As banks increase their support for ESG-focused trade activities and renewable energy projects, credit and political risk underwriters are taking steps to grow their own capacity and develop new products in the space. Felix Thompson reports.


Amid an increasing focus on environmental, social and governance (ESG) performance and a growing number of renewable energy projects globally, underwriters are looking to expand capacity and develop new insurance products, with a view to boosting their share of deals in support of the transition to net zero.

As many as two-thirds of the project finance cover requests insurance broker BPL Global received in the power sector last year were related to renewables. The company expects enquiries for credit and political risk cover to rise in the coming years, and for underwriters to “respond accordingly”.

In 2020, demand for credit and political risk insurance (CPRI) was particularly prevalent for onshore and offshore wind project financing in Asia and Europe, as well as solar in Australia, the US and Chile, BPL Global outlines in a market insight report, published in March 2021.

The broker had an aggregate limit of approximately US$416.6mn across existing project finance policies covering renewables projects as at February 2021. Just over 40% of that exposure relates to Europe, with Russia alone accounting for a further 18%. Renewable projects in Central and South America represent another 29%.

Driving the burgeoning renewables trend across the industry were European banks, key CPRI clients, which BPL Global says are allocating increasing levels of liquidity to the renewable energy sector.

“There are plenty of renewable energy deals coming to the market now,” says Andrew Beechey, managing director of Tierra, a new managing agent with a focus on the sector.

“That flow of deals is only going to increase, because we all know that over the next decade there has to be this huge rollout of renewables to hit certain targets under the Paris Agreement.”

Launched in May, Tierra has an initial focus on providing credit insurance to renewable energy infrastructure transactions in the project finance sector and plans to expand into green corporate and trade finance.

Mark Houghton, head of specialty for Asia at AXA XL, says the insurer is “ramping up” its support for renewable energy across all areas of its underwriting business, particularly in the credit and political risk insurance space. “We expect this sector to become a much larger portion of our overall risk portfolio in the future,” he adds.

Elsewhere, Sabine Lombard, head of credit risk at Euler Hermes’ transactional cover unit (TCU), says nearly 10% of the unit’s new underwriting business is now comprised of green transactions and the objective is to “really increase this share”.


Bank-led progress

Unlike in the banking sector, to date there have been few new ESG products and initiatives introduced within the insurance market – but there are now calls for that to change.

In November 2020, Euler Hermes launched a product that insures green transactions in several sectors, including renewable energy, energy efficiency and public transportation, before then investing the premiums into certified green bonds.

The Green2Green offering was initially started with Natixis and La Banque Postale, and Lombard says more than 25 agreements have been signed with roughly 15 insureds, including commercial banks, corporates and multilateral development banks.

“From a client’s perspective, it is a positive move. If a bank is making a sustainability-linked transaction they can now demonstrate that the insurer is acting responsibly with the premiums it is receiving,” says Lee Garvey, head of financial solutions for Australia and New Zealand at broker Willis Towers Watson.

But despite these “pockets of progress” across the non-payment insurance sector, broker Aon says in an analysis published in mid-2021 that the market tends to be “reactive to change”, with an absence of “meaningful product strategies”.

“We have spoken to a range of credit insurers who very broadly admit to not taking ESG criteria into account as part of their underwriting,” says Aon in its report. “Underwriters’ targets are not aligned to ESG strategies, and management has not yet put the agenda at the heart of their decision making; unlike the banking sector, where green credentials are beginning to be built into pricing models.”

Eran Charit, head of structured and capital solutions Emea at Aon, and co-author of the analysis, outlines the bank-led shift happening in the market.

“Traditionally, insurers seek 50% to 70% of the bank’s margin when pricing a policy. Say a bank was charging an interest rate of 5% on a loan that they want to insure; the insurers would expect to charge a rate of 2.5% to 3% on the policy. We are now seeing banks including ratchet mechanisms in their loans, where the interest rates reduce when the borrowers hit pre-agreed ‘green milestones’ – so the interest rate could come down from 5% to 4%.”

“These rate reductions are translated into the insurance market, where underwriters are following suit and agreeing to drop their rates in line with the reduction on the underlying loans being insured,” he says. “This is a step in the right direction, but as with typical underwriting, they are simply following what the market is doing in a reactive manner rather than proactively pushing the clients to do better.”

Speaking at a GTR event in early November, Michael Creighton, executive director, credit and political risks at Willis Towers Watson, agreed that ESG efforts in the private CPRI market are being propelled by banks.

“The CPRI industry is not driving the change in my view. Firms may have wider corporate objectives, but most of them do not have ESG targets at a credit and political risk product level,” he said.

Nevertheless, he said there has been a “slow but steady” shift, adding: “A number of CPRI insurers are starting to track ESG within their transactions, including considering an ESG rating element within their rating models.”


Capacity risks

But the development of new products and pricing in the insurance space may not necessarily provide the required breadth of support for green trade and renewables transactions.

“That’s one of the big unknowns in the market in the next five years; how much capacity will people bring into this space?” asks Beechey at Tierra. “I think there will be plenty of demand from clients for cover, and I suspect other firms will step up and support these deals. But there’s definitely a question in terms of how quickly the insurance market will respond.”

One potential issue is a lack of specialist expertise in the insurance market, which Beechey says is necessary to ensure correct pricing of renewable energy projects.

He says the lengthy tenors on renewable projects could also deter underwriters that are more comfortable with shorter-term transactions. “That’s one of the things that has traditionally limited the amount to cover. But hopefully that will change.”

Such pressure points are already visible in certain markets, namely Africa, where the private CPRI market appetite remains subdued.

“There is growing interest amongst insurers to support project finance structures, especially in renewable energy projects, and this support now includes significant tenors even up to 18 years. However, this support tends to be orientated towards more developed economies,” says Creighton of Willis Towers Watson.

