At the close of COP29, UN climate change executive secretary Simon Stiell described the decision to triple climate finance as an “insurance policy for humanity”. It’s a familiar theme for the insurance industry which is increasingly grappling with the role it has to play in helping to foster the global energy transition.
So, how is insurance evolving to meet this responsibility? This was among the questions put to Gus Majed (pictured), founder and group CEO of Paratus, a provider of insurance cover to the renewable power energy sector, in a recent interview with Insurance Business.
Touching on the changing conversation around insurance and the global energy transition, Majed noted that “pragmatism” is at the heart of this pendulum swing. After COVID-19, he said, there was a significant push for decarbonisation, causing a shift in investment away from conventional energy sources, including oil and gas, toward renewables.
This withdrawal of capital created underinvestment in maintaining existing fossil fuel infrastructure. “Of course,” he said, “it’s important to keep in perspective that there’s still a demand of over 100 million barrels a day.” This trend wasn’t entirely new; it had been developing since 2016–2018 but it accelerated post-COVID.
The situation worsened with the onset of the Ukrainian crisis, which exacerbated energy supply challenges and drove record-high power and gas prices. Now, he said, there’s a growing recognition of the need for balance: that while decarbonisation is essential, the transition will take decades. Energy demand remains high, and the technologies to support the transition - like renewables and new infrastructure - will take time to scale.
“As a result, within the last year and a half to two years, the pendulum is going back to this more centrist, pragmatic approach,” he said. “The question now is, how do we achieve a sustainable energy transition while being able to transition with as little volatility as possible? Does that mean more public-private partnerships? Does it mean you have to adhere to more of the COP suggestions? Is it a political discourse? Is it a mandated discourse? And what are the mandates that are being suggested and implemented?”
Majed highlighted that while the US is coming from a very revenue-specific ideology, the EU model is heavily grounded in mandates. The latter perspective is all well and good, he said, but there’s a careful balancing act between the most environmentally sustainable pathways and the most economically sustainable pathways.
“At the end of the day, it’s all about economics,” he said. “And if the economics don’t work and you go down the route of mandating everyone to follow one pathway, what will happen is that organisations will go bankrupt or you’re going to have certain jurisdictions that won’t be compliant, and you’re going to have regulatory arbitrage. So there has to be harmony and an international standardisation.”
In the background to this, he noted that there’s an opportunity for insurance, government and industry to take the initiative in educating consumers about their choices. If consumers are made aware that long-haul flights and shipping goods globally is a luxury and a privilege, and that there is a cost involved with that, it might help move the pendulum towards greater sustainability as standard.
“I think these discussions are incredibly important,” he said. “A lot of it has to come from the industry, having a genuine dialogue on an expert basis with government, and then you have this partnership where you are all solving for the same thing. Because what you actually don't want is inadvertent mandates coming in which are fundamentally unworkable. A logical example of that is in the aviation industry where the jet fuel market is 350 million tonnes a year, and current sustainable aviation is roughly two-to-three million tonnes of production a year.”
It's a complex tightrope for government and industry alike to walk, Majed said, but the answer can be found in designing coherent and economically stable solutions that satisfy all parties involved. What the last three years have shown is that those solutions do not need to be mutually exclusive, that it is possible to create a blend of solutions that each bring something different to the table and help to move the dial on sustainability conversations.
“I think that's where we'll ultimately get to,” he said. “It's a bit like in renewables, where you can have anaerobic digestion, wind, solar, nuclear, bio methanol and so many others. The key is that we have to be cognizant that as we invest in renewables, there has to be a significantly higher ratio of capital going into renewables than traditional. But at the same time, you can't turn the transition fuels to zero because you have fuel poverty and people suffering.”
The government has a very active role to play in helping to engineer a measured and careful transition, he said, and a responsibility to put the right frameworks in place to support that - whether it’s through Contracts for Difference (CfDs) or something more dynamic. “I think there's a lot that can be done that isn't being done in terms of fiscal solutions.”
Part of that is incentivising those insurers looking to innovate and enable a faster transition, including by allowing consumers and producers to better manage their balance sheets and protect against significant balance sheet volatility as a result of fluctuating energy prices. “For instance,” he said, “when we sell an insurance policy on renewable power, [consumers] still have to pay insurance premium tax (IPT).
“For me, that’s an example of where we should be incentivising and facilitating the transition. It’s little tweaks like this that will make all the difference. And I think we should be taxing traditional energy significantly more, and so incentivising renewables. That, to me, is a sensible and practical solution to this challenge.”
