Climate Change

Sustainable aviation fuel will help deliver Jet Zero

With the aviation sector’s carbon footprint estimated at 1.8bn tonnes of carbon dioxide by 2050 if left unchecked, sustainable aviation fuel (SAF) as an alternative fuel has been promulgated worldwide. The International Air Transport Association expects a significant acceleration in its production in the 2030s and estimates that SAF could contribute 65% of the reduction in emissions needed by aviation to reach net zero by 2050. The UK government has likewise published a SAF mandate that may be effective as early as 1 January 2025 requiring SAF to account for 10% of allaviation jet fuel. The mandate also sets parameters on what constitutes SAF (i.e. SAF must have 40% less carbon intensity than fossil fuel-derived kerosene etc). Airlines will have to carefully consider the contents of its chosen SAF to avoid greenwashing claims. As the UK government continues to invest its resources in boosting SAF (e.g. the £165mn Advanced Fuels Fund), we expect further regulation, policies and investments to emerge.

Greener skies ahead: electric air taxis offer a sustainable future

Hyundai’s Supernal is set to unveil a prototype of its electric flying taxi at the Consumer Electronic Show in 2024, signalling a transformative year for urban mobility. The electric vertical take-off and landing aircraft aims for a test flight in December 2024, marking a new era in efficient, sustainable transportation. Supernal’s development suggests a future where clean flight becomes commonplace, offering a swift and environmentally conscious solution to modern transportation challenges. As investments pour into this futuristic venture, companies can redefine the skies and drive us into a greener future. However, in order to make this a reality, regulatory frameworks and infrastructure must also develop in tandem.

Operational resilience will help deliver sustainable airports

Record-breaking temperatures, intense flooding and social awareness around sustainability will all increase pressure to deliver significant airport redesign. As the risks associated with extreme weather events continue to affect airports, many are already considering redesign or are in the assessment phase of performing infrastructure upgrades to mitigate the impacts of these climate stressors. This may include relocating vulnerable electrical equipment to rooftops to protect it from flooding; prioritising energy efficiency; reassessing stormwater infrastructure; implementing permeable pavements to help with drainage; and upgrading runways to handle extreme temperature variations. Operational resilience goes hand in hand with long-term sustainability.

Extreme weather-related casualty claims will increase

Extreme weather events will generate an increased range of claims in the casualty space. It is widely predicted that 2024 will see an increase in the number of extreme weather events including temperature highs, increased rainfall and more storms. The focus from extreme weather events is usually directed on property damage but such weather events have the potential to impact casualty claims in a number of areas. Outdoor workers may face extreme heat or similarly unsuitable weather conditions. The increased severity of storms could result in an increased risk of injury from flying debris. Businesses should consider what new precautions will need to be taken to ensure safe working environments.

Go green, go timber - underwriters beware

We expect to see claims as the industry gets to grips with the increased use (and uses) of timber. The use of timber in construction forms an important part of the government’s strategy to meet its net zero targets. The benefits are clear: a renewable material which is strong, flexible, lightweight and has excellent thermal insulation properties. The government is encouraging its use by funding research and development, promoting and incentivising the use of sustainable materials and requiring those in the industry to consider the environmental impact of their projects. We are seeing increased use in practice, but despite being used as a primary construction material for over 10,000 years, modern timber products and their innovative uses are relatively untested.

Shareholder activists will find creative ways to generate publicity and further their climate agenda against corporations

Climate activists have received a significant setback with the High Court of England and Wales refusing ClientEarth (a minority shareholder in Shell Plc) permission to continue a derivative action against the directors of Shell, and permission to appeal that decision being denied. ClientEarth could not demonstrate that Shell’s directors were mismanaging climate risks and offered no engagement on how the directors’ alleged wrongful actions constituted an approach that no reasonable director could have adopted. The decision endorsed the UK courts’ inherent unwillingness to interfere with the invariably difficult decisions directors must take when managing climate risks and carbon transition. While ultimately unsuccessful, publicity is second only to victory and the publicity generated by this litigation was invaluable. The activists’ appetite to challenge corporate behaviour will not have waned and they will find creative ways to circumnavigate company law obstacles and continue their fight. Corporations remain firmly under the spotlight to embed climate change into their business strategies and evidence progress. It is important to implement climate change strategies now and mitigate the risk of litigation and reputational damage.

