In the North American Renewables market, AXIS, GCube and PERse continue to lead this sector, but each has retrenched following significant unforeseen hail and wildfire losses, reducing the offered limits and at higher rates. Most utility-scale programs now are shared, with lead lines typically up to 40-50%. PERse is the exception, continuing to write 100% lines1.
2020 saw many personnel changes in the US Renewables market. After G-Cube was acquired by HCC, their US head left to start up the Renewable Energy wholesale broker NARDAC. Members of AXIS’ US team have left to set up AEGIS’ renewable energy team. PERse have retained their team and added some new capacity midterm to offset the exit of HCC. The partnership agreement between PERse and AEGIS will terminate at mid-April 2021.
AEGIS will be formidable in the Renewable Energy market in 2021, particularly for member business, with $250 million of net capacity expected to grow to perhaps $300 million. AEGIS plans to lead renewable placements on member business and participate mainly as a “follow” market for IPPs at a smaller line size.
Swiss Re also provides significant capacity, including leading some programs. Other conventional insurers, including HSB, Hartford, StarrTech (and others) remain active, while others (such as Zurich) limit their engagement to participation behind MGAs, GCube and PERse. Albus and others (including some reinsurers backing GCube and PERse) have left the Power market, but market entrants have replaced them, leaving more than ample capacity to write risks in the PV Solar and Onshore Wind markets.
Most Offshore Wind projects are written by carriers in London, though some US carriers have participated. Waste-to-Energy risks (including Landfill Gas, Biomass, Biogas and Biodiesel) continue to be challenging, as many carriers have withdrawn from the market. Insurers still insuring biomass include AIG, PERse, Swiss Re, StarrTech, Chubb, HSB and others, but their appetite varies significantly depending on the fuel source and technology used; insurers’ emphasis is on writing only quality risks that engineer well. Many biomass risks have little fire protection and don’t meet their requirements.
Meanwhile Swiss Re and others have developed parametric products, which become important for projects built in areas susceptible to hail and wind, particularly when clients need to minimize retention levels to meet the counterparty requirements. Hydropower risks explore parametric products tied to lack of rain causing low water levels that supply dams critical to producing electricity. Other creative solutions for renewable projects continue to be developed to meet client needs, as lack of rain causes low water levels which limit generation. Other weather-related products are being developed as needed.
Renewables insurers now require higher retention levels ($0.5-1 million for Physical Damage, plus a separate DSU waiting period) for wind construction projects and offer less capacity on such business, given this sector’s poor loss history.
More projects are being planned and built in wind and hail exposed areas, where renewable carriers are carefully deploying capacity; this has opened the door for traditional Builders’ Risk carriers to underwrite such projects. This is a different approach, as historically most Renewables construction programs have been negotiated to include the first year of operations, and some Builders Risk carriers won’t write operational cover. Consequently, separate operational coverage must be negotiated later, phasing in completed assets post-construction. Zurich has led several such Builders Risk projects but is now re-evaluating its position in this sector. Allianz remains in the sector but is scaling back its overall power footprint. StarrTech, Scor, HDI, Swiss RE, Liberty Specialty and Ironshore remain keen to write Builders Risk placements. These carriers’ policy forms differ significantly from those issued by renewable carriers, and there are some growing pains in these carriers adapting to each other’s forms.
2020 saw a record 30 named storms in North America, but thankfully damage to renewable energy projects was relatively small. Recent sector losses comprised of hail, wildfire and construction issues, and problematic Wind Turbine Generators (WTGs). Following sizable 2019 PV Solar hail claims, carriers now underwrite hail-prone risks much more carefully. Wildfire losses, already problematic in 2019, were worse in 2020, being more widespread in California and appearing in arid areas in other states not usually considered subject to wildfire risk. Losses range from more frequent $1-5 million events to some that could be in the $15-20 million range, and one that might reach $20-30 million.
Following a 2019 battery storage loss, carriers are now very wary of large battery storage projects. Such installations include a high concentration of lithium batteries under a single roof, without any natural fire breaks, turning a potential thermal runaway event into a large loss. This is a challenging problem being addressed now by battery management systems, but such measures are as yet unproven. Market appetite varies widely by carrier.
