The Catalyst for Change: Industry Leadership and Collaboration
Many industries struggle with collaboration in the face of the sustainability transition. In highly competitive environments, information-sharing and joint investments often take a backseat to maintaining a competitive edge. However, the insurance sector operates differently. While competition remains a driving force, insurers frequently collaborate by sharing large risks or spreading exposure through reinsurance. Brokers, too, play a critical role in balancing competition and collaboration to secure the best outcomes for clients.
At the heart of this industry sits Lloyd’s of London, a self-regulating marketplace that has facilitated insurance innovation for centuries. Lloyd’s provides a unique ecosystem where insurers and brokers operate under a common regulatory framework, ensuring smooth collaboration and competition. The central fund guarantees payouts on valid Lloyd’s policies, even if an insurer becomes insolvent, offering confidence to policyholders. Additionally, Lloyd’s global licenses enable insurers to operate across hundreds of markets worldwide.
An Innovation Legacy
Lloyd’s dominance began with its unparalleled access to shipping intelligence, making it the go-to marketplace for maritime risk exchange. Over time, it has pioneered insurance for emerging technologies, launching the first policies for motor vehicles, aviation, and space satellites. While not every innovation succeeded (e.g., airship insurance), Lloyd’s has cemented its reputation as the premier marketplace for insuring complex and unique risks—from Bruce Springsteen’s voice to Betty Grable’s legs.
Beyond underwriting, Lloyd’s has played a proactive role in industry research and crisis response. The Lloyd’s Tercentenary Research Foundation funds studies into risk management, and the marketplace has historically acted decisively in turbulent times. For instance, after the 1906 San Francisco earthquake, Lloyd’s facilitated immediate full-limit payouts. Following the 1980’s asbestos crisis, it led structural reforms to stabilize the market.
Now, as the world faces climate change—arguably the largest evolving risk—Lloyd’s has an opportunity to drive industrywide collaboration in support of cleantech solutions.
Lloyd’s has already taken steps in this direction. In 2021, it launched the Sustainable Products and Services Showcase, highlighting innovative insurance solutions from industry leaders. Its Lloyd’s Lab accelerator program has nurtured insurtech start-ups such as Kita (carbon offset insurance) and AstroTeq.ai (earthquake forecasting technology). These initiatives demonstrate Lloyd’s ability to foster innovation, yet focused engagement with the cleantech industry remains limited.
A Call for More Focused Action on Cleantech
While Lloyd’s remains neutral regarding divestment from fossil fuels, it can do more to leverage its market position in favor of cleantech. Currently, non-profit initiatives like InnSure in the U.S. are leading the way. InnSure’s climate initiative platform recognizes insurance as a critical enabler of clean energy deployment. In January, InnSure partnered with Energetic Capital, kWh Analytics, and the Coalition for Green Capital (CGC) to launch GreenieRe, an impact-focused reinsurance company designed to remove financial barriers for clean energy projects. With an initial $200M investment from CGC, the initiative aims to unlock over $30B in private-sector financing for renewable energy.
Lloyd’s is uniquely positioned to take similar bold action with the contacts, authority, and deep pockets to bridge information gaps in cleantech and facilitate innovative partnerships to unlock scaring cleantech. At a time when its relevance to a modernizing insurance market is under scrutiny, it has a rare chance to lead, organize, and innovate at an industrywide scale. By championing cleantech investment and insurance solutions, Lloyd’s can not only help mitigate climate-related risks but also secure its own long-term role in the evolving insurance landscape
Parametric Insurance: New Risk Transfer Solutions to Address Risking Physical Climate Risks
According to AON, In Q1 – Q3 last year (2024), the insurance protection gap was estimated to be 60% ($258B of economic losses vs. $102B of insured losses) and is growing, leaving communities, businesses, and individuals without a financial backstop for climate risks. The LA wildfires this year are estimated to cause as much as $250B in economic damage and account for 4% of California’s GDP.
These increasing extreme weather events are reducing the financial resilience of communities – after each loss, insurance premiums increase for communities in Cat-loss-prone areas, leading to more people being priced out of buying insurance. A negative feedback loop is created where the insurance gap then widens after each event, pushing the cost of damage onto taxpayers, downgrading the whole communities’ credit, devaluing properties and communities. One such solution to bridge the protection gap is tech-enabled parametric insurance.
Parametric Insurance: Rather than estimates via retrospective data and payouts based on loss, parametric insurance makes projective estimates of risk via advanced climate data models. These are being used to hyper-localize risk profiles for specific insurance lines (property) and perils (flood) and payout based on triggers.
Triggers can be verified by direct sensing (e.g., water sensor for flooding severity) and can enable fast feedback of event severity to replace sending loss adjusters and can enable fast payouts – however, as the sensor is in the client’s possession, reinsurers have raised fraud concerns. Instant payouts should reduce the overall cost of claims for insurers, saving on costly administrative loss-adjusting, and enable greater resilience for the insured.
InsTech Poll: Poll of Insurance Professionals on What’s Holding Parametric Insurance Back
Amongst other innovators, Cleantech Group spoke to Tanguy Touffut, CEO and co-founder Descartes, a leader in parametric insurance solutions. When speaking on the future of parametric insurance, Touffat said, “With the support of our partners, we will continue to develop and deploy a new generation of insurance products that are entirely tech-driven, simpler, more transparent and quicker to pay in the event of a loss – adapted for the new risks corporations and governments increasingly face.”
In speaking on the disruptive future of parametric insurance Touffat said, “Parametric insurance can both replace or complement traditional insurance; that being said, we expect to see more covers combining parametric insurance for speed and transparency for Cat perils with traditional insurance for non-Cat perils.”
What’s Holding Parametric Solutions Back?
Lack of Knowledge. In the case of parametric insurance, the insurance insider polled dozens of insurance experts in 2022 finding lack of education and awareness as the greatest barrier (52%) as to why more insurers hadn’t taken up parametric insurance. This is especially the case for retail brokers who are on-the-ground selling these products. Cleantech Group spoke to parametric insurance innovators, with most identifying brokers as key sales channels they needed to establish. Conversely, brokers should be more proactive in exploring these opportunities in cleantech.
Tech Gap. A more recent poll of insurance professionals on the obstacles to parametric insurance in August 2024 by Reinsurance News found that lack of data and models was the greatest obstacle to global adoption. This presents challenges where there may be misalignment between the pre-agreed parameters for the payout and the actual losses, necessitating the use of loss adjusters and delaying payouts after all.
However, many advanced and projective models do exist, accounting for complex, compounding risks of climate change, e.g., Descartes, Sust Global or Jupiter Intelligence. These solutions are also getting smarter, with proprietary and regionally-focused models, AI, and greater access to more accurate satellite data. Insurers need to explore partnerships with these innovators to advance and customize their models or outsource underwriting capabilities.
A Note of Caution
Capitalizing on emerging markets in cleantech, insurers are working with innovators in earlier stages and in more varied sectors which can fast-track scaling. However, insurers can wield significant power in shaping these markets – so they must invest in internal and external expertise to appropriately support, mitigate risks, avoid red-tape, and ultimately scale cleantech.