Increased risk of fires caused by e-scooters in student accommodation

With the increased use of e-scooters and e-bikes comes the challenge of how and where students charge the batteries given the shortage of suitable and secure communal charging points. Where students do not use the correct charging points and instead charge batteries within their own accommodation, this may be in breach of the terms of building insurance cover which the accommodation owner or provider has put in place. Damage to the accommodation or part of the wider building may not then be covered, leaving the building owner with an uninsured loss and potentially having to bear the costs of making good the damage. The increasing risk of such fires, and the resultant claims, is potentially magnified across a large portfolio of properties. Accommodation providers should ensure tenancy agreements reflect the provisions of insurance policies.

International ESG initiatives will continue to drive sustainable finance regulation in the UK

On 19 September 2023 the Taskforce on Nature-Related Financial Disclosures (TNFD) released its final recommendations. It provides a framework enabling companies to assess, disclose and manage nature-related risks and impacts with the aim of consistent and comparable reporting by businesses and financial institutions worldwide. This has been described as a “game changer” for corporates and financial institutions. The output of the TNFD complements that of the Task Force on Climate-Related Financial Disclosures (TCFD), enabling financial institutions that are already acting on climate risks to use TNFD’s integrated approach to address nature-related financial risks at the same time. Though the framework is currently a voluntary one, as happened with the TCFD we can expect governments and regulators around the world, including the Financial Conduct Authority in the UK, to move to introduce compulsory nature-related financial disclosures in line with TNFD alongside the current compulsory climate-related financial disclosures for in-scope firms.

Expect further exploration of ‘greening’ insurance

We predict that insurers will incentivise policyholders to make investments to protect against climate change risks. Measures that insurers may use to encourage insureds to take climate change mitigation action (i.e. to reduce greenhouse gas emissions) include pricing structures and changes to cover. Terms may add a reward, or a warranty that insureds will take certain measures, or an exclusion. This may require insurers to provide information on climate mitigation and adaptation to raise awareness. Further support is required from regulators.

Insurers will seek to reduce exposure to climate change risks

We predict that insurers will seek to reduce exposure to climate change risks. We have already seen a degree of movement in this space from a wordings perspective. For example, LMA5570 seeks to exclude liabilities arising out of any claim alleging that an insured caused or contributed to climate change or its consequences. This is hardly surprising, considering the increase in climate change litigation over the last few years: 2,341 cases had been captured in the Sabin Center’s climate change litigation database by May 2023 and the diversity in cases and number of countries in which such litigation is identified continues to increase.

Aloha to climate change exclusions

The evolution of climate change litigation means the prospect of a claim for damages against a defendant for its contribution to climate change is no longer far-fetched. The immediate risk to liability insurers is the exposure to defence costs for this type of litigation, as seen in the claim brought by Aloha Petroleum against its insurer under its commercial general liability policy. The claim follows the insurer’s refusal to pay costs incurred in Aloha’s defence of the underlying action relating to the alleged impact of fossil fuel production on the Earth’s climate and communities in Hawai’i. One key question currently before the Hawai’i Supreme Court is whether greenhouse gas emissions constitute “pollutants” for the purposes of the pollution exclusion. We would expect liability insurers to start addressing this uncertainty through the use of exclusions specific to climate change.

Biodiversity risk will move centre stage in 2024

While it may have been waiting in the wings of the ESG space in 2023, we predict the spotlight will fall on biodiversity risk this coming year. This is based in part on the publication in September 2023 of the recommendations of the Taskforce on Nature-related Financial Disclosures, providing companies and financial institutions with a risk management and disclosure framework to report and act on nature-related issues. Biodiversity risk also sits in the slipstream of climate change risks and will benefit from a general increase in awareness, despite being a separate risk focused on the direct harm we cause our environment and nature. For liability insurers, new laws and regulation will widen the scope for claims and litigation risks. But the big question is whether we will follow other jurisdictions, such as New Zealand, Canada and Colombia, in giving legal personhood to natural objects, such as rivers and forests. The risk of reputational harm should also not be underestimated.

