For many municipalities, geothermal projects are an attractive way to strengthen their energy supply and reduce their dependence on fossil fuels. However, drilling involves significant financial risks that deter many municipalities. Munich Re's Exploration Risk Insurance, which is specifically tailored to the needs of municipal investors, offers a solution.

Geothermal energy is one of the most important renewable energy sources and offers great potential for meeting part of our heating needs in a cost-effective manner. Deep geothermal energy, i.e., the use of hot water from deep layers below the earth's surface, is expected to play an important role in municipal heating planning in the future, both for the generation of heating and process heat.

However, the necessary drilling is associated with high costs and success is not guaranteed. The Exploration Risk Insurance developed by Munich Re in cooperation with the German Federal Ministry for Economic Affairs and Energy (BMWE) and the German government-owned development bank KfW reduces the financial risk for investors such as municipalities and local authorities.

Drilling success or risk

Test drilling is carried out before every new geothermal project. There are three possible outcomes: discovery, partial discovery, or no discovery. If a discovery is made, the project continues as planned. If no discovery is made, Munich Re pays out the full sum insured, and the project is terminated.

Partial discovery can be more complicated, especially for public utilities. However, wells with lower output are often still usable, for example using heat pumps or conversion to a deep geothermal probe.

Economic viability and bureaucracy as challenges

The implementation of geothermal projects is often hampered by lengthy approval procedures that can take several years. To change this, the German federal government is planning a geothermal acceleration act that aims to reduce bureaucracy and shorten approval times. In particular, the mining concession required for deep drilling is to be accelerated by introducing maximum time limits for approval procedures in mining law.

However, the realization of a geothermal project requires not only accelerated approval, but also extensive preparatory work. This phase involves considerable upfront costs, which can amount to several million euros for municipalities and local authorities. In addition, there are costs for the actual drilling, which can reach up to 80,000 euros per drilling day, as geothermal expert Matthias Tönnis from Munich Re points out. These high costs underscore the importance of careful planning and comprehensive risk assessment in geothermal projects.

How the Exploration Risk Insurance insurance works

 After project documentation has been submitted, including feasibility studies, geological and geophysical analyses, profitability calculations, and other documents, the basic insurability of the project is reviewed. The decisive factors here are primarily the quality of the data, clarification of whether drilling or projects already exist in the vicinity, and the insured heat output based on the expected temperature and flow rate of the thermal water. The insured parameters are determined in consultation with the policyholder, the risk is modelled, and a customized insurance policy is drawn up. After drilling begins, daily drilling reports are submitted regularly to monitor progress. A standardized test procedure after completion of the well then determines the success of the drilling.

In Germany, the Bavarian Molasse Basin in the Alpine foothills, the Upper Rhine Graben, and the North German Basin offer good conditions for geothermal projects, as their geological characteristics enable the successful exploitation of geothermal energy.

Exploration Risk Insurance as part of a comprehensive geothermal strategy

Munich Re is a pioneer in this field as the first provider of discovery insurance. The insurance developed by Munich Re is part of a geothermal energy initiative by the German Federal Ministry for Economic Affairs and Energy (BMWE). The aim of this initiative is to implement at least 100 additional geothermal projects by 2030, which would increase the share of energy used for heating from geothermal sources to ten times the current level.

The insurance program is expected to start in late fall of this year as “KfW Program 572 Deep Geothermal Energy” following the 2025 federal budget decision. The most important component is Munich Re's Exploration Risk Insurance and risk sharing between Munich Re and KfW.