The relationship between the Renewable Energy insurance market and developers, owners, operators and investors in assets producing green, clean or low carbon power is becoming increasingly challenging. This challenge is resulting from the rapid deployment of new technology and projects installed in new locations, coupled with the maturity of other projects. This is set against a backdrop of the hard insurance market, capacity limitations, sector losses and a desire by insurers to carefully select their risks and clients, reflecting a change of approach away from seeking premium growth and instead towards a focus on quality and good claims performance.
As we articulate later in this part of the Review, insurers are keen to keep pace with the accepted trajectory of the global energy transition; however, this does not come without its due diligence. While capacity providers may publicly announce their ability to write business, pointing to their lack of treaty restrictions and their commitment to the sector, it’s unlikely that the floodgates will open to all technologies, insurance product lines and generating assets.
The interest shown in this sector by fresh underwriting capacity is certainly having an impact, softening the blow for 2021 compared to conditions in the conventional Power and broader Downstream market. However, it is an underwriter’s job to complete accurate diligence on the material risks to assess, and then set a rate commensurate with the risk. Whilst there is undoubtably an increase in interest globally in the level of new project opportunities, we can expect insurers to remain very circumspect about the relationships they engage in and the price of their product.
So if there are to be these limitations, what does this mean for insurance buyers? Outlined below are some of the key challenges that the industry will face in terms of procuring insurance cover in 2021 and beyond.
While there has been a renewable energy renaissance over the last few years, it’s worth pointing out that renewable energy projects have been widely deployed for the last few decades - just not at today’s frequency and scale. There is now a substantial generation base consisting of assets in excess of five years of age with proven, consistent operating experience and revenue streams, which are likely to be attractive investments for private equity or established operators wishing to expand their portfolios.
However, insurers are likely to find these older assets to be less desirable from an insurance portfolio perspective; indeed, the technology manufacturer, operating platform, client and project experience will come under intense scrutiny. It is likely that most of these assets no longer benefit from the original equipment manufacturer warranty; without a commercial extension, insurers would consider this to represent a substantial increase in risk exposure to their underwriting account. When insurance buyers are projecting insurance costs in their financial models, in addition to the hard market adjustment discussed in this Review, they should also anticipate up to 20% increase in Property insurance premium costs on expiry of the original equipment manufacturer warranty; this is rarely taken into consideration in premium modelling projections. Similarly, the likely reduced premium cost for securing an extended warranty is rarely taken into consideration as a cost mitigant when considering whether to buy a warranty extension.
With renewable energy technology rapidly advancing, newer and more efficient models with enhanced material and manufacturing processes are routinely introduced. These significant advances create a real opportunity for the sector to reduce costs and challenge the Levelized Cost of Energy (LCOE). Unfortunately, as factories systems and processes are aligned to deliver the latest operating platforms, this can create pressures on the availability of spares for the previous years’ technology, which are now out of production. In today’s world, we are familiar with redundant technology; most of us would hardly entertain the idea keeping and maintaining our phone model for 20 years!
There are many operators who, after years of continuous operation of their assets, feel comfortable with taking responsibility for operations and maintenance on an in-house basis. Insurers will naturally defer to the comfort of known dependency of OEM full-service availability contracts, with guaranteed or proprietary calling on the available spare’s pool. With the level of deployed assets globally, there is an increased movement towards taking responsibility in-house, which can produce economic benefits for the operator.
However, until the insurance buyer can demonstrate that their organisational culture, internal controls, experience of their workforce, availability of maintenance and capital spares are effective, insurers are likely to take a pessimistic view. But if the buyer can prove their position by ownership or asset-sharing of critical spares, they are likely to benefit from preferential terms with their carriers.
Natural catastrophe (Nat Cat) risk is probably the single greatest challenge to renewable energy community assets around the world; it’s is also ironic that the deployment of low carbon technology is such a significant part of the fight to address climate change. Having said that, by historical standards this most recent review period has been relatively good from a Nat Cat perspective for insurers (even when considering wildfires). The historical exposure and losses sustained to renewable energy installations has made insurers reassess their understanding of maximum potential loss, the level of risk to which they wish to be exposed, their capacity deployment and their pricing.
However, the changes in the climate, its predictability, volatility and impact on the industry are being widely felt from earthquake, flood, wind, hailstorm and wildfire. Perhaps five years ago insurers would have assessed that their Probable Maximum Loss (PML) - the risk to which they are most greatly exposed - would be geared to the electrical equipment, considering that the wide footprint of their system should greatly reduce the potential exposure to a loss which is close to their Total Insured Value (TIV).
