The transition to sustainable energy depends on major investment in innovative technologies including wind farms, solar, and hydrogen and battery storage. The success of these types of capital-intensive initiatives often depends on having insurance in place to help manage the inherent risk of financing large low carbon energy projects.
The insurance industry has a long history of innovation that aligns with how the energy market is transitioning. Lloyds of London, explains Daren, was originally established to insure trade ships travelling to India. Likewise, in the late 1890’s the company that insured the Chicago World Fair—the first to be fully powered by electricity—established the standards and the analysis for energy and electricity assets going forward.
Because insurers rely on historical records to inform their decision-making, a significant challenge for those working in the energy sector is the lack of data available for new, novel technologies. While the insurance market excels at analyzing new contexts and risk and adapting what has been done in the past, the biggest question remains, where do insurers get additional data to deepen their understanding of new, novel technologies?
The answer, according to Daren, is better collaboration between the energy sector and insurers. For example, Tesla has set up their own insurance company to more seamlessly gather data during a crash. Leveraging that data feedback enables them to continuously improve the design of their electric vehicles (EVs), gradually making them safer. Tesla's approach to insurance exemplifies data-driven risk management. Although Tesla doesn't need the traditional insurer in their model, a willingness for the insurance and EV industries to share data would allow them to better work together.
In the traditional insurance model, the insurer contacts the policyholder once a year to review information and provide an updated price. One of the transitions into the new energy market is moving to a real-time flow of data, so that pricing or managing of risk can also move to real time. For example, an insurer who knows that an EV has been updated with new safety measures can automatically reduce the insurance premium for the owner.
To explain how the energy and insurance industries can actively share information in a way that's mutually beneficial, Daren references SmartMeters, a program the UK CGI team is working on. Instant assessment meters are installed in homes across the UK to provide a better understanding of how energy is used. The data collected allows the overall network grid to be more effectively managed. Daren encourages energy companies to involve insurers early in the design of these types of projects:
Peter’s final recommendation for the energy industry is to view insurance as a strategic opportunity rather than a cost.
- 1. The intersection of energy and insurance
-
Peter Warren:
Hello everyone and welcome back to another episode on our continuing podcast series on energy transition and, in this case, the intersection between energy and the insurance industry. Not everybody may think there's a logical or an obvious connection, but there is and to explore that with me is my friend Daren from the UK. Daren, do you want to introduce yourself?
Daren Rudd:
Yeah, hi Peter. So, I'm Daren Rudd and I lead the business and technology consulting teams over here in the UK for the insurance sector.
Peter Warren:
That's brilliant. Why don't we kick it off actually with the obvious question— so what is the importance of the insurance industry and how it supports the energy industry and energy transition?
Daren Rudd:
Okay, great question. So obviously a lot of the energy transition all comes down to bringing these innovative new technologies, wind farms, solar, and also hydrogen and battery storage. Most of these are fairly major investments, big capital-intensive projects. And historically to raise that type of capital, you need insurance in place. So, I think insurance is going to be a key part of collaborating around part of this energy transition.
Peter Warren:
Yes, go ahead. No, go ahead. Continue. I was just going to say, you know, again, and the intersection there between these two components is that I don't think people always think about the risk factor in the energy industry for insurance. And sometimes it's a separate thing. But risk is what energy companies manage probably more than anything, health and safety and risk. So, it might be something that is sort of secondary, but I do believe it should be more primary. You know you pointed out to me as we're talking before that there's a real important history back here for the energy industry as well.
Daren Rudd:
Yeah, I think I mean, I've worked in the industry for a long time, over 30 years now. So, I know a lot of people don't particularly consider insurance innovative, but in the London market that I work in, I mean, we've been around for hundreds of years, and it actually started—and I think this is quite a good parallel to the way that the energy market is transitioning—It all started in a coffee shop in London where people needed to look after the ships they were sending over to India to start the big trade piece. So, a couple of people got together in a coffee shop and worked out a way of ensuring that risk. That's essentially where Lloyds of London came from. And so, all the way back a couple of hundred years, we've been very innovative in terms of coming up with new mechanisms and ways of working to ensure and allow these big programs and these innovative new industries to grow.