As a consequence of growth and lack of expertise, carriers are seeing more Wind construction losses, with some thought to represent negligence on behalf of the contractor or their subcontractors. Various reputable contractors have been reported to have made outright fraudulent claims, unbeknownst to the owner/named insured. Losses are more by way of property damage than delay or business interruption.
Certain WTG OEMs have experienced more than their fair share of losses, and carriers have taken notice; they now require higher rates and retention levels - while at the same time reducing capacity - for projects involving the troublesome machinery associated with these programs. Carriers report that certain OEMs often take no responsibility for damage involving their equipment, citing contractor error, when more prudent design and better training might make equipment maintenance less troublesome, reducing the potential for losses to occur. OEM issues range from a number of problems, including carbon fiber blades, locking pins, lightning protection, blade delamination and gear boxes. Carriers are placing significant emphasis on getting maintenance work completed before customer warrantees expire to minimize the likelihood of post-warranty losses. At the same time, carriers are looking more favorably upon those projects managed either by OEMs or qualified third parties who offer O&M servicing contracts, including unscheduled as well as scheduled maintenance activities.
Tornados and hailstorms are more isolated than named windstorms and earthquakes. However, when tornado losses hit, they can be devastating to a limited area, as winds roar above feasible design levels. In one project, a microburst took down a WTG, shearing it off with incredible torque, resulting in a total turbine collapse. Another convective storm loss involving a wind project under construction, requiring repairable damage to 20-30 turbines, potentially impacting their life cycle (yaw control, etc.). This loss settled for about $15 million, but some believe other losses like it might cost $30 million or more.
In addition to weather events and contractor issues such as those mentioned above, solar losses have included inverter breakdowns. Carriers are wary of microcracking losses as well, as will be noted below.
For the past three years, insurers have focused on correcting their underwriting performance after many loss-making years and these measures have generally succeeded. Renewables rates and deductibles are now healthier than in past years from a carrier perspective, and insurers’ portfolios are profitable or close to profitable, despite the unforeseen losses noted above. However, continued pressure on rates and retention levels are expected going forward.
As in other sectors, Renewables are now being analysed based on many factors, including equipment used, EPC contractor, project location, loss history, contractual language, retention levels and pricing adequacy. In some ways, this has always been done, but the process is now more technically driven; furthermore, risk engineering during design and operating phases has also become more important from an underwriting perspective.
For 2020, onshore renewable projects saw rate increases of 20-30% on average, with significantly higher increases for risks with poor loss history, significant Nat Cat exposure or under-priced rating. Clean, non-Nat Cat exposed business should expect lower increases in the region of 10-15%, but such risks are now less common. Clients whose programs are coming off multi-year deals at favorable rates might see 80-100% rate increases, even on clean business; however, carriers are focusing more on retention levels and terms/conditions than pricing - they won’t write some business at adequate rates without appropriate retention levels in place. The market is trading in a wide band and results vary significantly from month to month.
Rooftop solar is less attractive than ground-mounted and getting rooftop solar deals done has become challenging. Solar rates, formerly as low as $0.05, are now as high as $0.25 or more per $100 of insured value, with Nat Cat loads in addition.
As larger and larger WTGs are deployed, insurers are insisting that retentions need to rise. Buyers need to anticipate this fact in working with lenders, as the previously common retention levels in lenders’ agreements are no longer attainable with larger machines. As larger equipment is used, higher deductibles are required, according to carriers; for example, historic wind deductibles of $100k-250k for smaller machines are inadequate for the larger WTGs (up to 5 MW) being installed today. Adjustments must be made to counterparty agreements to ensure that required deductibles are achievable, preferably before they are signed.
When OEMs uprate existing turbines to achieve higher power output, carriers will view such equipment prototypical until certified/proven, requiring higher deductibles. Carriers look for the OEM to back up this equipment by picking up the difference between the original and revised deductibles. When the OEM won’t agree to this, clients will need to find a third-party solution to cover this gap.
