Extreme weather is starting to perplex insurers’ minds. Seventeen lumbering giants recently formed ‘The Sustainable Market Initiative Insurance Taskforce’, a no doubt worthy effort to address the impact of climate change.
But it has to be said one of London’s most innovative insurers, Julian Richardson, got there years ago. “It has become clear to me for some time that climate change is not something to think of in the future. Climate change is already here,” he tells Impact Investor.
Whilst wishing the new initiative well – “climate change needs partnerships and collaboration across the insurance industry” – Richardson hopes it doesn’t “become another climate change talking shop.”
Richardson does a lot more than just talk. His insurance business Parhelion has been providing climate-related solutions for the last fifteen years.
Last month he launched “the world’s first sustainable insurance company” targeting a raise of some $500mn. It is being seed-funded by global insurance broker Howden, who found themselves “increasingly bombarded with client requests for climate-related insurance risk,” according to Richardson.
Insurance: a vital frontier in the fight against climate change
Richardson has built steadily towards his new business on his core belief is that “it's not possible to invest in something if it's not properly insured.”
And so he is convinced that London’s enormous insurance market has a vital role to play in addressing climate change. His new venture has that collaborative spirit that characterises the Lloyds of London reinsurance market.
Richardson’s existing business Parhelion will be the core of this new entity, which will take its name, but he will be welcoming a new co-CEO, David Cabral, to “add bench strength,” as he explains it.
The existing Parhelion is a boutique business, concentrating on certain niche markets, whereas the new Parhelion will be a fully sustainable insurance underwriter, potentially across all markets. Richardson intends to quadruple his headcount.
The exact structure of the new business is yet to be determined. “Investors will have an opportunity to shape it. We’re actively engaging with a wide range of potential investors including pension funds, family offices and sovereign wealth investors,” he says.
Insuring investments in the energy transition
Parhelion will begin underwriting in January and will provide traditional risk cover to sustainable projects as well as new ESG ‘products’. “In meeting the enormous challenge of the energy transition, new business models and technologies are emerging, and, inevitably, new insurance risks,” Richardson says.
In the energy transition, insurance is a vital part of the ‘capital stack’. “Equity takes some risk but with reluctance. Debt takes very little. That often leaves large areas of uncertainty, something that investors dislike, but that is ‘meat and bread’ to insurers,” Richardson explains.
He believes “until now most impact investors have not properly understood the vital role insurers can play.” The concept of a ‘waterfront’ sustainable insurer was road-tested first with asset management clients, but Richardson says he soon found the (positive) feedback was becoming repetitious.
Parhelion will use their own ESG metrics, which are baked into the underwriting process. “ESG insurance is a young industry, and the publicly available metrics are very blunt instruments. We had to create our own,” Richardson says.
History of innovation
His commitment to green issues is longstanding. Richardson actually ‘cut his insurance teeth’ in oil and gas markets, which he says is “great for understanding big, complex risk,” but an area he soon realised did not ally with his personal goals.
Parhelion was the result in 2005 – the name coming from an atmospheric optical illusion, sometimes called a ‘sun dog’, which as a keen skier Richardson often observed in the Alps.
Richardson admits that he has built something of a reputation for himself as ‘the sustainable insurer’ and people often bring him problems to solve. This is how Parhelion started to create insurance solutions for the risks around carbon emissions trading.
The Climate Action Reserve is the principal carbon offset registry for North America, which verifies the integrity and benefits of carbon offset projects. They came to Richardson with a crucial flaw in California’s Cap and Trade System under which there is a statewide cap on greenhouse gas emissions that is lowered every year. Any business which wishes to emit CO2 must purchase ‘allowances’ equivalent to one metric tonne, which are tradable.
Offset credits where an equivalent amount of emissions is removed are also traded. The principle of ‘buyer liability’ means buyers face the danger carbon credits they buy will be ‘invalidated’ – a process whereby the regulator determines a project or the calculations associated with it are not genuine. Buyers' consequent nervousness constricts liquidity.
Parhelion stepped in to provide a solution by offering insurance against this risk, and then successfully extended the principle to the US market for RINs (Renewable Identification Numbers – credits under the Environmental Protection Agency’s 'Renewable Fuel Standard Program').
Insurance adds certainty and liquidity to that market also, basically because it’s an investment-grade security. Biofuel producers are able to sell to more buyers.
Geothermal project insurance
Richardson’s key belief that insurance can step in and bridge gaps in markets led to a similar lightbulb breakthrough in another niche sustainable market: geothermal energy. Parhelion’s ‘GeoFutures Fund’ (GF1) will go live with a targeted $150mn raise next year.
The extremely high temperature and pressure of the earth’s interior causes rock to melt, and heat is convected upwards. Geothermal electric power stations tap this geothermal energy.
Such power stations emit less than 5% of coal power plant emissions and, it is estimated, could constitute 5% of global energy needs by 2050, and 10% by the end of the century. Six countries already generate more than 15% of their energy needs from this source: El Salvador, the Philippines, Iceland, New Zealand, Costa Rica, and Kenya.
Parhelion is very much involved in the East African development of this industry, working with The Green Climate Fund and the African Development Bank. It is something of a personal mission for Richardson, who is originally a White African. “I have always wanted to ‘give back’ to Africa,” he says.
The opportunity for insurers comes from the complexity and riskiness of the extraction process, as well as its length. Geothermal wells are extremely deep (sometimes more than 3km), and the rock is often abrasive and contains corrosive fluids. This makes drilling more hazardous than oil wells. A typical well can cost $10mn and there is a 20% failure rate.
GF1 initially proposes to provide investment to between 8 -12 projects in and around the East African Rift Valley which will be a mixture of support to early-stage exploration projects, by granting sustainable development loans, and insurance-backed guarantees at all stages.
These projects are expected to contribute up to 600MW of additional energy capacity, servicing the needs of approximately 26 million people whilst avoiding the emission of 1.3mt CO2 annually. P4G, “a global platform accelerating pioneering green partnerships” are onboard, something Richardson says gives “vital access to their network.”
Given this career of innovation, it is no surprise Richardson has been a trusted counsellor to international organisations and governments for years, including the G20 and the UK. But he is stepping back from all of these now to prioritise the launch of the world’s first sustainable insurer.