stakeholders. It is crucial for insurers to generate income from both sides of the house at all times – prudent and disciplined risk management, underwriting and investment management are key processes to sustain profitability and long-term value creation. ESG issues are relevant to both the insurance and investment sides as risks posed by ESG issues can undermine the solvency of an insurance company and the long-term economic health of the insurance industry and its partners, ranging from insureds – households, businesses, and governments – to the entities financed by insurance capital. Thus, it is imperative for insurers, regulators, and policy makers to collectively address ESG issues in the insurance industry.
The main reasons that adversely affect the insurability of risks can be classified as supply-side and demand- side barriers. The supply-side barriers include volatility in the occurrence of claims, particularly for weather- related insurance. This can be smoothed to some extent with reinsurance, but this raises the related barrier of inferior data quality. Poor data on climate change related hazards and exposures means that uncertainty is much greater and this makes the private insurance and reinsurance market less willing to participate in risk-
bearing. Geographical, economic and climate data tend to be poorer for developing countries and access to such information is often prohibitively costly.
There are also regulatory barriers. A balance needs to be found between regulatory control of the market to protect consumers and flexibility in managing insurance operations in response to a changing risk landscape. Overly rigid insurance regulations will deter private insurers or result in suboptimal insurance solutions. Also, it is important that public control of the risk management framework (land development, safety regime, etc.) is maintained. Equally important, regulators must set a reasonable standard of care for policyholders to avoid moral hazard, that is adopting very risky practices in the belief that regulators will restrict insurers’
freedom to modify policy terms. A
final difficulty is high administrative expenses, a major problem for policyholders with only few assets because conventional insurance products have relatively high overheads. Simplified products can help solve this.
Some demand-side barriers can be overcome by the private sector through time; others may need public sector intervention. The most significant is probably low
Box 9: Mobilising private investment into sustainable energy in India
India has the fifth largest installed renewable capacity in the world. In 2009, private investments of renewables in India amounted to US$ 2.3 billion ranking India in the top ten G20 members, while VC/ private equity financing stood at US$ 100 million (Pew Charitable Trust and Clean Energy Economy 2010). This has been driven by a suite of policy measures at state and federal level that have included:
■ Clear short and medium-term targets have been identified for renewable energy and energy efficiency amounting to 14 GW of new renewable energy capacity by 2012, and an ambitious plan to install 20 GW of solar energy by 2022 (Pew Charitable Trust and Clean Energy Economy 2010), financed through a national system of gradually increasing renewable purchase obligations (RPO) for power utilities combined with gradually decreasing feed-in tariffs;
■ Feed-in tariffs and tax allowances for solar photovoltaic (PV) and solar thermal power, supplemented with support for PV manufacturing in special economic zones (CERC website) have been implemented. These policies led to US$ 18 billion in new solar PV manufacturing investment plans or proposals by private companies;
■ A renewable portfolio standard for utilities has been set up, starting at 5 per cent in 2010, rising to 15 per cent in 2020. One state has already enforced penalties on utilities not complying with the standard;
■ Nationwide energy conservation codes are in place for residential buildings, hotels, and hospitals with centralised hot water systems, requiring at least 20 per cent of water heating capacity from solar;
■ The National Mission on Energy Efficiency (NMEF) will initiate trading in energy certificates for several industrial sectors. NMEF will have two funds one to provide guarantees to banks providing loans to energy efficiency projects and the other to support investments in the manufacturing of energy efficient products and provision on energy efficiency services. The trading scheme will potentially generate transactions close to US$ 15 billion by 2015; and
■ A coal tax of US$ 1 per tonne was put in place in 2010 to feed the National Clean Energy Fund. India depends on coal for 66 per cent of its energy needs and this tax would generate annual revenue of US$ 600 million.