In this article we explore the five ways in which parametric insurance can help reduce your energy transition risk volatility.
The volatility of weather-related events is putting revenue and future growth agendas at risk for companies across the natural resources industry. Parametric insurance is fast emerging as a critical tool in risk managers' toolkits, addressing risks such as wind, irradiation, lack of water, wildfire, hail, and other revenue disruptors, providing a stable financial bedrock to build short- and long-term business plans with clarity.
The energy transition is stitched into the fabric of the natural resources industry, with threads running through companies' operations, obligations and aspirations. Innovation is building at pace. And forward-thinking companies are mobilizing for change.
Traditional insurance remains a core mechanism to protect critical assets, but as climate change continues to drive severe and volatile weather events, natural resources companies' operational and financial resilience is being tested in new ways.
Parametric insurance is a critical tool for risk leaders, filling protection gaps, de-risking lender financing and building a more stable foundation to make informed financial decisions.
HOW PARAMETRIC INSURANCE CAN ACCELERATE INNOVATION IN THE ENERGY TRANSITION
Although the immediate demands of the energy transition will vary by sector, with mining, power, renewables and traditional energy companies all navigating specific challenges, planning for the future with confidence demands a stable financial foundation to model growth and innovation.
"Forward-thinking leaders of natural resources companies are using parametric solutions to free up capital for investment in growth initiatives."
Juanita Blanco | Director, Alternative Risk Transfer Solution Centro America & Caribbean/LatAm at WTW
Used strategically, parametric solutions can help natural resources leaders future-proof their energy transition strategy by supporting:
Parametric solutions can provide coverage for emerging technologies that might be considered too risky for traditional insurance products, reducing the protection gap whilst supporting forward investment cycles.
01 Revenue protection
By nature, revenue is intrinsically tied to the availability of a resource. For wind farms, wind speed is key, for hydroelectric plants, water flow is critical, and the same is true for industry players across all natural resources sectors around the world. As climate change continues to drive weather-related volatility, knowing if the sun will shine or if the wind will blow with the same velocity in 15 years' time is not without modeling complexities. Any shortfall in supply will have a direct impact on a company's revenue and ability to fulfil its off-take agreements. But without any property damage, traditional insurance products would not be triggered.
Parametric insurance protects revenue, enabling leaders to make more stable revenue projections and make informed decisions about growth plans.
02 Immediate and flexible liquidity
The solution unlocks capital, fast. Since the severity of the event is recorded against a pre-agreed payout matrix, delays associated with loss assessments in traditional insurance are eliminated. Claims are typically settled within 15-30 days, enabling decision-makers to mobilize a response plan much more effectively.
On payout, insureds are free to use the payout in any way that best supports the business. Examples include offsetting the cost of energy purchase, supplementing the balance sheet after a revenue shortfall, investing in repairs or replacement technologies after property damage, or even providing financial aid to employees or communities impacted by an event. This immediate liquidity can be crucial for companies looking to drive their business plans forward without interruption.
03 Innovation incentives
With a more predictable risk landscape, companies can allocate capital for long-term investments with more certainty.
By leveraging data and algorithmic models to predict and optimize outcomes, parametric insurance is proving to be a game-changer in the industry's efforts to innovate and adapt to a low-carbon future. By providing a way to safeguard against specific, measurable risks, finance and insurance leaders are positioned to build a steady flow of investment to support transition projects.
"Parametric solutions can provide coverage for emerging technologies that might be considered too risky for traditional insurance products, reducing the protection gap whilst supporting forward investment cycles."
Derrick Easton | Managing Director, Alternative Risk Transfer Solutions, Americas, WTW
04 Capital flow
Parametric solutions are opening doors for risk and insurance teams to play a bigger role in enabling natural resources companies to secure financing. As natural resources companies move to explore new fuels, lenders can be reticent to provide the necessary financing – often due to a lack of data to model the risks of new technologies or operations. Parametric solutions can de-risk the technology exposure, enabling banks and other lenders to focus on the financial risk in isolation, reducing financing costs.
Parametric insurance provides a financial safety net for investors and debtors, ensuring the stability of a project's cash flow and revenue stream despite the volatility of weather conditions. In securing finance for projects, parametric insurance can offer limits that satisfy lender and project finance requirements, helping to drive investment in cleaner technologies and operations as part of the energy transition imperative.
05 Resilience
Since any payout amount is predetermined and calculated according to a predefined matrix, risk and finance leaders have a clear understanding of the payout they can expect before a loss event even happens.
Companies can use parametric insurance to enhance their resilience against climate-related risks, which is increasingly important as they transition to low-carbon operations. This resilience supports continuous investment in the energy transition without significant setbacks from unforeseen climate events.
Parametrics can handle the complexity of current and emerging risk exposures. The energy transition is creating a vast network of interconnected challenges, such as integrating intermittent renewable energy sources like wind and solar, optimizing grid operations, and managing the shift from centralized to distributed energy systems. Parametric models can capture the interdependencies and nonlinear behaviors of these complex systems, helping leaders make decisions with clarity.
PARAMETRICS COMPLEMENT TRADITIONAL INSURANCE
By filling the protection gap
In 2023, the world faced a considerable protection gap with total economic losses surpassing $350 billion.
Traditional insurance policies can only go so far to reduce these gaps, as policies often come with large deductibles or sub-limits, particularly for natural perils. While material damage can be protected, for an industry that is heavily reliant on the availability and stability of natural resources such as wind, rainfall, or solar irradiation, extreme excess or absence of these core resources can halt operations and revenue flows.
Parametric solutions are tailored to address the protection gap in non-damage business interruption scenarios, especially in regions where traditional insurance coverage is insufficient or absent.
- Low power output due to inadequate natural resource availability
- Cost overruns during the construction phase
- Downtime of third-party transmission and distribution lines
- Decreased demand for power consumption due to seasonal temperature fluctuations
By providing a financial recovery mechanism for uninsurable risks, parametric solutions complement traditional insurance towers, supporting financial resilience and business continuity.
LOOKING AHEAD
Unlocking the immense potential of parametric insurance
The weather cannot be controlled, but as weather-related events increase in severity and frequency, natural resources companies can control the impact on business. Through this complexity, parametric solutions are building clarity now and into the future.
Forward-thinking leaders of natural resources companies are using parametric solutions to free up capital for investment in growth initiatives.
Parametric insurance is a paradigm shift in risk transfer, offering a transparent, fast, and flexible solution to modern risk management challenges. As the natural resources industry faces an increasing number of unpredictable and impactful events, parametric insurance is a valuable tool for businesses to look into a volatile future with clarity.
For smarter ways to reduce your energy transition risk volatility, get in touch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.