the problem with Business Interruption (BI)
Introduction – conventional risks still to the forefront
According to figures produced by the International Energy Agency (IEA), world electricity production was circa 24.3TWh in 2017. Upon further analysis, the IEA figures also show that generation from combustible fuels continues to account for over 60% of the total production figure, as shown in Figure 1 below.
Whilst renewable forms of power generation worldwide continue their growth at an extraordinary pace against the backdrop of ongoing climate change policies and the resulting push for clean energy, the fact remains that conventional power will remain a significant source of electricity generation for the foreseeable future.
This presents ongoing challenges - not only for the industry itself, but also for the insurance market supporting the industry. Whilst projections predict a reduction year on year in generation from conventional power sources, in favour of renewable sources, the ongoing risks for insurance buyers remain as important as ever.
Underlying causes of power losses
An analysis of losses occurring globally since 2015, derived from our WTW Energy Loss database, have identified some interesting trends with regards to high level causes of losses.
Mechanical failure responsible for 50% of all losses
In almost all regions, mechanical failure is identified as the most significant cause of loss; this in itself is probably not surprising, given the age and operational parameters of generation equipment coupled with the ongoing increase in demand for power.
However, given this and the comparable values associated with these claims, insurers (both from an underwriting and claims handling perspective) will continue to be keen to fully understand the planned maintenance and outage schedules to ensure that the recommended requirements are complied with.
OEM/O&M contractual obligations critical In parallel, the contractual obligations and responsibilities of the Original Equipment Manufacturers (OEM) and/or the Operations and Maintenance (O&M) Contractors remain a key component in assessing - and indeed limiting - insurers’ potential exposures when failures do occur.
PD losses outstrip BI
Since 2015, the value of global Physical Damage (PD) claim costs have exceeded Business Interruption (BI) costs in terms of overall quantum for losses. This may be put down to a number of factors, including the successful mitigation efforts on behalf of operators or simply that the reinstatement has taken place within uninsured waiting periods.
BI claim challenges
Of course it is well understood that for a BI claim to succeed there is a requirement for damage to be suffered as defined within the relevant damage section of the policy, irrespective of whether the quantum is within policy deductible levels. In our experience, this can cause issues where the root cause of a loss is unable to be determined easily or expediently.
Insurers’ tendency is to wait for a conclusive position on cause prior to any admission of liability, even under an All Risks policy form. This in turn causes frustration for the Insured, who is trying to manage cash flows and projected insurance recoveries as part of their financial reporting, both internally and to external shareholders.
One way for all parties to try to reduce these concerns is to agree on a common expert to carry out the Root Cause Analysis, although the willingness and openness of the OEM/O&M plays a huge part in achieving a clear and agreed position.
Non-damage BI However, there are many examples of Business Interruption losses suffered by power generation companies that have not been paid by insurers due to the absence of insured damage, or as a result of technical arguments on exclusions relating to defective parts or wear and tear, ultimately leading to a lack of policy response and significant uninsured losses.
This issue has provoked plenty of discussion within the insurance markets around the world as to whether buyers, their advisors and insurers should continue to explore the development of a form of non-damage business interruption cover which responds when the costs associated with repairs or rectification have been met under maintenance or warranty obligations.
Meanwhile, operators remain at the mercy of OEMs and O&Ms in terms of expediting effective solutions and any significant delays directly impacts the operators themselves and their bottom line.
Conclusion – same issues arising in the renewables sector?
As we approach the third decade of this century, the overriding question is perhaps this: will any of these issues diminish as we move further away from conventional thermal generation?We are already seeing similar issues within the wind, solar and hydro sectors, with the same concerns and frustrations experienced by buyers and insurers alike. However, as generation from these alternative sources continue to expand and new generation sources develop further, the insurance industry needs also to remain open to explore alternative solutions to meet the buyer’s needs. To quote Socrates: “The secret of change is to focus all of your energy not on fighting the old but on building the new.”
Chris Ling is Claims Executive Director for Natural Resources at Willis Towers Watson in London.
