Oh, the Irony: Climate Change-Related Catastrophes Put Green Energy Infrastructure in Peril

A newly released report by GCube looks at how the renewable energy sector will fare with the potential of frequent Nat CATs.

By: Alex Wright | November 11, 2022

The insurance industry may turn its back on the renewable energy sector if it endures another year of unprecedented natural catastrophe losses like 2022.

That’s the view of Fraser McLachlan, CEO of GCube Insurance, which recently published its North American Nat CAT Update report.

The study has found the North American renewable energy industry sustained record losses running to the hundreds of millions of dollars from extreme weather events this summer, with McLachlan telling Risk & Insurance® that he estimates total losses to be around $700 million, excluding Hurricane Ian, with insured losses coming in between $350m to $400m.

“It’s by far the worst year for natural catastrophes that we have seen to date,” said McLachlan. “And the trend is only going to get worse, as we have seen in previous years.

“It’s the perfect storm: there have been a plethora of catastrophic losses in a very short timeframe; insurers have been hit with $50 billion to $70bn in losses from Hurricane Ian; and reinsurers need to increase pricing to cover their costs. And my biggest fear is that, if we have another year like this, insurers could decide to stop offering coverage for renewables altogether.”

Then there are the multiple supply chain shortages and delays, and significantly increasing repair and replacement costs for insureds caused by the current inflationary environment. The very matter was raised as recently as September by U.S. renewable energy insurance market leaders at GCube’s annual advisory council meeting.

Dramatic Weather Pattern Shift

According to the GCube report, as a result of some of the most destructive natural catastrophes in recent years caused by a dramatic shift in weather patterns, the renewables sector has vastly exceeded many of its sub-limits of up to $50m. Most of the damage has stemmed from unmodeled weather events such as hail and windstorms, which are far more prevalent and damaging than traditional catastrophes like hurricanes and flooding.

Additionally, as renewable projects have increased in size, so a greater surface area has been exposed to these events. Most vulnerable are solar installations, with 80% of claims arising from external events such as flooding, hail and tornadoes.

Worse still, current predictive models are struggling to keep up with these unprecedented events. And the financial impact of these losses is hindering the development of robust mitigation strategies to tackle the problem.

“While the increasing frequency of extreme weather and Nat CAT events is not surprising to us, the rising severity of losses and the industry’s continued difficulty in managing these risks is a concerning trend,” said McLachlan. “The unprecedented growth potential unlocked by the Inflation Reduction Act will count for little if the North American renewable sector is unable to combat extreme weather risks.”

The fact is that the market correction hasn’t gone far enough to address the growing severity of these events and protect the U.S. renewables sector’s sustainable growth, the study has found. But so severe is the problem, that a significant rate rise could jeopardize the growth of the U.S. wind and solar segment faced with these evolving risks, it has cautioned.

“The solar market, in particular, has been underpriced for years now,” said McLachlan. “Insureds have become so used to a certain pricing that when it has to be put up so that re/insurers can cover their costs, it comes as a big shock and often means they aren’t able to go ahead with building the renewable project because they hadn’t factored it into their initial budgeting.”

Increasing Unmodeled Events

The situation is only going to get worse, the report has revealed, as unmodeled events are on the rise, outpacing modeled catastrophes in terms of frequency, with 40 severe storms encompassing high winds, hail, tornadoes and derechos recorded over the last three years. That compares with 13 traditional windstorm events such as hurricanes over the same period.

They’re also more severe, as evidenced by the fact that hail losses in Texas alone this year are projected to reach in excess of $300m. In context, that’s almost 10 times the estimated losses from Hurricane Hanna in 2020.

Among those installations which have sustained the most damage, solar has been far more impacted than wind since 2020, both in terms of claims frequency and severity, with operational projects and those under construction alike exposed to losses. That is in stark contrast to technological developments in wind turbines, which target scale, strength and weather-proofing against severe events such as typhoons.

The study has concluded that the renewables industry needs to do more to improve the quality and strength of materials used in its structures and facilities. For example, solar technologies have proven particularly vulnerable to hail, exposing weaknesses in the sector’s current impact testing standards: the International Electrotechnical Commission’s hail tests uses 25mm projectiles, which are half the size of the average hailstone from a severe hailstorm.

Better Historic Data Usage

Moving forward, risk modelers and insurers need to use available historic weather data to track these unmodeled events. By determining an established pattern of events, they can more accurately assess, mitigate against and underwrite the risk.

Losses must also be separately logged for each type of event to help model more effectively against that specific peril. For example, distinguishing between tornadoes and derechos.

For their part, project managers and renewable energy firms need to work with their insurers and brokers to regularly revise sub-limits. That requires using the latest understanding of natural catastrophe and extreme weather risks to ensure their assets are fully covered in the event of a claim.

McLachlan concluded: “Concerted effort is needed across the value chain to strengthen policies, improve data utilization and update modeling and testing procedures and support sustainable growth for the sector. Our latest report issues a clear call for collaboration in the U.S. renewables industry to develop measures to combat the fallout for extreme weather and support a stable, successful energy transition.” &

Alex Wright is a UK-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected].

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.