Insurance market: Financing and regulatory changes, the risks facing the energy sector on the road to a carbon neutral economy

PRESS RELEASE from Marsh

This is a machine translation of the original release, issued in Spanish

• Companies must adopt new technologies, evaluate costs and the long-term financial viability of their projects to address these risks, according to Juan Carlos Rey, technical manager of Energy & Power and Construction at Marsh.

Santiago, September 2024.- Chile has been on the path towards energy transition for several years, with a focus on more sustainable energy sources. Proof of this is that the authorities presented a report to the United Nations in April 2020, indicating that decarbonization would be responsible for 76% of the reduction in emissions for the period 2020 - 2050. Likewise, in 2022, the "Framework Law on Climate Change" came into force, which establishes the goal of the country being carbon neutral and climate resilient by 2050 at the latest.

In this context, companies that are developing projects linked to renewable energies are exposed to numerous risks in different areas and it is important that they can protect themselves against them. Juan Carlos Rey, technical manager of Energy & Power and Construction at Marsh, the number one insurance broker and risk advisor globally, analyzes the most important contingencies that can affect companies in the energy transition process and how they can face them.

1. Technological risks: “The adoption of new renewable energy technologies and systems generally presents technical and operational challenges,” says Rey. In addition, for him, companies have the obligation to ensure that they have the necessary experience and resources to implement and maintain these technologies effectively.

2. Regulatory risks: Changes in energy-related policies and regulations could affect the profitability and viability of renewable energy projects, according to Rey. With this, companies need to be aware of local and international laws and regulations to ensure they comply with requirements and avoid penalties.

3. Financial risks: Renewable energy projects require a significant initial investment and this is an aspect that companies must consider in their risk analysis. “The costs and long-term financial viability, as well as the risks associated with financing renewable energy projects, must be carefully evaluated,” says Marsh’s technical manager for Energy & Power and Construction.

4. Reputational risks: As awareness of the importance of sustainability and environmental responsibility increases, companies may face reputational risks if they do not adopt clean energy practices. “It is already well known that consumers and investors are increasingly interested in supporting companies committed to sustainability,” says the expert.

5. Supply risks: Depending on geographic location and weather conditions, renewable energy sources may be less reliable than traditional energy sources. “Companies must consider the risks associated with the availability and stability of renewable energy supply,” explains Rey.

How to face these risks?

The insurance market has also been evolving in parallel, increasingly understanding the risks associated with the growth of renewable energies, generating products and coverage that seek to adequately address these risks.

Some of these examples are: construction policies designed exclusively for renewable energy projects; parametric insurance, which consists of policies that pay the client based on the intensity of an event and the amount of the calculated loss (for example, a natural disaster); policies to cover financial transactions for the purchase/sale of these assets; insurance that covers risks associated with the technology used in the energy industry, such as interruptions in the IT infrastructure, cyberattacks and failures in control systems, among others.

“We are aware of this situation and have been working with the insurance and reinsurance industry through a strong presence in the market to educate and better understand the current and future concerns associated with these risks. Insurance is an important tool for companies in the energy sector to manage and mitigate technological, regulatory, financial, reputational and supply risks. It provides financial protection and peace of mind to companies in an increasingly complex and volatile business environment,” says the Marsh expert.

In this context, we have seen a greater interest from energy sector companies to minimize these risks and an increase in demand for insurance for the projects they are developing. “Considering that the decarbonization and energy transition process in Chile is an imminent reality that is on the government's agenda, clients are seeing the development of renewable energy projects as a necessity to keep their business viable in the long term, and at the same time, they have seen the need to take out insurance policies to protect themselves from the aforementioned risks,” adds Rey.

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 and Oliver Wyman. With annual revenues of $23 billion and more than 85,000 employees, Marsh McLennan helps build the confidence to thrive through the power of insight. For more information, visit marsh.com, or follow us on LinkedIn and X.