And actually, when I was sort of doing a little bit research here, Peter, and thinking about this as a podcast, I came across a really great little article that—I hadn't realized that way back in, we've already been here in insurance in an energy transition when we moved from steam power to electricity power. An example is towards the late 1890s, the Chicago World Fair needed insurance. It was one of the first fairs to actually use electricity across the board. And the insurers brought in an electrical engineer to suggest better designs and to actually reduce the risk. Now that guy set that up, all worked very well. The World Fair was a great success, but that company actually then went on to create the standards and the asset analysis for energy and electricity assets going forward. And that company still exists today.
So, a lot of insurers still require your new electrical assets to be reviewed by this company. So, I think it's a really good example of how insurers and the industry can work together to deliver a better result, particularly where innovative new things are working.
Peter Warren:
That's really a fun story and actually I didn't know that. That points to maybe another intersection here because we're going through this other energy transition where there's going to be a lot of new, novel technologies, even new entrants into the industry, people coming from manufacturing, even retailers are coming into our industry. How does that all affect things with new technologies?
- 2. Innovative insurance solutions for new technologies
-
Daren Rudd:
Yeah, as I said, insurers have been innovative, but they also look backwards. One of the comfort factors, that's probably an unfair thing to say, but one of the factors and the ways that insurers work is look backwards historically and they want records. When we look at these new, novel technologies, there just isn't that data available. There isn't the historical record. So, it can be challenging for an insurer to step in and go, okay, I know how I'm going to insure a wind farm or how we're going to handle hydrogen energy. But again, what we can do is we can look at, we've got this huge experience in insurance. So, how do we then leverage that history and that experience by looking at parallels? So, if I take the example of, and any underwriter listening to this is probably going to cringe a little bit, but if we look at a wind farm and a wind farm is actually fairly similar to an offshore oil rig in some of the risk profiles. Geothermal wells, there'll be parallels there for fracking for gas and drilling. And again, an electric truck is actually fairly similar in risk to a diesel or petrol driven truck. But the context is slightly different. So, we can take a lot of the value from that, but then we do need to look then at where the differences come. And that's the biggest challenge, I think, for the insurers is where do they get that additional data? Where do they get that additional understanding from?
But I think the insurance market is very good at looking at new contexts and look at the risk, taking what we've done before and adapting it now to these new, novel technologies.
Peter Warren:
Yeah, I like that what you said there. And one of the common themes in our podcasts have been data, data, data, and more data. And the fact that, you know, there's many different audiences for this data. I think sometimes we forget about the external people like the insurance industry, even the financial banking industry. We talked about this with Andy on one of the calls about things not being funded so much because they couldn't prove the math on the environmental social governance aspects of it and so on.
So, the insurance industry, I'm assuming they would like more access to data so, how do they do that? What are the parallels to maybe things like personal and commercial businesses? How are things outside of energy industry providing that data at pace and scale?
- 3. Data sharing: A path to better risk managements
-
Daren Rudd:
Yeah, so it's a really good question. And yeah, you're right. Insurers want and live and die by the data that they have. I suppose, just to give you sort of the flavor of some of the novel challenges the insurers are looking for. And I think we can come back then to how I think the energy sector and the insurers can collaborate to get better at it. If we take just personal lines, there's some just some basic, simple things that we need to be thinking about. So, a modern house will potentially have solar panels that's been on the roof for a while now. But the new context is that I've got battery packs that are starting to be installed in the buildings and running and storing energy. That's a new profile. The biggest challenge for the insurers at the moment, particularly in somewhere like the UK, where we are very data driven and it's almost all done, I mean, 90 % of insurance for personal lines is written online. The data standards haven't caught up yet.
So, actually the common data standards where they're transferring information from the website back into the insurer's rating engine just doesn't exist at the moment. So, the more information that battery producers or solar powered organizations can share into that model will help the industry work out how they're going to manage their rating pricing. It's a of a similar position with things like EVs, electric vehicles.
Essentially, the shift of electric vehicles has pushed the fact that they've become living computers now. They're running and they're much more complex than cars used to be. And there's an impact now on the cost of repairing those. So, lots of smart assets, smart technologies, cameras, sensors all over the place. And it's really then understanding what the impact on a crash is going to be in terms of returning that vehicle back to power. To the point now where Tesla is an interesting example of how they've taken an approach on this, they've actually set up their own insurance company. Now, seems like a slightly odd move, but what they're doing and one of the factors here is because they're now gaining all of that information about what happens during a crash, what the damage is done, they can actually start to change the way the car is designed. So, if it's a front-end impact, not all of the sensors are sitting at the front. So, they're starting to make some changes now, leveraging that data feedback.
