Understanding the geopolitical implications of energy transition
As the risks associated with climate change worsen, the need for the transition has become unavoidable. The imperative to transition to cleaner energy has been further compounded by geopolitical events, with the Russo-Ukrainian War sparking the first truly global energy crisis, according to the International Energy Agency.
Historically, the geopolitical landscape and global power dynamics were strongly linked to control over natural resources, like oil and gas. It is likely that this balance will shift in favour of dominance over areas where materials like lithium, nickel, cobalt, manganese, graphite, copper, zinc, silver and rare earth elements are sourced. These elements are essential for renewable technologies, and demand for these is set to grow precipitously in coming years.
Given this enormous shift, the transition will necessitate a profound re-evaluation of global power dynamics and supply chain intricacies, impacting all industries and companies along the production line.
As we are already beginning to witness, nations vying for access to materials crucial in the renewable energy transition are experiencing new friction points and geopolitical tensions are emerging. Geopolitical security is energy security.
Currently, China is responsible for the production of 80 percent of rare earth elements and therefore plays a big part in the global energy transition.
Where there is significant risk to a project vital to societal prosperity, in this case, the energy transition, the insurance industry must be ready to step in as the societal backstop. As insurers, we have been preparing our response and developing products to answer the need to mitigate geopolitical risk and enable the global renewable energy transition.
Navigating the new risk landscape as insurers
The insurance industry has always played a pivotal role in supporting companies through provision of political risk and violence coverages, underlining the necessity of responsible practices and community engagement for a successful and safe energy transition. In line with global changes, our focus as underwriters shifts to ensuring that these companies can navigate the challenges effectively.
Once active, renewable energy operations such as an offshore wind farm or a solar photovoltaic installation are exposed to a very particular type of political risk: we assess that, by and large, these fall under the low-risk category for terrorism, strikes, riots and civil commotion (SRCC), and political violence. War perils are a different story.
To protect our clients against the threats posed by political risk and political violence, we must assist them in securing supply chains, investments, and operations. The goal is to transfer some of the risk associated with these endeavours from the client's shoulders to the insurance industry's balance sheet.
The underwriting process involves assessing the geopolitical situation, understanding the client's behaviour and business practices, and evaluating the internal knowledge and security measures of the client. Location and political stability play a crucial role in determining the insurability of a project.
The last five years have been marked by numerous events of civil unrest that have occurred across the world. These are now becoming more frequent and as such, becoming more commonly written into insurance and protection policies. SRCC coverage is now often included in property insurance policies, business interruption insurance, or political violence insurance.
The SRCC coverage becomes relevant in situations where political or social disturbances lead to property damage, business interruptions, or other financial losses for individuals or businesses. The goal of SRCC insurance is to mitigate the financial impact of such events by providing compensation for covered losses.
Facilitating protection through underwriting and risk management
Across all stages of the energy transition supply chain, from extraction to transportation and manufacturing, different companies exhibit varying levels of awareness and readiness to engage with SRCC insurance.
While some sectors readily embrace these products, others, particularly manufacturing companies, may not immediately see the necessity. As the energy landscape undergoes transformative changes, we have seen a significant uptick in companies’ appetite to insure themselves against these risks.
The transformative journey towards energy transition is not only reshaping the energy landscape, but also redrawing the geopolitical map.
The insurance industry, through thoughtful underwriting and risk management, stands as a crucial partner in facilitating a smooth transition, ensuring the safety of investments, supply chains, and the people involved in this monumental global shift.
Björn Reußwig is regional line of business manager for terrorism and contingency, central Europe at Liberty Specialty Markets