In recent years, the Renewable Energy insurance market has developed within a softening overall Property market environment, offering clients inexpensive, broad coverage with high limits and low deductibles.
This is now changing. Market hardening in the overall Energy sector has not spared the Renewable Energy portfolio, which sustained poor underwriting results in both 2017 and 2018. After years of unsustainably soft conditions, and a slew of losses, pricing for onshore wind projects has firmed and deductibles are rising. Typical onshore wind project deductibles are now $250,000 for Physical Damage (PD) and 30 days for Business Interruption (BI). Wind rates now range from $0.20-$0.30 before Natural Catastrophe (CAT) loading. Higher deductibles protect carriers from smaller frequency losses, which clients now retain.
AXIS, G-Cube and PERse expect to be profitable in 2019, due to their disciplined approach. While higher deductibles have helped insurer responsibility in respect of gearbox/blade losses, the industry continues to be impacted by multi-million-dollar turbine fires in the $2-7 million range. The industry has also been hit by a slew of losses due to improper installation of equipment and carriers are working to better oversee contractor work to prevent this from occurring. Underwriters seek to manage their exposure to certain contractors whose projects have led to more frequent losses than others, but this is challenging as a small group of contractors dominate the space and carriers dedicated to the industry cannot afford to shy away from every opportunity where they are involved.
However, better terms and higher prices inevitably open the door to competition from other insurers who have been “waiting in the wings” for more attractive terms. Some carriers have opportunistically underwritten the Onshore Wind portfolio before but exited as market conditions deteriorated. Other carriers are strategically entering the wind sector altruistically or to replace premium lost to their withdrawal from the coal-fired generation portfolio, a shrinking sector that some carriers can no longer write at all. There is a need for this capacity, as the traditional Renewable Energy insurers seek to reduce the capacity offered to projects involving large turbines, so as to limit their exposure in the event of a large turbine event – onshore turbines can now generate as much as 4.5 MW. Additionally, Lloyd’s markets backing these renewable insurers have reduced their capacity as well, reducing the line size that these insurers can now offer.
The PV Solar sector has seen large weather losses in recent years involving neither hurricanes nor earthquakes but including tornados occurring in unexpected areas (The Mojave Desert in 2015) and hail (West Texas in 2019).
The impact of lightning strikes is another area of concern. Developers didn’t fully evaluate and design for catastrophe (CAT) exposure when capacity was abundant and cheap, and carriers now are demanding that new projects be engineered to handle these natural hazards. Some speculated that securing coverage for solar projects in CAT zones may become uninsurable; the boom in building wind projects to meet subsidy deadlines has led to timing pressures that predictably result in construction losses. Defective equipment led to a large battery storage event in Arizona, although the defect has been addressed and other measures have reportedly been taken to prevent future problems.
Another way in which carriers are attempting to improve their bottom line has been a significantly increased emphasis on claims management, including root cause analyses and exploring subrogation possibilities where available. This ultimately can benefit both clients and carriers in that these measures can reduce losses paid, which is a component of premium calculations.
Carriers also have increased their focus on risk engineering, particularly in managing contractors and ensuring clients are doing what they originally planned. Historically, carrier involvement in loss control has varied significantly, and in some cases has been completely absent. Strong engineering information and an engagement with the client with respect to recommendations proposed are now essential to securing coverage from most carriers; they utilize engineering services to provide value in project development, providing more to the client than solely capacity.
In addition to deductible and pricing changes, carriers have firmed up their historically broad policy language, adding exclusionary language typical in other property policies, including removing LEG3 defects wording in favour of the LEG2 defects wording accepted throughout most Property forms.
Banks and developers have taken advantage of abundant capacity and a market hungry for renewable energy risks to secure coverage beyond what most would consider necessary. With the ability to buy whatever they wanted cheaply, developers have not needed to think about risk and insurance in a holistic way. Instead they have focused solely on their insurance cost, expecting all other aspects of their coverage to be easily provided at their lenders’ asking.
But now carriers are pushing back on the limit and deductible requirements sought by lenders and lender consultants that they feel are either unsustainable (low deductibles) or unnecessary (full CAT limits when exposure is well below these limits).
Furthermore, with respect to liability risk, some General Liability carriers are expressing concerns regarding solar Independent Power Producers (IPPs) being held liable for wildfires, particularly if the IPP owns the lines to the offsite interconnection point.
In summary, carriers believe that lenders and lender consultants need to make a paradigm shift in their requirements, given what is available in the marketplace with respect to deductibles and scope of coverage. In past years, the competitive insurance marketplace gave lenders everything they asked for, such as low deductibles and coverage enhancements. However, these requirements provided more coverage than clients ultimately needed, at unsustainable retention levels for insurers, and insurers no longer will support these needs. Lender agreement requirements have become obsolete and unattainable from traditional insurers; buyers are therefore being forced to either negotiate changes (or waivers) from their lenders or purchase expensive deductible buydowns and coverage enhancements from opportunistic Excess & Surplus Line insurers to meet lenders’ needs.
Michael Perron is Renewable & Power Generation Leader, North America, Willis Towers Watson, New York.