risk management challenges for the renewables industry
Introduction – “Another Mexico now”? ‘There is another Mexico now’. This is the bold statement from Mexico’s new President Andres Manual Lopez Obrador, who promises to end corruption, reduce violence and address Mexico’s poverty.
But what does this mean for renewables in the country? Mexico is emerging rapidly as a world leader on energy reform and renewables, through its long term auctions and the introduction of Clean Energy Certificates (CECs) in 2018. These energy reforms aim to increase the amount of electricity generated from clean sources, including nuclear energy, to 35% by 2024 and 50% by 2050. It is anticipated that the Mexican market will add approximately 15GW of solar PV by 2022, placing it in the top 10 markets worldwide.
For the moment, it appears that Lopez Obrador is supportive of the clean energy agenda and has indicated his intention to accelerate Mexico’s transition to renewable energies through several means, including connecting 45,000 rural areas to electricity through renewable sources, and giving tax incentives and credits to firms that run on renewable energies.
Natural catastrophe vulnerability But the growth and opportunity which has characterised the last decade of Mexico’s history is of course threatened by its vulnerability to natural catastrophe. The threat is only going to intensify as a consequence of climate change, growing populations, urbanisation and increased wealth (and therefore higher values at risk). Without a doubt, insurance has responded to protect economies and communities from these risks. The 2017 record natural catastrophe losses, three Category 4 Hurricanes and two earthquakes, cost the insurance industry approximately US$135 million.
The insurance market reaction As a consequence, and in a generally hardening market, insurers are taking steps to reduce their exposures through imposing higher premiums (particularly for those clients dealing with pending claims), deductibles (typically US$250,000) and coverage restrictions (for instance, an annual aggregate limit and/or sub-limit). In fact, it is becoming the norm for underwriters to either decline business or offer smaller lines in territories with higher natural catastrophe exposures, such as Mexico, which clearly demonstrates the impact these losses have had on the insurance market.
Cargo theft increases insurance rating levels as Delay in Start-Up capacity pulled Whilst the threat of natural disaster has always been present in Mexico, cargo theft has become a sudden major concern in recent years, with more than 4,000 thefts in 2017, and a 108% increase in cargo thefts in the first quarter of 2018. The biggest impact of the robbery surge on logistics companies and project developers has been the increase in insurance costs. As a result of several fairly large claims paid for theft of containers of solar panels and other key equipment whilst en route from port to project site in Mexico, many (re)insurers are withdrawing their Marine Cargo / Marine Delay In Start Up capacity, and/or imposing a higher premium rate and/or higher deductibles for theft or hijacking (typically between US$50,000 – 100,000).
New security conditions It is becoming common place for (re)insurers to impose security conditions when offering marine cargo coverage, such as:
Alternative solutions As traditional Marine (re)insurers seem more and more reluctant to accept more theft exposure in these high risk areas, it is becoming increasingly necessary to investigate alternative solutions, such as purchasing a Terrorism policy with an Organised Crime extension, including such cover for project equipment in (inland) transit to the project site. However, depending on the risk, this can be an expensive alternative solution.
Conclusion – problem set to intensify The problem is only set to intensify, since port cargo volumes are ever increasing year after year and the country’s ports and highways are being heavily invested in to support the fast-growing manufacturing sector. Mexican shippers and transportation providers have called for a reduction in the country’s deadly violence and cargo theft; it remains to be seen whether President Lopez Obrador can address Mexico’s deepening security crisis through his plans for ‘another Mexico’. Until then, policy holders can expect growing insurance costs and a focus on transportation security.
Melanie Carter is an Account Executive in the Renewable Energy division at Willis Towers Watson in London.
All sources for this article are from the following websites:
https://www.joc.com/rail-intermodal/mexican-cargo-theft-spike-rattles-shippers_20180601.html https://abcnews.go.com/International/mexico-now-countrys-president-reflects-challenges-ahead/story?id=59516091 https://www.renewableenergyworld.com/ugc/articles/2018/03/01/mexico-reform-and-renewables.html https://mexicoelectionsblog.weebly.com/energy-and-environment.html https://www.lloyds.com/news-and-risk-insight/speeches/2014/mexico-and-catastrophic-risk https://www.theguardian.com/world/2017/oct/20/hurricanes-and-earthquakes-will-cost-insurance-industry-72bn https://www.insurancejournal.com/magazines/mag-features/2017/11/20/471195.htm https://www.axa.com/en/spotlight/story/next-stop-mexico-part-1-resilience-in-the-face-of-natural-catastrophes https://www.ttnews.com/articles/cargo-theft-explodes-mexico https://www.joc.com/rail-intermodal/mexican-cargo-theft-spike-rattles-shippers_20180601.html http://www.aimuedu.org/aimupapers/MexicoWhitepaper.pdf https://www.joc.com/port-news/international-ports/new-and-old-challenges-dog-fast-growing-mexican-shipping_20180821.html https://www.thedialogue.org/analysis/will-amlo-be-able-to-bring-peace-and-security-to-mexico/