Liability renewal results track close to the Property portfolio, with rate increases also the norm in this market. Wildfire is a big issue for Liability risks and line sizes are dictated by the level of wildfire capacity that the carrier will provide. A number of domestic markets have retracted capacity, putting up lower umbrella limits and layering towers. Battery Storage and residential Solar are tough classes for Liability market; the Rooftop portfolio in general has been challenging following the Tesla (Solar City)/Walmart dispute that was settled in 2019.
Though most areas of construction activity were down due to COVID-19, renewable projects were an exception to that rule. While project locations vary, more and more locations are subject to Nat Cat perils, and/or are located in low lying land subject to flooding (such as Louisiana) and/or feature significant exposure to named windstorm and convective storm. For flood exposure, designers attempt to site projects on the outskirts of identified flood zones; however, insurers now consider such areas as flood exposed and therefore high-risk. Solar farms continue to be built in California and the Pacific Northwest, and carriers are warier now more than ever of wildfire exposure. Creative solutions, including parametric offerings, will be needed to secure coverage needed for many of these risks going forward.
Tornado, Hail and Lightning perils now require higher deductibles and sub-limits often apply. The vast majority of projects are lender financed; standard lender agreements default to historic deductible levels and policy limits, some of which are no longer commercially available. Lenders advisors have been slow to acknowledge the contracting capacity and hard market, and as such have been pushing clients to secure business on terms that have been provided in the past but are no longer commercially available. Clients are hesitant to renegotiate lender agreements once signed, so it is important to fully review lender requirements for new projects before signing them to ensure that these requirements continue to be attainable. And for existing lender agreements with unattainable requirements, clients will need to either renegotiate these agreements with lenders or purchase expensive complementary coverage (parametrics, deductible buydowns, excess CAT coverage) to meet these requirements.
Carriers are taking steps to better protect themselves from Wildfire losses, including:
These Wildfire subjectivities have not been tested in any actual claims, and we envision possible coverage disagreements. Was the loss Fire or Wildfire? Is it legal for the carrier to sublimit Wildfire coverage in a Fire policy, in California or other states? Does this change if the insurer is admitted or non-admitted? Who determines if the provisions of an express warranty were fulfilled by the client?
Carriers say they simply want their clients to “cut the grass”; this may be their intent, and clearly some clients need to implement better vegetation management programs. However, more work is needed to ensure contract certainty.
For construction business, carriers are concerned with certain EPC contractors and their subcontractors on Wind where they have seen poor loss experience. However, as these are large players in the sector, carriers are mainly addressing this exposure by minimizing their line sizes rather than decline business. Carriers believe some contractors at times are submitting unjustified claims, unbeknownst to the project owner; sub-contractors are frequently improperly trained, leading to more construction losses. Some carriers have “black-listed” certain contractors where they have encountered problems, citing potential negligence and fraudulent claims. Carriers will sometimes manuscript endorsements, passing the onus on claims from the insurer back to the EPC and requiring that claims can only be filed by the first-named Insured, limiting the troublesome contractor’s rights under the owners’ policy.
One evolving area of PV Solar losses involves microcracking and degradation of panels (see separate article on microcracking earlier in this Review). Following a hailstorm, owners are concerned that their panels may have been damaged; they also fear that hail contact might impact the future performance of these panels, in which case the owner will want them replaced, as well as requiring continued warranty protection post-event from the OEM.
Sometimes the cost to test the panels can exceed the cost to replace these panels. Carriers are frustrated they have paid multi-million losses to test panels after a hail storm, just to determine whether or not the panels have been damaged. Consequently, carriers now limit what they will pay in testing the panels, while any post-event testing carried out might be required via sampling and subject to a separate sub-limit. The presence of microcracking doesn’t prove hail damage, as panels can sustain microcracking damage in transit, during installation or during maintenance, etc. Carriers might support a performance-based test protocol on the panels, testing panel performance before and after a hailstorm, requiring an agreed upon drop in performance (perhaps 25% or more) to trigger coverage.