He explains that there are a number of factors contributing to insurers being reluctant to support long-tenor project financing in emerging markets. “The financial position of most African utilities is precarious, generally requiring the backing of the ministry of finance; the track record of successful renewable energy projects remains in its infancy; and there is uncertainty over the regulatory environment and political risks in the long term.”


Ditching oil and gas

Another key challenge facing the insurance market is its ability to completely transition away from fossil fuels, which have traditionally represented a sizeable portion of certain insurers’ books.

In July, eight of the world’s largest insurers and reinsurers formed the Net Zero Insurance Alliance (NZIA), with a view to eradicating emissions from their underwriting portfolios by 2050.

The move aims to align the insurance underwriting sector with efforts to limit global warming to no higher than 1.5 degrees Celsius above pre-industrial levels, and is endorsed by the UN.

AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich are the founding members of the alliance, although others are starting to join. Lloyd’s of London signed up in late October and advocated for its 100-odd managing agents to lay out their plans for reaching net zero.

Outside of this initiative, the insurance industry has already taken some steps towards this goal by incorporating restrictions on the most polluting of fossil fuels into their underwriting guidelines.

According to a November report from campaign group Insure Our Future, dozens of firms have now exited the coal industry, leading to reduced coverage and soaring premiums for mining and power-plant companies.

Even markets previously identified as laggards in the transition, such as Lloyd’s, have since pledged to end support. In December last year, members were ordered to stop new cover for coal companies and projects by no later than January 1, 2022.

At Euler Hermes, Lombard tells GTR that the firm “excludes business with coal-based companies by applying a set of criteria and thresholds which have been developed in line with scientific targets to limit global warming to 1.5°C”.

It also excludes oil sands-based companies from its business. While oil and gas are still “very much part of the global energy mix”, she says TCU will take an increasingly “cautious approach” to these types of deals. Each transaction must be filtered for ESG risks, and particularly sensitive transactions are reviewed by the company’s central ESG department.

Other firms are implementing similar policies. AXA XL banned any fresh support for coal plants and mines in 2017, and cut coal-related commercial client relationships in 2019.

Meanwhile, in October – ahead of the Cop26 climate conference – the firm halted underwriting support for new upstream greenfield oil exploration projects, except in circumstances where the company carrying out such work can prove a “far reaching” and “credible” energy transition plan.

Nevertheless, the industry’s ability to reject fossil fuels in their entirety looks to be a tricky prospect.

Insure Our Future finds in its report that only three insurers – AXA, Italy’s Generali and Suncorp in Australia – have thus far adopted policies restricting insurance for much or all new oil and gas projects.

“The market is still heavily reliant on oil and gas as a whole, so we have to toe this line between net zero emissions targets and the fact that a big portion of income is coming from traditional industries,” says Charit.

“So many underwriters have filled their boots with oil and gas,” says Creighton. “It will be hard to see how the new sectors will replace that.”


ESG progress in the export credit sector

According to a landmark paper from the International Chamber of Commerce (ICC) published in September, the role of export credit agencies (ECAs) in supporting sustainable finance is changing rapidly, with agencies in OECD countries increasingly looking to adopt new policies and incentives.

ECAs have historically failed to keep pace with changes in the wider sustainability finance industry, with their activities often omitted from national-level greenhouse gas emission targets and other commitments, the paper finds.

“However, this is now changing fast,” says the paper, which was produced by an ICC working group comprising several senior industry executives as well as the non-profit Rockefeller Foundation. It follows years of research, including surveys and interviews across the global export finance sector.

“Virtually all OECD ECAs interviewed for this report (and many of the non-OECD ECAs) reported that they were in the process of developing a climate policy, with publication expected in the next few months,” it says.

“A key driver of this flurry of activity appears to be the Cop26 conference in November 2021.”

In July this year, Export Development Canada became the world’s first ECA to set a net zero emissions target by 2050, which also includes an ambition to reach neutral emissions from its operations by 2030 – a move seen as significant given its prior role as a major backer of fossil fuel projects.

UKEF followed suit in September, unveiling its own net zero target by 2050 as part of a wider climate change strategy. The agency – which has also faced criticism over its funding for fossil fuels – says it will also increase support for green exports and improve its understanding of climate-related risks.

In recent months, further ECAs have also outlined net zero targets. Denmark’s EKF set a 2045 goal for going carbon neutral in early November, a month after Japan’s Nexi outlined approaches for reaching the same target by 2050.

Hussein Sefian, founding partner of Acre Impact Capital and co-author of the paper, said during a recent GTR roundtable held to discuss the paper’s findings that many ECAs “are really starting to mobilise”.

“We’ve seen announcements from ECAs exiting certain sectors, and in some ways going beyond what the banks are doing, completely stopping support to oil and gas being a notable example,” he said.

Historically, however, the paper points out that coordinated ECA action on sustainability has lagged behind progress made in the private financial sector.

Up until a recent decision within the OECD Arrangement on Officially Supported Export Credits to restrict backing for unabated coal-fired power plants, no new multilateral decisions had been reached among ECAs since a 2016 agreement on coal-fired electricity generation.

“In contrast, innovation in the banking industry has increased significantly since 2015, with the issuance of green, social and sustainable and sustainability-linked bonds and loans rapidly multiplying over a short timeframe,” it says.

Co-author Jennifer Loewen, director of projects at International Financial Consulting, says the gap between ECAs and commercial banks was highlighted during the research process.

“One of the questions we asked survey respondents was whether they believe their institution is doing enough to support the sustainability agenda, and only 40% of ECA respondents confirmed that, compared to 60% of bank respondents,” she said at the GTR roundtable discussion.