Increased approvals of onshore wind farms will lead to an increase in judicial review applications

Recent changes in UK government national planning policy mean that Local Planning Authorities are now directed to approve planning applications for onshore wind farms if the sites have been identified in the local or neighbourhood plans and provided that the proposals have community support. The concerns of affected individuals must have been appropriately addressed but projects can no longer be vetoed by a single objector. Onshore wind farms remain a controversial and emotive subject, with opponents ranging from conservation charities to community interest groups concerned about the impact on the landscape in terms of visual and noise intrusion, including the impact on birds. We anticipate an increased focus on judicial review as local communities and conservationists attempt alternative redress to prevent development. Developers will seek to mitigate this risk by arranging robust legal indemnity insurance.

Policy changes will give rise to new opportunities in the renewable energy sector

The Energy Act 2023 established the groundwork for the UK’s future energy sector, focusing on net zero energy project delivery. We expect the energy infrastructure sector to buck the trend and promise profitable growth. Renewable energy infrastructure projects involve complex development on land often blighted by defects in title, such as access issues and restrictive covenants. Developers and their funders will need legal indemnity insurance to mitigate the costs and delays that would be caused by property and planning disputes.

New marine fuels will face greenwashing risks

The technology for carrying and burning methanol as an alternative fuel is already well advanced, with Maersk taking delivery of the world’s first, ocean-going methanol powered container ship in June 2023. However, the infrastructure for delivery of the quantities of ‘green’ methanol required by the industry is woefully inadequate. The severe restriction on supply suggests that, at least in the short term, some vessels will be forced to use ‘grey’ methanol. Shipowners and operators switching to methanol will therefore face increasing accusations of greenwashing, unless they can readily demonstrate the provenance and truly green credentials of the fuel on a well-to-wake basis.

Insurers will need to do more to support decarbonisation R&D

In order to meet the International Maritime Organisation’s 2050 and interim targets, shipping will need to ramp up its investment in new fuel and propulsion technologies. This will require significant investment in research and development, with pilot schemes to demonstrate proof of concept, safety, and that any new technology can be scaled. Equipment manufacturers and shipowners who are willing to make such investments will need the support of the marine insurance market to ensure that these projects are viable, helping to lower the barriers to innovation. This collaboration will in turn provide insurers with valuable data on the risks of insuring these solutions, should they be adopted at scale.

Extreme weather events will continue to disrupt and divert supply chains

As climate change continues to alter weather patterns, intensifying extreme weather conditions and causing prolonged periods of drought, global shipping routes will continue to face significant disruption as inland waterways become impassable to all but the shallowest-drafted ships. Key pinch points such as the Panama Canal continue to operate at reduced capacity. As delays increase, we will likely find some cargoes being diverted either to multimodal alternatives or via longer routes, changing (and in some cases increasing) both the cargo and hull risk for those journeys.

Increased focus on wind assisted propulsion systems

The shipping industry is aiming to achieve net zero emissions by 2050 and as part of the efforts to decarbonise we expect further research into the viability of wind assisted propulsion systems (WAPS). WindWings, a type of WAPS and the result of a collaboration between BAR Technologies and Yara Marine Technologies, is already gaining traction in the industry. It is estimated that the technology could increase the fuel efficiency of a vessel by up to 30% thereby reducing CO2 emissions. To date, WindWings have been retrofitted on two bulk carriers in collaboration with Cargill and MC Shipping on the Pyxis Ocean and Berge Bulk on the Berge Olympus. However, given the early stage of this initiative, there is little data on their effectiveness in a commercial environment. We anticipate that there will be further advancements in WAPS including competing technologies in the market as well as further trial runs of WindWings on other types of vessels. Marine insurers will need to get to grips with the potential new risks these modifications will bring to the operation and structure of the vessel.

Continued trouble with subsea cabling

The Global Underwater Hub has estimated that approximately 85% of the total value of insurance claims emanating from offshore wind projects is related to subsea cables, with the average settlement claim being approximately £9 million. Subsea cables are a critical part of the infrastructure of offshore wind projects as the conduits for transferring the energy generated by the wind turbines to the onshore grid. Failure of these cables not only disrupts the transmission of energy but is also very costly to remedy. With the number of offshore wind farm projects predicted to increase, we expect there will be further significant claims on insurance policies which will likely lead to higher premiums and a knock on effect on the financial viability of these types of projects. However, we also expect new technologies to emerge that seek to address the issues regarding the durability of subsea cables.

