Insuring a Renewable Future

15 Nov 2019

By Carl Angelo Dill

With change comes risk. This is true of any business, and especially true as we watch the evolution of technologies, distribution methods, and business models in the renewables industry. Prototypical or unproven equipment, such as specialized blades, gearboxes, and new maintenance concepts, requires constant technical evaluation and greater underwriting expertise. At the same time, new financing and ownership structures and cost-saving measures impact operational efficiency, and may result in challenges to long-term loss performance. If these aren’t perilous enough, climate change (associated with more intense windstorms, hailstorms, and flood events) tends to make renewable energy a risky business for insurers and investors alike.

Evolving risk scenarios

Loss trends vary widely by industry sub-segment. For wind, the causes of losses are different between onshore and offshore wind farms. With onshore risks, turbines can suffer from gearbox failures. These are sometimes associated with costly serial losses and fires, similar to those that recently caused insurance claims in the Euro millions, forcing insurers to review their portfolios. Natural perils are another major concern. Events like lightning strikes can cause blade delamination, while windstorms can result in turbine collapses.  

Additional risk comes with the constant evolution of technology. Larger rotor diameters and tower heights can result in higher dynamic loads and complex vibrations, which increase rotor blade stress and impact the drive train. Along with aging equipment, pressure on maintenance budgets, and reduced subsidies, these exposures may affect loss patterns and long-term profitability. 

Causes of offshore wind project losses include sub-sea cables, which account for 70-80 percent of those losses in terms of overall claims amount incurred. From losses of entire cables during transport, to bending of cables during installation, and damage caused by anchors and vessels, sub-sea cable losses have driven multi million Euro claims in offshore wind. While technology risk is a driver in offshore wind, losses tend to be aggravated by complicated logistics such as vessel availability and the need to wait on fair weather conditions to venture out to make repairs. The cost ratio between on- and offshore claims can reach 1:10. 

Solar photovoltaic (PV) panels are subject to a wide range of natural hazards such as windstorm, flood, hail damage, wildfires, and snow load, but are also susceptible to theft, as they are worth from $100 to well over $1,500 each. Other sources of large losses include transformer fires, which can result in business interruption (BI), and frost heave that can damage racking and modules.

Finally, there are storage and distribution risks like undersea interconnectors that bear the risks of sub-sea cables, and battery storage systems (BSS) exposed to thermal runaway (when Li-ion cells overheat and catch fire). 

Insurance trends and challenges

As a growth market, the renewable energy insurance sector has attracted significant capital, leading to a soft market and many challenges for insurers. Premium has developed in line with installed capacity in the industry, which has grown at an annual rate of around 8 percent since 2010. However, recent loss trends in many segments of the renewable energy industry have raised concerns over deductible and rate adequacy. From large hurricane losses to PV plants in Puerto Rico during Hurricane Maria in 2017, to fires devastating onshore wind turbines and repeated theft claims, the renewable energy industry suffers from frequency as well as severity events. Apart from this, challenges include a mix of risk engineering, price modeling, digital distribution, and comprehensive product innovations – all above and beyond traditional insurance solutions. 

Risk consulting and engineering are challenged by rapidly evolving technologies requiring close monitoring of different elements (e.g. new wind turbines being developed and upgraded in ever shorter cycles). Keeping up with international engineering standards, as well as certifications for equipment and projects, is also challenging. 

Predictive maintenance and data analytics will drive innovative concepts for the evolving risks, eventually opening up opportunities for tailored insurance solutions.

Digital distribution continues to be influenced by the smaller size but higher numbers of risks. While utility-scale PV and onshore wind plants can reach installed capacity in the gigawatt range, many installations are on the smaller end; these require more efficient handling. PV and onshore wind continue to be standardized through broker facilities and digital trading platforms. Larger, more complex segments like offshore wind, geothermal, or concentrated solar, require thorough, case-by-case underwriting.

Due to its complex financing and ownership structures, renewable energy demands a comprehensive insurance product offering. Traditional products are often bundled across project phases and lines of business; non-traditional products, such as protecting against a lack of wind or sun, aren’t fully exploited by customers yet, and require further product integration. If implemented before financial closing, these can reduce financing costs and free-up capital. Other products cover upfront decommissioning costs for assets, and lower capital requirements at the start of a project.  

Traditional insurance solutions cover renewable energy “all-risks” across multiple products and lines of business, as well as across project phases: planning liability for architects and engineers during the development phase; cargo all-risks and delay in start-up (DSU) during the transport phase; erection all-risk, advance loss of profit and project liability products during the construction phase; and operational all-risk, BI and public- and product-liability covers, as well as environmental liability, during the operational phase. 

Recently, there has been an uptake in multiline demand (marine, liability, engineering) and the tendency to pool them into one policy, as well as an increased interest for alternative risk transfer solutions such as so-called “proxy revenue swaps”. These are financial derivative contracts offered to wind farm developers and other renewable projects guaranteeing revenue to fall within a certain range, regardless of meteorological factors.

Insurance will continue to evolve with the renewables industry as we move forward to a greener, more sustainable world.

 

Carl Angelo Dill is Global Senior Underwriter, Renewable Energy for Allianz Global Corporate & Specialty. He manages the global Green Energy initiative for AGCS. 

Allianz Global Corporate & Specialty | http://www.agcs.allianz.com

 


Author: Carl Angelo Dill
Volume: 2019 November/December