So, I think one of the ways that the industries can work together is by sharing more information. And there'll be a challenge there with who gets access to that information, where's the insurer, and what's the insurer's role in that. Tesla have set themselves up, so they don't really need the traditional insurer in the model. And they've got that instant feedback loop. So, it's going to be interesting to see how those two industries work together to manage the data between the two of them, the willingness to share. And I think, just thinking about it little bit, there's often a reticence within an industry to share information with an insurer because you're seen to be, your premiums will just go up because you're now sharing more information. But I think coming from the industry, that's not the intention. The intention is to better understand the risk. So, I think we've got to move to a point where both sides are more willing to share the information for the right reasons. Going back almost to that Chicago World Fair example of sharing more information reduces the risk and that's essentially what insurers want to do. They don't want to just grab premium; they want to reduce the risk.
Peter Warren:
And reduced risk, of course, is that common overlap with our industry. We want to drive out risk. It's interesting your story about the Teslas. Two years after my wife had her Model Y, one of the software updates actually improved the way the car behaves in a car crash. So, the seat belts tighten differently, the airbags go off differently and so on because Tesla worked out that, you know, beyond the government tests, here's real data that says this is how to reduce the risk to you. So, oddly enough, two years after owning the car, it's more safe than when she first bought it.
Daren Rudd:
And that's a really good example actually, Peter, of the traditional model of an insurance, an insurer is I will talk to you once a year, you'll give me all the information I've got, I will take a snapshot of that, I'll compare it historically, and I'll give you a price. Now you may come back to me part way through the year and say, actually, I've got a Model Y, but I've changed it to a Model X, so give me a reprice. Or I've now got my son driving and I want to add him to the insurance.
That's like a midterm change, but it's not a major one. We've got so much data flowing through our systems today. And I think one of the transitions into the new energy markets is you've to be that much more efficient with it and moving much more data around. We can move to a point where you've got real-time data flowing through. So that actually pricing of risk or managing of the risk can actually move to a real time.
So, in your example, what should have happened is your insurer would have been talking to Tesla going, you've got an update, you pushed that through. I can reduce your wife's insurance premium because I know it's actually safer. Now that's the way we should be moving. Again, that's not where we are today, but it's in everybody's interest, in the size and scale of cost of insurance within the market that energy providers do think ahead about the insurance costs within their organizations and within their assets.
Peter Warren:
So, as we wrap up here, I'll ask you one last question and leave it in here. So, if Tesla can do this, how do you see the energy industry and the insurance industry actually crossing that bridge you just laid out? How do you see them maybe in the future actively sharing information to each other and benefiting each other?
- 4. Future collaboration between the energy and insurance industries
-
Daren Rudd:
I think there's a good example. So, in the UK, we're rolling out something called SmartMeters, which is a program that the UK CGI team are working on. It's putting instant assessment meters in each home across the UK so that we can actually understand how energy is being drawn into each of the homes. And that allows the grid, the overall network grid, to be much more effectively managed because you can actually control and compare where the pockets of data and energy are being used. Now, that's obviously been driven and all of that consideration has been doing about making the smart grid smarter. But potentially, we can use that information or extend it slightly to have an impact in terms of the risk factors across the network. But unless the energy organizations are thinking ahead in terms of their risk profiles, that tends to get left right at the end.
I'm normally the one banging on the door of my colleague going, have you actually realized there's an insurance component to what you're building here or thinking about here? So, my ask, I suppose, to the industry would be, think about, talk to your risk managers, bring your brokers and your insurers in early, particularly when you're building these new, novel designs, and bring the risk factors in because some of those small changes will make a massive difference to potentially what's actually a fairly large chunky part of your overall cost base.
Peter Warren:
I love that and don't meet just once a year. Maybe have regular touch points.
Daren Rudd:
Yeah. Yeah, exactly. Exactly that.
Peter Warren:
So, treat insurance not as a cost but as an opportunity in the energy industry. So, thanks, Darren. I really appreciate that. This was a great talk. And thank you, everyone, for listening. We'll see you on the next one. Bye-bye.