Structured trade credit insurance can give the green light

The world will increasingly recognise the positive impact of trade credit insurance. The transition to net zero is difficult, even without the political considerations associated with the costs in post-COVID economies. Trade credit insurance can and does contribute to the battle against climate change, albeit the industry could perhaps be louder in pointing this out. Structured trade credit insurance can de-risk certain financial aspects for banks/investors by insuring against loan defaults. These insurance products enable capital exposure to be spread across the banking and insurance industries; smarter use of capital and risk sharing ensures that more green projects are developed, especially in developing states.

Ukrainian shipping route indirectly increases risk of political violence in developing nations

Political violence risk increases the longer the Black Sea corridor remains exposed. Pre-war, Ukraine was one of the world’s leading exporters of grain in the world, especially to developing nations. It provided more than 50% of the UN’s World Food Programme supply of wheat grain in 2022, to help people in Afghanistan, Ethiopia, Kenya, Somalia, Sudan, and Yemen. With the status of the Black Sea Grain Initiative still unclear, those in developing nations face significant uncertainty around food security – especially as the impact of climate change affects domestic harvests. Increased civil unrest related to a government’s (in)ability to feed its population is a significant risk as the war in Ukraine continues. Whether the corridor reopens will be watched keenly by underwriters in both the political violence space and political risk (as those seeking power may seek to take advantage of impending humanitarian catastrophe for their own ends).

All professions: The re-emergence of ‘deep pocket’ professional indemnity claims

Technology, ESG and the broader economic horizon will continue to combine to frame the challenges confronting the professions and their risk and liability exposures. Construction professionals, lawyers, auditors, accountants and surveyors are all facing climate change risks and sustainability demands from their clients, consumers and regulators. At the same time, cyber risks in all of their forms continue to be top of the list of threats for professional services firms, and this runs hand-in-hand with the need to achieve appropriate risk safeguards around the increasing use of AI in the provision of services. Finally, the broader economic environment presents headwinds for 2024. The Insolvency Service commented on 31 October 2023 that Q2 and Q3 2023 saw the highest quarterly insolvency numbers since Q2 2009. Combined with an apparent slowing in the real estate sector, and the consequent defaults, the potential for the re-emergence of ‘deep pocket’ professional indemnity claims must be real.

Construction Professionals: It’s not easy being green

There is increasing pressure on the construction industry to build in an environmentally sustainable manner; this brings with it risks for construction professionals. The construction industry is a heavy emitter of carbon dioxide. The Carbon Emissions (Building) Bill (now withdrawn), which would have required the whole-life carbon emissions of buildings to be measured, is an example of the type of governmental pressure which is likely to be exerted on the industry. We anticipate that this will be coupled with increasing consumer demand for carbon neutral and highly energy efficient buildings. This will bring new risks for all players in the procurement chain including construction professionals. Developers are likely to face scrutiny over ambitious net zero claims. This could in turn spark claims against designers for failure to meet energy performance criteria. Contractors will face risks in terms of the time that construction takes for workforces unfamiliar with green construction and the additional cost of using green materials.

Lawyers: The claims environment will heat up in respect of climate change advice

We predict that the incidence of claims against lawyers in relation to climate-related advice will increase unless firms and in-house legal teams support their colleagues to upskill in this area. In October 2023, the Law Society issued guidance to the profession on climate change, governance and the risks associated with greenwashing. The Law Society distinguished between the advice on issues such as greenwashing, that in-house lawyers may be under a duty to provide to their company’s Board, and advice given to clients by solicitors in private practice. The Law Society also identified the areas of risk for companies and clients and the relevant legislation that lawyers should have in mind when advising. The message from this is two-fold. Training is key to ensure that solicitors are competent to give advice in this critical but emerging area. In addition, solicitors must scope out their retainers carefully, so that clients are clear about the limits of the advice they will receive and when they may need to instruct a specialist.

