A Hardening Renewable Energy Market Renews Interest in Basic Risk Management
Renewable power took an undeserved knock when Winter Storm Uri ravaged Texas in February.
Given multiple progressive failures in resiliency, redundancy and regulation that came to light across the many investigations of the crisis, wind and solar shortcomings were among the lesser problems.
That said, the storm came at a time when the insurance market for renewable energy was already hardening. The number of claims in renewable energy soared a vertiginous 2400% from 2010 to 2019, according to a widely cited report, “Hail or High Water,” issued by specialty underwriter GCube, which has been insuring renewables for more than 25 years.
Some underwriters and syndicates have left the sector while others have reduced capacity. Rates have risen sharply, terms and conditions have become stricter, and sub-limits have been imposed.
Underwriters say the restructuring of the sector is necessary to ensure viability, and brokers concur there is little disagreement of that reality among insureds. Still, there is some concern about a chilling effect on growth if insurance costs significantly change the financial picture for some projects.
A Hardening Market
The hardening of the market is driven by rising frequency and severity of losses, which in turn is driven by climate change.
Notably, the big winter storm in Texas did not inflict major property losses on the renewable sector, but huge financial losses are looming over the entire power industry. Taken together the structural shifts are driving a return to fundamental risk management.
Ideas range widely, including wider use of catastrophe bonds and parametric coverage and operational and engineering changes to improve resiliency.
Patrick Hauser, senior underwriter in energy property at Swiss Re Corporate Solutions (SRCS), explained that losses in renewable energy have become bigger and less predictable. Losses from hail, a major threat to solar arrays, as well as wildfire and windstorm have increased in frequency and severity.
Noting that a few carriers have left the segment, while some others have reduced their exposure, John Ravenna, head of energy property for North America at SRCS stressed that his firm is sticking: “Renewable energy is extremely important to our strategy and also to the well-being of the global community.”
That said, he acknowledged profitability in the segment is difficult, and most carriers are raising rates and deductibles while imposing sub-limits on some perils, such as hail.
Turning to the recent winter storm that ravaged Texas in February, Brian Beebe, head of origination for weather and energy in the Americas for SRCS, said that from the traditional property perspective, it was not a major event.
“There were extraordinary losses on the power price side. There are already at least 10 major lawsuits arising from lack of power production during that five- to six-day period. The dollars at stake are huge, already around $700 to $800 million,” he said.
Beebe also noted there is already starting to be a knock-on effect.
“Renewable power developers in other regions are seeing the economic carnage in Texas and [are] now coming to the market wanting to address those 1-in-5-year and 1-in-10-year events,” he said.
There are other potential risk transfer approaches, but those are not yet being widely discussed.
“One of particular interest would be climate catastrophe bonds issued by regulated utilities or states. The CAT-bond market has the capacity for meaningful amounts of risk transfer,” Beebe said.
Given the multi-billion-dollar exposures across Texas and other affected states, Beebe suggested that “CAT bonds would likely be attractive for Texas, across the Gulf Coast, and also in the Caribbean.”
Alternative Risk Transfer Solutions
In the nearer term, Hauser expects the renewable power insurance market will continue to harden. He added, “We and some other carriers offer alternative risk transfer [to developers], if [their] lenders are agreeable.”
“Wind and solar are 95% of our business. But we’re not banging the drum just for renewables; we are banging the drum for an energy mix. And also for the equitable sharing of risk,” Fraser McLachlan, CEO of GCube said.
“Two decades ago, projects were much smaller, and banks and investors have gotten used to accepting very low levels of risk. The deductibles and excess they have insisted on have not changed much until just the last two or three years. Now we are trying to drive a rebalancing. Lenders and investors are going to have to accept more risk, or there could be a question if there will be a market at all.”
McLachlan acknowledged that not only puts financial pressure on developers but also puts some responsibility on underwriters.
“People have been offering ridiculous deductibles given where the industry has gone over the past years. People got in thinking it was easy money. Some have pulled out.”
With a nod to alternative forms of risk transfer, McLachlan added, “The majority of our clients were pretty smart in their power-purchase agreements, [meaning] there were provisions for constraints [on generating]. Some contracts did have an obligation to supply. There is separate insurance for that.”
Parametric coverage “has been a harder sell,” McLachlan said, “but it is becoming something a smart developer or backer will consider. There has been more interest since the storm in Texas.”
Brokers confirm the rapid restructuring of the market.
“Until about five years ago, there were only a handful of carriers,” said Carol Stark, U.S. renewables practice leader for Aon.
“They competed aggressively on attachment points, limits and pricing — until the losses started to come in. It’s the soft CAT losses that are the true driver. The industry is well able to model the big CAT perils.”
Stark is a supporter of comprehensive risk management.
“Before developers and backers turn to traditional risk transfer, they need to focus on good risk management. That is exactly what we are working on with our insured.”
Part of the challenge, she explained, is that many of the financial structures providing capital to developers, such as tax equity agreements and loans “were created in soft market conditions. Finance parties are about two to three years behind. The party that is stuck in the middle is the owner/developer. All the parties [carriers, insureds, backers] need to step back from where we are and evaluate where we are going.”
Stark also advocates diversifying risk transfer, including quota-sharing and layering programs, excess difference-in-conditions coverage, and parametric.
“Better structures, and non-insurance components are available. It’s just a matter of education, and we are having discussions about greater flexibility with some the new financial parties,” she said.
Katherine Klosowski, vice president and manager of natural hazards and structures at FM Global, said the focus is on “breaking the cycle” of soft markets turning hard. “When you prevent losses you can break the cycle,” she explained.
As an example, she noted that developing technology and equipment, as in renewable energy, may not be designed and installed with hazards in mind. The focus is on performance and profitability rather than persistence.
“The surface of most photovoltaic cells is glass,” said Klosowski.
“Our testing has found that 4mm glass can withstand hailstones up to 2 inches in diameter. We saw the same sort of thing in passenger cars, as safety devices became standards.”
She noted that on their own, makers of solar cells have no incentive to use more durable surfaces, “but insureds can break the cycle for themselves.”
Keeping the long-term growth of the renewable energy sector in mind, Tom Dickson, CEO of New Energy Risk, a subsidiary of AXA XL, said, “There could not be a more exciting and challenging time in renewable energy. There are ways to improve the dynamic — the situation is not too different from the D&O/E&O crises in previous decades. There are lots of options for insureds, including captives and group captives, as well as cat bonds.”
The fundamental problem, Dickson explained, “is that the premium for property is relatively small. That concentration is a concern. That is good tension, because it means there are going to be changes. There have to be. Renewable energy is a societal imperative, and renewables will continue to have continued investment. There are definitely engineering solutions and preventive measures.”
In addition to the measures that are available to owners and developers, Dickson said that his firm “has a very expansive view of renewables, from biomass to fuel cells to energy storage. That we you can’t say that this corner or that corner did not do so well so there is a crisis. We are trying to expand what is insurable to expand the premium volume and diversify the risk.”
He is also confident that all measures — diversification, greater profitability and risk management — will be effective.
“We are only at the front of the repositioning. Capacity will come back. It may not be the ones who came early and left, but new entrants will not have legacy problems. Terms and conditions will tilt back to better balance for the risk takers and that will attract more capacity.” &