Insurance Industry Keeps Up with Renewable Energy Development
As the need for energy security drives investment in renewable energy, the insurance industry is responding by providing innovative products to mitigate some of the potential volatility.
Global investment in renewables fell by 14% during 2013, but the percentage of electricity generated by renewable sources still grew, according to the United Nations Environment Program. Renewables accounted for 8.5% of the global electricity mix, up from 7.8% in 2012, and accounted for 43.6% of newly installed general capacity last year.
Swiss Re expects to see a 50% increase in renewable energy investment by the end of this decade, which it says is likely to produce more than a doubling of insurance spending in six of the world's leading renewable energy markets alone. Depending on the scenario, annual expenditure on risk management services could reach $1.5bn to $2.8bn by 2020.
While there was a dip in investment during the recession, this was in part mitigated by the shift in funding sources from West to East. The type of investor is also shifting, with institutional investors such as pension funds becoming increasingly important.
Tried and tested
While capacity for proven renewable projects is readily available, Lloyd's underwriters continue to play an important role in providing cover for emerging technologies. This includes Ascot Renewco, Brit, Catlin, GCube, Sciemus and Markel, amongst others.
"Solar PV (photovoltaic) and onshore wind farms are pretty proven now," says James Green, renewable energy practice leader at JLT. "That technology has been around for 30 to 40 years, so it's quite straightforward to get coverage for those kind of projects, certainly in Western countries."
Emerging technologies - areas such as offshore wind, wave and tidal, concentrated solar power and bio-energy - are more complex to underwrite due, in part, to a lack of track record. Here capacity is more limited and tends to be the domain of Lloyd's specialist renewable energy underwriters.
"For onshore wind farms or solar PV you could easily approach 50 insurers for that project and most would go in 100%," says Green. "But when you go offshore you're talking about five or ten lead players and they all work on a syndicated fashion. [Offshore wind] is more complex and more risky and you need to have experienced leaders on your insurance programme to make sure you're getting the coverage you need."
Insurers work closely with the insured to understand how each project will be risk managed and to offer advice in areas where there have been claims. "I do a lot of wave and tidal energy projects, which are still very much prototypical," says Green.
"The insurers want to support the industry but they don't want to pay for the R&D costs of the industry.
"Generally insurers like to see between 8,000 and 10,000 of successful operating hours for a particular make and model of kit before they deem that to be proven technology and are therefore able to offer the widest defects coverage and other coverage for these projects," he continues.
"Although there is an increasing track record of claims history, there's still a large element of due diligence involved. The underwriter wants to know that risk management is embedded in their company and their project teams."
One area is the laying of cables for offshore wind farms where there has been a high frequency of claims. "Insurers will go into the minutiae," says Green. "They will check out the credentials of the cable-laying crew."
The cost of fixing a damaged cable can be significant because of the specialist vessels required for the job. "Between 40% to 60% of the cost of an offshore wind farm is basically the vessel costs," says Green. "If you have to hire an offshore wind jack-up vessel at short notice and it's not scheduled you could be paying up to $150,000 a day, and that soon ramps up in terms of claims costs."
The rising market share of offshore wind, particularly in Europe, is expected to increase construction risk, warns Swiss Re. Delays and downtimes in offshore wind projects, for instance, are not uncommon and can materially reduce the expected returns on investment.
Covers are now available which can mitigate the financial impact of unscheduled downtime. These products are triggered by one or more parameters such as wind speed or wave height. "They us meteorological information to determine the wave height and if it goes above a certain height the insurance will pay out towards the delay costs," explains Green.
Lloyd's and company market underwriters are at the forefront of such innovation, says Green, offering bolt-on products for weather risk, political and credit risk and performance. This has come about as a result of a "meeting of minds" within various re/insurance companies and within brokerages.
Conventional energy or renewable teams are pairing up with financial risks and weather risks colleagues so that they can offer these bolt-on products whether it is performance risk or the weather cover or increasingly there's been a lot of research into subsidy cover.
Lloyd's insurers and brokers are currently working on a policy that would pay out if crucial state subsidies are suddenly withdrawn from a project.