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Climate mitigation and adaptation: With innovation comes risk

Technological innovation is critical to addressing the climate crisis – but any new technology brings potentially novel risks alongside potential benefits.
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By Ryan Bond , 

Head of Climate and Sustainability Insurance Innovation

11/29/2023 · 3 minute read

Insurers look to the past to understand future risk. But with new technologies which lack history, forecasting risk becomes less straightforward. Climate change mitigation will require new technology so new ways of pricing risk will be required.

Innovative technological responses to these two streams – mitigation and adaptation – come with their own risks that need mapping and forecasting.

Mitigating the risk of climate mitigation

The electrification of transportation, for example, is potentially one of the most important innovations furthering the decarbonization agenda. However, the cost of insuring electric vehicles has recently been in the news in the UK, as premiums are being driven up by higher-than-expected repair costs as well as issues around battery safety.

Clean hydrogen is another advancement that can potentially further the net-zero transition, but this also poses novel risks. As a carrier of energy, hydrogen can be relatively easy to store and transport – but it needs to be handled carefully as it is highly flammable. Marsh is leading in the way in facilitating insurance of the construction and operation of hydrogen projects, helping to unleash worldwide investment in hydrogen production facilities that is expected to top US$150 billion by 2025.

Finding the right insurance models will likewise be critical to innovative decarbonization approaches such as solar farms in space, which beam down energy to receptors on land using microwaves – an approach becoming economically feasible thanks to the decreasing cost of launching satellites.

Insurance and new adaptation risks

Adapting to the changing climate may also raise novel kinds of liability that the insurance industry has not yet come across.

Geoengineering, for example, is being more seriously considered as a response to the climate crisis. This discussion includes questions about the feasibility of techniques to lower global temperatures by reflecting the sun’s rays – and there is potential for unintended consequences and spillover effects.

Any attempt to change weather patterns may cause detrimental impacts in certain areas, even if the overall impact is positive. What is more, reliance on solar geoengineering may raise new risks of a sudden spike in temperatures if the geoengineering activity is discontinued. And, as with any new idea, there may be unknowns when theory becomes practice.

While debate continues, parametric insurance has been proposed as an approach that could help to build consensus on the potential deployment of solar geoengineering, by reassuring stakeholders that they will be compensated for adverse effects on the weather in their localities. Parametric insurance is increasingly used in other contexts as a tool to build climate resilience.

Insurance at the fore

Exciting new technologies can fast track the global net-zero transition in tandem with new ways to quantify risk. With the right risk management and insurance models, decarbonization projects can attract the investment they need and scale construction and operation to mitigate climate change.

On the adaptation front, insurers’ expertise can help to foresee and anticipate novel risks associated with climate change itself as well as the technologies being developed to address it. Insights resulting from risk mapping and scenario analysis can then lead to the development of better risk management and potentially new insurance products to manage these novel risks.

The insurance industry has a key role to play in helping organizations to navigate both sides of the climate change coin – mitigation and adaptation – towards a more sustainable future for all. It is imperative to ensure that new development will not quickly find itself in a similar position as climate change unfolds.

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