Surveyors and Valuers: Sustainability and ESG matters should form an integral part of the valuation approach

It is inevitable that a multi-tiered approach to real estate valuation will emerge and, with it, a greater exposure for those who fail to factor sustainability, in all its guises, into their advice. The Royal Institution of Chartered Surveyors, in its UK supplement issued in October 2023, notes that “wherever appropriate, the relevance and significance of sustainability and ESG matters should form an integral part of the valuation approach and reasoning supporting the reported figure”. In short, minimum energy efficiency standards, energy performance certifications and flood (or subsidence) risk assessments, not to mention the maintainability of income (and capital expenditure required to preserve it) wherever revenues are likely to influence the value of an asset over the anticipated life of the loan, look set to play an ever-increasing role in valuation methodology and, in consequence, valuation conclusions. The profession needs to have sustainability at the forefront of its mind when both valuing assets and caveating its conclusions

Shining a light on solar energy challenges for insurers

The rise in solar energy and photovoltaic installations is anticipated to be a growing challenge for property insurers in 2024. In August 2023, the Microgeneration Certification Scheme announced that 2023 was the first year to reach a monthly average of more than 20,000 domestic solar panel installations. With a largely unregulated market and a cost of living crisis, we predict customers will increasingly opt for cheaper installation options (often compromising on safety and quality). Insurers will also need to be mindful of the impact of severe weather, maintenance issues, theft and ever improving technologies.

Climate change will impact the frequency and resolution of subsidence claims

With our summers getting hotter and drier, we predict an increase in tree root subsidence claims as trees seek out moisture in clay subsoils. Such claims will extend to areas not previously associated with subsidence, for example further north in the UK. We will also see reoccurring damage as previous engineering solutions fail as the soil becomes dryer at greater depths. Also relevant to subsidence claims is the Environment Act 2021, which adds a consultative process to the potential removal of council-owned trees. While tree removal is generally a quicker and cheaper solution, with less invasive repairs and permanent resolution, we predict that tree owners will increasingly rely on the Act to pursue alternative substructural repairs. These can however have a greater environmental impact than tree removal.

Insurers will Build Back Better in 2024

Flooding remains an ongoing challenge for insurers in ensuring that they support their customers through distressing circumstances while managing their own significant financial impact. As the UK suffers further bouts of flooding, the benefits of Flood Re’s Build Back Better Scheme is brought into sharper focus. The scheme enables homeowners to install flood resilience measures up to the value of £10,000 when repairing properties after a flood. This ensures that the home is better prepared to keep more water out next time the area floods and, when the water does enter, it is quicker and safer for homeowners to clean up and move back in. We predict that more insurers will sign up to the scheme and we will see continued developments in technology in support of flood defence systems for residential properties.

Is ESG the new asbestos for reinsurers?

Asbestos has had a significant impact on global reinsurers. Reinsurers have entered liquidation and losses remain from asbestos exposure in the 1960s. For reinsurance contracts with damage occurring triggers, exposure may date back to any period in which the claimant was exposed to asbestos. There are similarities with ESG claims, especially climate change litigation, which relate to exposure over several years, if not decades. Companies, whose practices or products are found to contribute to climate change, may face claims for damages. We expect reinsurance contracts responding on a damage occurring basis to see increased activity as cedants seek to maximise recoveries by notifying losses to multiple years of account, which means reinsurers from years ago will have to dust off their reinsurance contracts.

ESG factors will be an important focus in M&A deals

Corporations recognise that tackling environmental, social and governance (ESG) issues can give them a competitive advantage and provide opportunities for growth. With greater scrutiny of ESG targets by consumers, employees, investors and regulators, ESG considerations are increasingly an important focus in M&A deals. Buyers are critically assessing sellers’ commitments to energy savings, operational efficiencies and social responsibility as part of the acquisition process, to ensure ESG statements stack up and their merging corporate cultures will align. Significant differences in ESG ideology and performance criteria could be an obstacle to integration post-merger and may result in claims if mismanaged. ESG scoring – which uses quantitative measurements to independently verify ESG factors – is a growing market and it is expected to become more common place in the M&A due diligence process.