This requires massive infrastructure, and investors will be looking for bankability. To get the carbon credits or the tax breaks that the panel earlier were hinting at, you need to ensure that the carbon is going to be sequestrated for decades. How do you do that? Well, we’ve repurposed the environmental liability market to treat carbon as another pollutant and enable projects, operators and investors to ensure the safe and prolonged sequestration of that carbon. And if it leaks during the period of the policy, which is renewed to match the cycle of the credits, those devalued credits are insured against and can be replaced by the buyer. 

So, by offering liability coverage, insurance ensures that carbon credits will be secured for the long term, making them more attractive to investors. 

In another example, an insurance product of ours has helped stabilise forestry-based carbon credits in emerging economies by covering risks like natural disasters, political instability, and fraud. This ensures that the credits retain their value and offers security to buyers and sellers alike. 

There’s a huge potential to unlock, and underwriters can provide that sort of protection if projects are undertaken in the right way. We need to use insurance, yes, to de-risk things financially, but to enable and ensure that people's promises are kept. Insurance as a form of governance. 

Integrating physical risk into financial planning 

Another challenge that we must address is the accurate quantification of physical risks like extreme weather. With climate change increasing the frequency and intensity of natural disasters, it is essential for investors to account for these risks when planning future cash flows for low-carbon projects.  

Currently they’re not adequately accounted for. There will be some assessment of the physical risk, but no quantification of the annual average risk for a one in 100 return period, for example. We don’t leverage the risk metrics of our industry, and nor do we note it as a contingent liability, so that future cash flows account for this. 

Whether it's solar panels with enhanced resilience or making sure infrastructure is robust, managing physical risks will require collaboration between engineers, insurers, and financiers. We have to make sure that we blend the expertise of our combined sectors. Because if we're going to spend $20 trillion between now and the end of the decade and more, we can't do it again in another 20 years’ time.  

The importance of regulation in incentivise de-risking 

At the heart of these challenges is regulation. For insurance and finance to truly drive the energy transition, there needs to be appropriate regulation, not just around carbon emissions and new technology, but around how we assess and manage risk. A lot of this is about how risk is going to be regulated. Risk, after all, is not inherently negative; it’s about making informed decisions about what we value and how we control our destiny in this transition. 

Risk comes from the Italian word risicare, which means ‘to dare.’ In this sense, risk is a choice rather than a fate. It’s about saying we are going to have control over our destiny, 

Our requirement is to retrain the invisible hand so that the risks that we perceive as being a challenge in this transition are properly accounted for, are properly recognised. Because only when risk is accounted for can we then actually be credited and have the economic incentive to de-risk.  

And that's what happened 200 years ago. What we need to do here with this group brought together by the Energy Institute, in this partnership we're looking to build, is to blend capital, science and policy together in a harmonious way.  

As I said, we're very lucky. The Energy Institute is the ultimate convening body. Howden is a broker. Our job is to create relationships and make things happen, conversations with a purpose.  

My final plea is to consider us – insurance - as a portal between this massively important sector that you represent and a bankable, secure transition.