Financing Renewable Energy Risk Is Challenging. Can Carriers Deliver Consistent Pricing and Terms for the Industry?

By: Jason Kaminsky | December 8, 2023

Jason Kaminsky is the CEO at kWh Analytics. Just prior to joining kWh Analytics, Jason spent more than three years as a Vice President of Environmental Finance at Wells Fargo Bank. As a senior member of the Wells Fargo deal team, Jason originated, underwrote, and financed tax-equity investments during a time when the bank added nearly $1bn of solar assets. Prior to joining Wells Fargo in 2011, Jason worked at SPG Solar, where he supported the CEO on strategic corporate initiatives.

Topics: Renewable Energy | Risk Insider

The renewable industry looks to be at an inflection point — yet new opportunities still lie ahead. Benefits from the Inflation Reduction Act are now starting to be realized, with 2023 utility-scale solar deployment rates forecasted to be double those in 2022.

The U.S. solar industry appears to have weathered strong headwinds from delayed IRA guidance, supply chain disruptions, labor shortages and rising capital costs that exacerbated project delays.

Though near-term hurdles persist, many remain confident IRA tax credits will drive renewable energy expansion long term as the industry works through current issues. From unpredictable pricing to battery fire hazards, insurance remains a complex issue for renewables, but innovative solutions are emerging amid the uncertainty.

A Volatile General Liability Landscape

General liability coverage for the renewable energy industry, particularly solar PV and energy storage, remains unpredictable and inconsistent.

Unlike more established industries, there are no standardized insurance rating codes specifically for renewable energy general liability exposures. This results in significant variability in how different insurers assess risk and price coverage.

There is not yet industry consensus on a rating methodology — some base rates on megawatts, acreage, policy limits, or other factors — making pricing difficult to predict. Brokers want more standardization and consistency to provide clarity on benchmark pricing and properly advise their renewable energy clients.

Overall, renewables general liability is still a “Wild West” market with ample opportunity for an insurer to lead in bringing structure and consistency.

Could Parametrics Plug Excess Coverage Gaps?

Interest in parametric insurance options to cover weather risks like hail damage for solar projects is rising, as finding affordable excess hail coverage has become increasingly difficult.

Parametric policies pay based on an event trigger rather than actual property loss. These structures are gaining some traction as a gap-fill alongside property policies, though they may be a tough sell for clients wanting guaranteed payouts for damage.

The parametric trend highlights an increasing appetite for capacity solutions amid a hard property insurance market. Overall, parametric insurance appears to be an evolving option, but there is still more to be learned.

Battery Fires: A Burning Dilemma

Uncertainty remains around best practices for mitigating battery fire risk in energy storage systems.

Some battery operators promote fire suppression for lithium-ion batteries as an important safeguard, while others suggest these systems have limited effectiveness. Letting batteries burn in a controlled manner may be preferable, since, as one fire suppression expert said, “nobody has yet figured out the technology to put out a lithium fire.”

Effective solutions likely involve focusing on early fire detection and prevention through thermal management and load-balancing software to predict and prevent thermal runaway.

However, upgrading fire safety capabilities on older nickel manganese cobalt (NMC) batteries appears limited, raising concerns these systems remain vulnerable compared to newer lithium iron phosphate (LFP) technologies — which themselves have caught fire over the past year.

Overall, battery fire hazards persist, especially with aging NMC storage sites, though the technology shift towards less fire-prone LFP chemistries should help incrementally. Underwriting experience to effectively manage battery system fires will be key, highlighting batteries as still a challenging market within the broader renewable energy segment.

Resilience and Contingency Planning Are Key to Minimizing Business Interruption

Supply chain disruptions and lagging equipment lead times are leading to tighter business interruption (BI) and equipment breakdown insurance terms, and increased scrutiny of indemnity limits and revenue cycle time assumptions for renewable energy providers.

As more renewable projects seek the Production Tax Credit, BI limits within property policies are forecast to increase significantly, exposing carriers to more operating risk.

As a result, carriers are considering longer BI waiting periods to share some risk with insureds. Policyholders can proactively mitigate time-related disruptions and instill confidence in insurers by implementing resilience and contingency strategies.

Securing alternative suppliers of critical equipment and parts and having a repowering plan in place for aging equipment can significantly reduce lead times, which in turn can shorten the waiting period allowed by the insurer.

Looking Forward

The renewable energy industry is at a crucial juncture, with the Inflation Reduction Act catalyzing growth despite ongoing challenges, underscoring the sector’s durability in the face of obstacles such as delayed guidance, supply chain disruptions and labor shortages.

In response to emerging complexities, the industry is exploring innovative solutions to address gaps in coverage and tighter terms, especially for weather-related risks like hail damage. This trend reflects a growing appetite for capacity and resilience solutions amid a challenging property insurance market. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.