How can the energy industry address growing climate risks?

This is an automatic translation of the original release issued in Spanish.

PRESS RELEASE from Marsh
October 2024

Santiago, October 2024.- Climate change is here to stay, as demonstrated by the increase in the number of extreme weather events that occur each year. In the case of Latin America and the Caribbean, between 2003 and 2022, the population affected by natural disasters rose to 174 million, an increase of 67.3% compared to the previous 20 years (1983-2002), according to figures from   EM-DAT , an international database on disasters. In this context, the insurance industry has developed solutions, such as parametric policies, so that companies in sectors as diverse as mining, agriculture, energy and construction can be protected.

Parametric insurance is where the event that triggers payment is defined in advance in the policy and is paid without the need to verify damages once the parameter has been met. Some examples where it can be applied are a certain wind speed in a storm, which can cause trees to fall, which affected the energy distribution segment last July and August in our country; millimeters of falling water that can cause a flood; and a certain Richter scale reached in an earthquake or a large magnitude of a hurricane.

Siegfried King, Marsh's New Business and Parametric Solutions Manager for Latin America, comments that "the benefits of this policy consist of the speed in the payment of the contracted coverage, with previously agreed parameters and without the need to verify physical damage, which allows mitigating the financial impact of the adverse event and allows companies to speed up repairs for the damage caused."

King will be part of the seminar “From Uncertainty to Opportunity: Global Risks and Economic Perspectives” that Marsh McLennan , the company’s parent company, will hold on November 6, where topics of climate risks and solutions for different industries will be addressed. As for companies and industries, for the Marsh executive, none of them is immune to being affected by climate risks.

“Not being adequately protected against these events can lead to significant losses for the business. In Chile, one of the key industries is the energy industry and the continuity of operations in its different segments is a key aspect, so preventing possible adverse events from impacting them appears to be a crucial element that must be considered in their risk analysis,” explains King.

For the expert, a good parametric insurance in the energy sector would be solar parks. “It turns out that the sun, like all natural things, is variable. You can have a year with less radiation, either due to bad weather or even a volcanic eruption like the one in Caulle in 2011. Any solar park that has been developed and has been under that cloud will obviously generate much less electricity.”

This lower electricity generation will generate less income for the plant, as well as less ability and capacity to pay its debts, without causing physical damage to the asset. So, one of the parameters that are established can be, for example, if the radiation is less than XW/m ² , the insurer starts to pay, and so on in a staggered manner, the less radiation, the more money the plant receives.

“As climate change progresses, with more frequent and severe events, at the same time we have more and more data, measurement tools and satellites. Therefore, all our bets are that the future of parametric insurance will continue to grow in this sector” concludes King.

About Marsh

 

Marsh , a business of Marsh McLennan (NYSE: MMC), is the world's leading insurance broker and risk adviser . Marsh McLennan, a global leader in risk, strategy and people, advises clients in 130 countries through four businesses: Marsh , Guy Carpenter , Mercer ... With annual revenues of $23 billion and more than 85,000 colleagues, Marsh McLennan helps build the confidence to thrive through the power of insight. For more information, visit marsh.com, or follow us on LinkedInand X.