Climate Insurance Underpins All Roads Leading to Net Zero

In our first thought piece on the topic, we produced a perspective on carbon markets and challenges they face to scale meaningfully. As a multi-stage venture firm investing at the intersection of technology and financial services, we are excited to turn our attention to the topic of climate insurance and the challenges and opportunities facing the industry.

When we think about the future of insurance, what if….

• Any nature-based project is able to secure financing because a full stack insurer provides full coverage related to credit invalidation and removal risk from unforeseen occurrences anywhere on the planet?
• Any green hydrogen developer is able to launch a project because an insurer protects against an buyer becoming insolvent in the future, thereby stranding the project and asset?
• Are there more predictable, simplified and affordable coverage options via parametric policies for natural catastrophic events and changes in the weather, which is increasingly impacting the insurance industry as a whole?

Let’s start with making a very clear assertion: we believe achieving a net zero economy will not be possible without the insurance industry and climate insurance becoming more central to products offered across the value chain. The insurance industry is critical, and underpins all the efforts being made to develop and finance carbon projects, deploy infrastructure, build community resilience, and distribute carbon-negative products to achieve net zero. We can even call this a transformational moment for insurers. Insurance creates the market for project-level financing.

The energy transition is here to stay and the insurance industry has taken notice. Risk management, and how it’s been defined in the past, is taking new shape with technology driving the change. As capital re-allocation to low carbon technologies continues to move forward, perfectly addressing volatility to ensure an orderly and durable transition will be essential . As physical risks rise, risk transfer solutions and innovative insurance products will be critical.

To frame the opportunity with numbers, it is projected that annual global investment in decarbonization technologies in renewables could account for $800 billion by 2030, which translates into $10-$15 billion in insurance premiums on capital expenditures. (1) By other estimates, investments in green energy will lead to energy-sector related cumulative insurance premiums of $237 billion by 2035 (2).

Source: SwissRe Institute(2)

While established technologies such as solar, on- and off-shore wind, EV batteries and charging infrastructure will be the near-term target for many insurers as the technologies are comparably well-established versus others, emissions-intensive assets will become equally as important in the years to come, including in carbon capture and storage, green hydrogen and electrolyzers, and electric heat pump retrofitting. The capacity across multiple project types will have to greatly increase – providing a major opportunity for insurers in the years to come.

Source: McKinsey and Company(3)

Even more so, the insurance industry can be an enabler to drive a net zero future. For example, in the voluntary carbon markets, by insuring against carbon credit invalidation or removal risk in nature-based projects, the industry can accelerate the development of these projects around the globe. The protection given to both buyers and sellers will catalyze the market.

These ‘what if’ scenarios are not fanciful but are already here and will become more commonplace.

There are increasingly opportunities on the horizon for climate insurance.

In the context of climate, a lot of insurance talk is related to projects to remove or sequester carbon. Therefore, there will be no market for project-level financing and no way to reach our carbon reduction goals, without insurance. Additionally, with project finance, there will always be some type of risk – technology risk, offtake risk, physical damage risk, or resource risk. The market for insurance is deep and broad.

Insurance is the bridge to de-risk barriers to bankability of critical projects. Or, in other words, the means to allocate risk to parties that can best handle it. By unlocking barriers in supply chain (i.e. feedstock for hydrogen production), performance/delivery, or reliability of counterparties, many of these projects, despite suffering from political, capex, technology, or scale-up risk can find credible and eager financiers.

New ways are needed to manage risks and finance climate tech projects, and the critical role re/insurers can play to expedite deployment of climate technologies and engaging projects at pre-commercialization stages. Typically, P&C insurance companies are approached during the final financing and construction phases of projects. Most projects, over 80%, are developed by small to mid-sized companies without substantial balance sheets,major in-house risk management expertise or demonstrated project success (3). This ultimately means the requirements for investors to invest in these projects don’t meet the high risk/return profiles. The consequence is that most projects fall in the ‘Valley of Death’ and never commercial deployment at scale.

Source: The Geneva Association (4)

Developing underwriting expertise to fully understand the risk profile during the R&D phase on previously difficult to insure projects will be critical to build confidence to insure these projects at the early deployment stage. What’s really needed are additional mechanisms to bring more stakeholders together to get these climate projects off the ground. These mechanisms are needed to engage insurers with technical and certification bodies, the institutions involved with setting standards that will help drive the development of appropriate risk management standards that can be scaled across many projects.

