For a long time, conversations on climate change and its many associated risks have evolved, including its implications on the business sector, creating strains on supply chains, material scarcity and logistical concerns. While the rules have forced businesses to change their way of conducting business, these radical changes in the weather are creating abnormal situations to the point where plants are becoming extinct, global disasters are becoming more frequent, and there is a lot more left in the unknown, which is cause for concern. For example, last year alone, there were over 295 billion dollars in economic losses due to climate-related events and there are predictions for 2024 for this figure only to increase.
While small changes are being made to the climate crisis, not much is reflected in restoring the world to its former glory. We seem to be doing too much, such as deforestation, to the point of destroying whole ecosystems, which is still more than common, so this factor, among many others, is sending alarm bells to not only people but those with businesses to protect. This is where insurance plays a pivotal role for businesses navigating through the climate transition.
These rising business trends and threats are attempting to destabilise the global economy and affect millions of people’s health and safety. This is also a great opportunity for insurance brokers to transform and capitalise on this volatility and provide a protection solution to businesses and individuals. These are three areas where trade credit insurance plays an active role:
Pricing Out Financial Implications
This is helpful for stakeholders in the sense that they can see and understand the financial implications and potential threats of climate change through advanced analytics.
Insurers need to understand that having a wide range of data sources upon which they can conclude the level of risks can help them develop an informed view of what lies ahead. Compared to traditional models regarding risk and catastrophe, climate change risk models are, by nature, designed to be forward-thinking.
“The insurance industry has a large body of climate risk and disaster cost data and insight because it monitors climate-related risks across the economy.” Liz Henderson, Global Head of Climate Risk Advisory
Mitigating Physical Risk
Developing strategies and solutions, such as for businesses, to reduce huge financial losses.
Enabling Capital
Provide capital for innovative clean technologies through de-risking, longer insurance policy terms and government policies.
But to understand the true impact credit insurance has on the low-carbon economy, we need to know every part of how it can protect businesses across the world.
Reducing Risk For Green Investments
With technologies being developed at such a quick rate, there are always new ones that come with more risk than trust in success. So it’s obvious that credit insurance can protect lenders and investors from any potential financial losses due to project failures or non-payment from buyers.
Examples of Credit Insurance In Action
While it’s all good and well to talk about the positive impacts credit insurance could have in facilitating the transition to a low-carbon economy, here are some of the reasons it has:
Renewable Energy Projects
Credit insurance has been used to insure loans for solar, geothermal and wind power plants, allowing those striving for a green world to expand and help build the steps forward in clean energy sources. If these plants expand, the energy will become more accessible to a wider range of people.
While it’s important to think that these do take up a lot of space, for them to further create a healthy environment, this needs to be assessed and appropriate strategies put in place. For example, some land farmers can rent out their land to these companies, and to make sure payments are on time, the farmers themselves could take up a contract with credit insurance.
Sustainable Infrastructure
Insuring loans for green buildings, energy-efficient transportation systems, and other sustainable infrastructure projects can attract investors and accelerate their development. It seems that the world is becoming more and more woke to the idea that we need to make a green change and these green buildings with vegetation and electric buses are just a few steps forward. Governments could benefit from credit insurance to protect them from working alongside tech companies and so forth.
Supply Chain Sustainability
Credit insurance can be used to support companies in the process of changing their supply chain towards sustainable practices. Therefore, this provides a safety net and some sort of encouragement for businesses to leap to a more sustainable approach. Especially in more modern times, while the cheap stuff can be appealing in times where money is an issue, there is more and more research to suggest consumers are going for environmentally friendly products so this is a huge thing for companies. Credit insurance is the final push towards a holistic green approach.
What The Future Holds: Potential Collaboration?
What the future holds for green finance and credit insurance is full of potential. They are both very powerful tools for business, whether they are striving for sustainability, energy projects or much more. Through their collaboration, governments, financial institutions, credit insurance agencies and businesses need to work together to:
Develop Standardised Green Project Evaluation Criteria
Establishing clear benchmarks will not only help businesses assess the environmental benefits and financial viability of green projects but will also facilitate credit insurance coverage.
Raise Awareness
Promoting awareness of credit insurance as a tool for green finance can encourage wider participation from the financial sector, relieving a lot of the stress from themselves and community fundraising and loans.
Promote Innovation
Exploring new credit insurance products tailored specifically to address the risks associated with green projects can further unlock investment opportunities.
Risk Mitigation Case Study
Parametric insurance covers the level of probability for a predefined event happening, rather than indemnifying any actual loss incurred. Parametric insurance is a relatively new type of insurance which helps support businesses’ sustainable growth and dealing with climate change, particularly in areas where natural disasters, such as flooding and hurricanes regularly occur. This type of insurance involves an agreement to make a payment in the event of the occurrence of the triggering event.
In the Philippines, one of the leading renewable energy providers used parametric coverage to mitigate risk. The energy provider had a network of physical infrastructure and distribution networks located across the country and, due to the catastrophic weather conditions and events which regularly take place, was worried about the potential for disruption in its facilities. There are roughly 20 storms and typhoons per year in the Philippines, which cause millions in losses and widespread disruption to public utilities.
By investing in parametric insurance, the company was able to make the most of a quicker and more transparent claim application and settlement. Just 10 days after the insurance was finalised, Typhoon Rai hit, and a payment was made within 30 days. It’s important that, in the face of climate change, businesses look to adapt and build a more resilient insurance strategy, with climate-change loss set to be a prominent discussion in years to come.
Final Thoughts
By mitigating risk and fostering investment, credit insurance plays a clear and critical role in enabling green finance to drive sustainable growth. As we navigate the transition to a low-carbon economy, credit insurance has the potential to be a game-changer in this market for sustainability and innovation, unlocking the vast potential of green finance and creating a more environmentally conscious world.
