Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

As global energy exposures grow opportunities emerge for reinsurance and weather risk transfer


A report published today by reinsurer Swiss Re looks at the growing energy markets, how they are forecast to change and grow as renewable energy sources become ever more important and policy begins to reflect climate science and how they will require financing and risk transfer solutions. The report identifies a growing opportunity for reinsurers, risk transfer specialists and weather risk management instruments as global annual expected losses from energy look set to double.

The report, Building a Sustainable Energy Future, looks at how the changing mix of global energy production could impact climate change and seeks to provide a framework looking at issues such as renewable energies, greenhouse gas emissions and how to adapt to a changing climate.

“This study clearly shows that renewable energy will play an important role in the global power mix of the future,” says Andreas Spiegel, Head of Sustainability & Political Risk at Swiss Re and author of the report. “At the same time it shows that adaptation to climate change will increase in importance because the window of opportunity for mitigating climate change is getting much narrower.”

While the composition of the world’s energy mix is difficult to forecast, the increasing use of new technologies and renewable sources of energy looks set to increase the energy sectors global expected losses rapidly over the coming years.

Various scenarios are explored looking at how the energy sector could evolve, how it could be financed and how much risk transfer it could need in the future. Currently, global energy sector expected losses are around $20 billion per year. By 2030, under once scenario, Swiss Re believes that could grow to as much as $42 billion and if a theoretical full adoption of renewable energy technologies were to happen that number could rise to $50 billion or more each year.

Global annual energy expected losses, USD bn per year, 2030

Global annual energy expected losses, USD bn per year, 2030

Much of the growth of the energy sectors expected losses would be weather related, given the exposed nature of many renewable energy technologies, and these losses would also include supply issues around volume risks (lack of generational power for example), construction risks (as many renewable projects are in difficult geographic locations) and weather or catastrophe damages.

The report from Swiss Re says that the risks associated with renewable energy require unique risk management practices and new risk transfer options which offer a viable alternative to traditional insurance and reinsurance. For this goal, the alternative risk transfer markets, weather risk markets and the convergence tools such as catastrophe bonds and industry loss warrants (ILWs) could be invaluable.

Currently those taking the lead in providing risk transfer for renewable energy projects are led by the large, global reinsurers, but there is clearly an opportunity for niche firms, potentially convergence sector collateralized players, to turn their focus to what is a growing market opportunity.

We fully expect the weather risk management market and innovative reinsurers to embrace this opportunity. It is also likely that we will see cat bond type structures put to use for renewable energy transmission and generation risks in the future. How quickly the market can innovate to provide protection remains to be seen but we have heard encouraging noises from some interested parties in the alternative reinsurance markets, with parametric policies cited as another potential solution.

You can access the full report from Swiss Re here.

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