Today, their exposures to Nat Cat are being assessed as key risk factors, with heavy modelling, more limited capacity and higher deductibles; this change in focus is also resulting in the broad imposition of sub-limits of cover for losses arising from these risk scenarios. Insurers consider that they are also increasingly exposed to weather events which are in themselves not considered to be Nat Cat events due to their size or because they fall outside accepted seasons. As a result, we are expecting the market to harden further in respect of weather and Nat Cat cover during 2021 and price and cover for Nat Cat remains a key challenge.
According to Fraser Mclachlan, CEO at GCube1, since 2010, Nat Cat claims for onshore wind projects have become more frequent, steadily rising to more than 5 a year from 2015 until 2019 (the last full underwriting year at time of going to press). These losses were also increasingly severe, reaching nearly $80 million in 2016 after a series of devastating losses caused by Hurricanes Harvey, Irma and Maria, as well as tornadoes and ice storms.
The most frequent Nat Cat losses during the period 2010-2019 period resulted from named windstorms and floods. Named windstorms have caused consistent losses throughout the past decade, with a usual rate of one major claim per year – however, as hurricanes and typhoons become more frequent and severe, and their paths less predictable, the number of projects affected dramatically increased in 2018.
Conversely losses due to flooding, while less frequent than named windstorm losses, can be much more severe financially due to the prolonged periods of the event, exacerbating the extensive Business Interruption while resolving the claim. Flood claims are also growing, as weather patterns around the planet become less and less predictable - while the average claims due to flooding were approximately $2 million in 2015, flood claims in 2019 averaged $14 million. Extreme cold can also result in significant damage; hailstorm losses average $18 million due to widespread asset damage.
For insurers involved in the market for the last 10 years, it would be fair to conclude that there has been a slow maturing of claims knowledge as real volume loss data has become available. According to Nigel Spencer – Global Development Manager, RSA.:
“Whilst it is well known that poor experience has plagued the market for a number of years, we are now getting much more knowledgeable about which characteristics of a risk drive this poor experience, leading to recent cover revisions and appetite changes across the London Market.
Interestingly, Solar and Wind technologies demonstrate different behaviours when it comes to loss patterns; Solar is much more susceptible to natural perils, particularly windstorm and its cousin sandstorm. Combined with the much rarer but costly hailstorm, wildfire and flood events, these account for between 40-50% of identifiable claims costs.
On the other hand, Wind seems less prone to catastrophe events, the bulk of notified losses staying stubbornly in the mechanical arena, whether caused by accident or design. That said, the key driver for poor loss experience is the Fire claim, where irregular but high cost losses of individual turbines account for over 30% of losses.”
Determining the correct sub-limit relative to the overall risk is very subjective; this is driving an increased focus on the risk location, the data assessed and its qualitative application relative to local or international design considerations. Insurers are concluding that the overall risk exposure to their account of a substantial loss incident to a full insured value is not worth the relative premium to their account.
During 2020, insurers became more aware and focused on the increased risk presented by vegetation management, specifically by Solar PV Projects but also more broadly by recent market wildlife losses in Australia and California (please see Jamie Markos’ article earlier in this Review). These have demonstrated insurers’ substantial exposure to hot, dry locations, where the grass underneath and the surrounding the sites become extremely dry and overgrown if not maintained correctly; this in turn leads to fire spreading easily though a site if the vegetation is ignited. Submitting a vegetation management plan at the time of securing terms, or having conditions attached to adherence, is likely to be a common feature in 2021.
Probably the second greatest challenge for developers and operators – and for consideration by insurers – is the experience of the contractor parties. To support senior debt requirements in project financing and many owner operators’ preferred procurement strategies, frequently project insurance covers are put in place on assets by the owner, which include the benefit of covers to all parties connected with the project on a co-insured basis.
In the last few years, there has been an increased concern that highly experienced and respected developer, owner and operator parties are contracting with parties whose failures have resulted in substantial losses. While insurers spend considerable time assessing their exposure to external perils and influences, the frequency of incident causes which may be put down to contractor negligence will undoubtably drive insurers to greater diligence around the assessment of the contractor’s reputation, performance and conduct during any claim’s settlement process.
Most developers will have pre-qualified suppliers who will competitively bid to deliver the projects. Insurers’ opinions regarding the technology provider, the technology or the ability of the workforce to act professionally and safely to perform their contracted works, will impact premiums going forward. While proof of sole negligence on behalf of one party is very subjective and difficult to prove, we can expect insurers to have a greater focus on recovering from the negligent party.
The losses sustained are no doubt a factor in the substantial increase in deductible levels seen over the last review period during the construction phase. Most Physical Damage deductibles are passed through by the owner/developer to the contractor on a back-to-back basis. An increase is seen as a direct response to making contractor parties more accountable for their own failures, either in the equipment supplied or the actions of their workforce. Developers should expect to have increasingly challenging discussions with their contractor parties over retained risk.