One panel manufacturer (First Solar) uses thin-film technology that is more resilient to hail events. Some insurers favor these panels, but others are skeptical, and no panel design is 100% hail-proof.
Given the prominence of recent hail, tornado and wildfire losses, emphasis has been placed by carriers on understanding a client’s exposure to such risks. However, modeling for these perils is not as developed and proven as for windstorm and hurricane, given that hail, tornado and wildfire losses have only recently impacted renewable projects, and little data is available to develop precise modeling. More projects are being built in Nat Cat - exposed zones, putting more and more projects in harm’s way. Modeling firms are quickly adapting their offerings, and each version of their models provides more useful results. But in overall terms, carriers are skeptical of tornado and wildfire models and choose to manage their risk through higher retentions and modest line sizes. Carriers are also hiring personnel with modeling experience and having them partner with their risk engineering teams.
2020 brought two notable developments with respect to lightning:
Carriers are striving to reduce the number of events that insurers will pay under the Series Loss Clause, as they feel such losses should be borne by the OEM responsible for the defect that led to the loss.
Competitively-priced insurance has impacted risk management for renewable projects in that there has been less emphasis on risk engineering, as carriers didn’t have the leverage to require clients meet their needs; so often premium levels didn’t support engineering visits at all.
This has all changed quickly; carriers require engineering reviews now that they didn’t even ask for in previous years, with some hiring their own technical staff and others partnering with expert third parties. Carriers are looking for clients that understand their risk and manage it well; they are doing what they can to educate themselves and their clients on risks as the industry matures, aggregating information for clients, preparing white papers and holding webinars, amongst other initiatives.
Due to COVID-19, much of the risk engineering activity has been conducted virtually rather than in person, but site visits began in some areas during the fall of 2020. In the past, underwriters were interested in engineering for wind projects, but less concerned with PV solar projects; however, they now want engineering for both, with Wind surveys more focused on mechanical/engineering issues and Solar more on Nat Cat and vegetation management programs for wildfire.
True baseload energy storage is coming in the form of hydrogen, which will provide baseload capacity when solar and wind power are not available. This approach will help reduce supply challenges when electricity demand spikes and intermittent sources are unavailable, for significantly longer than batteries can now. However, green hydrogen2 is expensive, and it will take several years for it to be competitive. And to make hydrogen from water requires enormous energy, supplied by renewable energy – this will provide more demand for renewable energy projects. Hydrogen is explosive, and storage and use of hydrogen fuel brings additional risks.
The newly-elected President Biden is known to support renewable energy, so initiatives favoring renewable energy projects are expected in the US during 2021 and beyond.
This year, given an increased comfort level at higher pricing and retention levels, carriers expect to increase their target lines to 60-70% for risks that they favor, subject to upcoming reinsurance and binder renewals. Carriers are looking to find their spots and grow in identified target areas; with healthier terms and conditions, new players are expected to enter the Renewables market. Ultimately, added capacity could again put pressure on reducing retentions and rates as insurers compete for business.
Clients should be prepared to review counterparty agreements (lender requirements, tax equity requirements, etc.) as many of these agreements are based on terms and conditions that are no longer commercially available. Additionally, contractual language regarding wildfire issues, including indemnification and risk of loss issues, also requires attention. As clients often have contractors listed as Additional Insureds on their policies, clients should ensure that these contractors do not have any wildfire exclusions in place on their policies. Meanwhile, coverage limitations for modified technology, microcracking, wildfire and vegetation management will continue to evolve. Clients should again prepare for double-digit rate increases in 2021 but take steps to position themselves in the most positive light with insurers. Such steps should include the following five-point process:
Michael Perron is Power Generation Leader, North America, Willis Towers Watson New York. Michael.Perron@WillisTowersWatson.com
1 One noteworthy exception: carriers will offer 100% lines for small community solar projects, or for solar portfolios with good spread of risk. But even for portfolios having single asset sites of $15-$20m, these carriers would rather share the risk with others than take them on alone. 2 “Green” hydrogen is a zero-carbon fuel made by electrolysis, using renewable power from wind and solar to split water into hydrogen and oxygen
