Coal plant insurance faces green hurdles

MUMBAI: Thermal power plants are finding it difficult to obtain reinsurance cover in international markets as global giants tighten their environment, social and governance (ESG) policies. This has created capacity constraints for insuring coal-fired power projects, which are too big for the balance sheets of domestic insurers.

Most of the reinsurance markets in the West have closed the doors to coal-based projects. On December 10 last year, Munich Re had announced that it has stopped insuring coal-fired power plants. Last month, Swiss Re announced that it was accelerating its race to achieve net-zero status in carbon emissions in its portfolio. “We also revised our oil & gas policy in 2020 and, beginning in 2021, are gradually withdrawing insurance support for the most carbon-intensive oil and gas production,” the reinsurer said.

Insurance marketplace Lloyds of London also said in December that it is scaling back its exposure to coal and oil sands. European primary insurers like Axa and Zurich had already pulled back from underwriting fossil fuels such as coal and oil sands.

According to an insurance broker, scouting for cover for a power producer which is looking to arrange protection from global markets is proving to be a challenge. “Reinsurers in the West have been hesitant to cover thermal power projects in keeping with their environment, social and governance policies,” said GIC chairman Devesh Srivastava. He added that, given the use of coal in Indian power generation, capacity for reinsuring thermal power projects internationally has been an issue.

However, companies can work around these issues by innovating on the policies. One method is to break up the assets for separate policies and looking at combined limits. “Most reinsurers worldwide have stopped writing coal on a facultative reinsurance basis. However, they permit reinsurance on a treaty basis,” said Marsh India country head & CEO Sanjay Kedia.

Facultative reinsurance refers to the project-specific contracts that insurers enter into with global underwriters. Treaties refer to the contracts where the reinsures commit to sharing the risk of an insurer’s portfolio.

“This is not like the issues faced in getting cover for nuclear plants where there are global restrictions on sharing know-how. This is purely from each company’s ESG standpoint. However, since most of the large western reinsurers are taking a hard stance on coal, we depend on other markets,” said Srivastava. In India, nearly three-fourths of the power generation is from thermal projects. Besides NTPC, the country has large projects owned by Adani, Reliance and Tatas.