One positive is that the emergence of specialty MGAs (Managing General Agents) with extensive expertise in modelling certain risks is helping insurers better understand these technologies. Additionally, co-designing innovative risk management solutions like public-private partnerships and risk pooling with aid in underwriting is supporting insurers’ understanding.

What about outside of project development?

Parametric insurance is becoming increasingly important and demand is  increasing. Parametric policies have been around forever, but as extreme weather events become more common, indemnity coverage will become less affordable and less practical. From 1980 to 2010, the United States faced an average of five severe natural catastrophic events, (having an inflation-adjusted $1 billion in damages or more annually. Between 2011 and 2022, that number tripled to an average of 15 per year (5) Not only do these policies provide natural catastrophic coverage but can protect against massive weather shifts that have adverse effects on assets (i.e. drought) or even protect against income loss on renewable assets. The parametric insurance market is anticipated to grow from $14.8b in 2024 to nearly $40b by 2032, driven in large part by natural catastrophe coverage (7).

Source: Captive (6)

Anthemis’ portfolio company, Raincoat, has built an operating system for parametric insurance related to climate risk in emerging markets. While traditional solutions have struggled to serve customers affected by disasters in a timely manner, with claims taking months to years to payout, Raincoat’s platform fully automates parametric products and delivers them through embedded distribution channels. While the construction of parametric policies is challenging due to the R&D and data required to develop pricing models, plus the need for technology to manage and trigger policies at scale, Raincoat is well-positioned to enhance the customer experience and help policy holders recover from disasters in a much more efficient manner.

If the industry moves to a more simple and standardized parametric coverage approach that is multi-year and provides more predictable and affordable coverage across multiple assets and projects, insurers will benefit from appropriate pricing and protect long term loss ratios in their portfolio. Through use of data for pricing, parametric insurance simplifies underwriting leading to faster quotes and binding of a policy and reducing overall costs. (7)

From carbon insurance, AI-enabled insurance data and analytics products, specialty MGAs, and even unique tax recapture insurance product offerings used to hedge against the growing demand for buying and selling of clean energy tax credits, alongside the changing regulatory landscape, we see insurance increasingly playing a more outsized role in climate tech in the years to come. In addition to Raincoat, discussed above, some examples of startups leading the charge are:

Kettle: An Anthemis portfolio company, Kettle is built on one simple premise: the complexity and pace of risk expansion is currently outpacing human cognitive capacity. The company’s cutting-edge machine learning models allows them to simplify and synthesize unstructured data sets, helping to find hidden patterns and signals that are imperceptible to humans, but critical to high-level decision making. Kettle wants to save and protect lives by building the reinsurance underwriter of the future, starting with wildfire risk.

Oka: A full-stack insurer offering protection against invalidation and removal risk associated with carbon projects around the world. As the voluntary carbon market continues to be scrutinized for its integrity and quality of credits, Oka is positioned to establish lasting confidence in the markets for years to come.

Carbon Pool: The company is accelerating the net zero transition by providing in-kind insurance for unexpected carbon credit shortfalls or reversals. By having an inventory of quality carbon credits, Carbon Pool will pay claims in carbon credits, rather than cash, taking a new innovative approach to claims in the market.

Re-ask: The need for data and analytics solutions will continue to increase as insurers drive to continue to differentiate themselves in the market, especially related to being the most effective at risk management and pricing as the changing climate makes this more challenging. Reask is an AI platform for extreme weather events and risk forecasting providing advanced extreme weather data for re-insurance, insurance-linked securities, financial markets, corporates, and governments.

The sector continues to be active with several companies innovating at this intersection.

Insurance is critical to achieving net zero and positioning the broader financial services industry to drive the 21st century green economy at scale. If you’re building a company at the intersection of  climate and insurance, we’d be keen to speak to you. Feel free to reach out to jeremy@anthemis.com.

1. “Capturing the Climate Opportunity in Insurance”, Financial Services, McKinsey & Company, September 2022.

2. “Insuring a renewable future,” Property Casualty Re-Insurance, SwissRe Reports, 2023.

3. “Capital Projects are critical for a green future”, McKinsey & Company, August 2023.

4. “Climate tech for industrial decarbonization: what role for insurers,” The Geneva Association, 2024.

5. “Navigating shifting risks in the insurance industry”, Financial Services, McKinsey & Company, July 2024.

6. “Parametric Insurance Market Set for Significant Growth: Projections to 2032”, Captive, 2024.

7. “Parametric insurance trends and alternative insurance,” Descartes Underwriting, Insights. 2024.