During 2021 it is likely that we will see greater challenges to the very wide waivers of rights of subrogation which have historically been achieved. Moving to permit insurers to maintain recourse against contractor parties, should it be possible to substantiate that losses, originates from the lack of due care and attention – effectively contractor negligence. This is likely to drive increased insurance costs for what will effectively be dual insurance; primary covers being affected by the employer responding on prima facia property damage, contractors will be obliged to maintain their own secondary (contingent) covers and employers’ insurers will make recoveries where they believe the root cause is sufficiently strong (or not disclosed) to support recourse against the contractors. This could effectively add contractor’s negligence to the definition of a vitiating act under an owner-arranged insurance programme.
Insurers have voiced their concerns around the widely reported use of contractors engaging transient, inexperienced backpackers in Australia to assist with solar PV installations. Furthermore, the market has suffered from a number of wind turbine technology losses resulting from the failure to remove a rotor lock pin before energisation, another example of a workmanship issue.
Whilst re-financing is common, the original debt term is often 20-25 years, which represents long-term financing against the anticipated revenues expected to be generated by an asset. These long-term financing agreements make several stipulations around minimum mandated covers, maximum deductible levels or permitted exclusions.
With the increased deployment of renewable energy assets globally over the last five years, many financing term sheets were executed in a soft insurance market. While it’s common to achieve a level of flexibility relative to what is “commercially available” in the insurance market, many agreements contain minimum insurance schedules which are reflective only of the softer market terms available exclusively at the time of execution. The challenges presented by the hard insurance market are being acutely felt by many financed projects; they either have to pay substantial increases to achieve the mandated level of risk transfer and deductible positioning or to embark on a process of seeking technical waivers from their lending parties.
While newer financings will at least recognise prevailing market conditions, older agreements where assets are still operating have substantial pressures to balance what they can (or are prepared to) pay for a level of cover which is considered appropriate by their lending parties with their own low risk tolerance. This is particularly felt by renewable energy assets located in high Nat Cat locations where, as discussed earlier, increased deductibles, often ranging into several million dollars, have to be supported by the Special Purpose Vehicle balance sheet.
The rapid escalation in technology in terms of size, complexity, logistics, proven experience and location of deployment continues to be a challenge. Insurers gain comfort from having a historical technological base from which to predict future performance.
For each new operating platform, technological development or assertion of deep investment to research and development and testing, there will only be a handful of insurers sufficiently confident to take a technical engineering lead. Most will prefer to deploy their capacity after a few years of successful operating performance. It is rare that new technology or operating systems enter the market without requiring some level of adjustment and technical bulletins are regularly released by the leading OEMs.
As capacity becomes more risk averse, requiring a deeper understanding of the manufacturers’ assessment of their technology, in 2021 it is reasonable to expect that greater transparency will be sought between leading insurers and OEMs, with insurers demanding confidential but transparent sharing of root cause analysis for loss issues. Lack in transparency is likely to result in more onerous terms being made available and greater pressure to have recourse to the contractor parties.
The renewables industry is in a constant state of development, with the advent of commercialisation and the broad deployment of Floating Offshore Wind, 6MW onshore wind turbines, 13MW offshore wind turbines, commercial battery energy storage systems and hydrogen technology. The insurance market’s technical and engineering focus will only continue to grow if it is still able to support the green revolution with evolving technology; close and open partnerships are therefore going to need to be established between the technology providers and the insurers. If this not possible, it will undoubtably impact both insurability and bankability and will be a key consideration for renewable energy developers during early procurement.
The global pandemic has impacted every single person and business, directly or indirectly, and insurers are still determining their level of policy response and the financial impact of that response. There are immediate challenges around delivering timelines amidst continuing long-term uncertainty. It is widely accepted that insurers will be applying exclusion clauses in the future, and the extent, type and impact of such clauses are the subject of a separate article in this publication. Will all clauses remain bankable? Will the developing position of the market lead to progressively tougher limitations? Or will the market be open to negotiate a softer overall stance? The current market is substantially limiting the cover previously enjoyed by many renewable energy buyers and its current stance will continue to present a challenge during 2021 and onwards. The renewable energy industry continues to be integrated; delays and financial impacts resulting from interruption to the supply chain have been widely felt and are likely to continue to do so for some time. How communicable diseases not classified as a global pandemic are addressed relative to contractual force majeure language will undoubtably shape the way in which buyers manage or transfer their supply chain risks in the future.
Steven Munday is Head of Renewable Energy, Natural Resources, Willis Towers Watson GB. Steven.Munday@WillisTowersWatson.com
1 All data reproduced below in the next four paragraphs is courtesy of G-Cube’s own underwriting information and is reproduced with their kind permission.
