Navigating insurance coverage challenges in the energy sector

The insurance industry is facing significant capacity challenges in the energy sector. There is a substantial protection gap between global economic losses and insured losses, with a gap of around $60 billion. Severe convective storms, flooding, wildfires, windstorms, and earthquakes are driving substantial losses, with the United States being the region experiencing the highest insured losses.

Reportedly, many insurers are reluctant to deploy capacity for certain industries, such as oil and gas, due to climate change concerns and the risk of litigation. Major insurance companies that previously offered substantial limits, often exceeding $100 million, have significantly reduced their capacity. Some have even capped their offerings at $20 million or less.

The legal environment has also contributed to the capacity challenges. The increase in nuclear verdicts and the rise of a “reptilian trial strategy” have made certain venues more plaintiff-oriented, even in traditionally conservative areas. This has led energy companies to implement proactive strategies such as utilizing neuropsychologists to train corporate witnesses. Energy companies are exploring alternative solutions to address the capacity challenges.

Captive insurance companies have become increasingly popular, with companies using captives to complement commercial markets and finance layers within their insurance towers. However, there is a need for caution when taking on significant risk within captives, ensuring appropriate funding and risk diversification.

The transition to cleaner energy sources has also presented opportunities for the insurance industry. Companies involved in building transitional infrastructure, such as wind farms and solar projects, are facing challenges in budgeting for insurance costs and are turning to alternative solutions. The insurance capacity challenges in the energy sector are multifaceted, driven by factors such as climate change, legal risks, and the transition to sustainable energy sources. Companies are actively exploring innovative solutions to manage these challenges and maintain adequate risk protection.

Energy companies face increasing pressure to transition toward cleaner energy sources and address climate change risks, both physical risks from extreme weather events and transition risks such as the perceived viability of fossil-fuel-centric businesses. Insurance plays a crucial role by insuring energy companies’ operations while also making investment decisions on where to allocate premiums. Many insurers have reduced investments in fossil fuel companies over the past year.

Companies are taking real actions to enhance their environmental, social, and governance (ESG) commitments. Examples include investing in carbon capture projects, acquiring natural gas assets, procuring energy from renewable sources such as solar and wind, and exploring clean energy solutions such as microgrids and battery storage. Utilities are extending the life of nuclear plants to provide reliable baseload power with lower emissions.

ESG considerations present challenges in obtaining insurance coverage as some carriers are reluctant to deploy capacity for certain industries. However, it also creates opportunities for insurance solutions such as captives, ILS, and resilience bonds to support the transition to renewable energy infrastructure.

Energy companies are enhancing ESG risk mitigation strategies such as implementing national transportation counsels for quick response to accidents, engaging neuropsychologists to train corporate witnesses, and proactively communicating ESG initiatives to underwriters. Robust ESG programs can strengthen the narrative for securing insurance capacity.