The renewable energy industry in China shows a steady growth trend. Due to the impact of COVID-19 and the economic slowdown, the growth rate of investment and newly-installed renewable capacity is rather lower than in 2019. We saw a significant stalling of new construction projects during Q1 2020 because of the outbreak of the pandemic, but there has been a general recovery since Q2 2020. The Chinese government has been developing their “New Infrastructure” strategy during 2020 to stimulate the domestic economy; renewable energy is an important part of this new strategy. New investment and application of new technology for renewable energy are therefore attracted and encouraged.
Renewable energy’s proportion of the Chinese energy mix has been increasing in recent years. Renewable energy contributes more than 40% to current structure of national electric capacity in China, including hydropower at 17.73%, wind at 10.45%, solar at 10.18%and nuclear power at 2.42%.
Following the global trend, the Wind Power industry in China has been developing rapidly in the last few years, particularly Offshore Wind. In Q1 and Q2 2020, new wind turbines with a total capacity of 6.32GW have been installed in China, including 5.26GW of new Onshore Wind, and 1.06GW of new Offshore Wind. At the end of June 2020, the total capacity of Wind Power in China was up to 216.75GW, including 209.76GW of Onshore Wind, and of 6.99GW of Offshore Wind. Electric production generated by Wind Power increased by 10.9%, in contrast to the same period in 2019.
Wind Power insurance premiums continue to grow in 2020, although the loss ratio for Onshore Wind in the Chinese insurance market is still high (estimated by insurers to be around 100-150%). Most Chinese insurers have suffered an underwriting loss on the operational phase of Onshore Wind, especially after various wind turbines ran out of their maintenance warranty periods. The loss ratio for Onshore Wind’s construction phase was much better than the operational phase. Due to fierce competition in the local market, the premium rates for Onshore Wind power in the Chinese insurance market remain stable compared to 2019.
The insurance market prospects for Offshore Wind are much better than for Onshore Wind in China. Most Chinese insurers have made an underwriting profit from Offshore Wind projects, including construction and operational, although the premium rates and deductibles are much lower than in the international markets. The loss ratio of Offshore Wind projects remains at a low level; not many Offshore Wind accidents and losses were reported during 2020’s windstorm season.
The premium rates for Offshore Wind projects in China have remained at the same level as in 2019, despite some Chinese insurers’ aggression during various Offshore Wind insurance tender processes. However, because of the effect of the global hard insurance market, as well as risk accumulations in certain regions in China, more international reinsurers have withdrawn their capacity or stopped writing Offshore Wind business in China. Chinese insurers will have to use their retentions to cover Offshore Wind risks because of a lack of an appropriate reinsurance treaty. The increased rates would be expected to apply to Offshore Wind projects in the near future. It should also be pointed out that the use of Marine Warranty Surveyors (MWS) is still not standard practice for Offshore Wind projects in China.
Because the current tariff for Offshore Wind imposed by the government will be dramatically reduced at the end of 2021, most power companies and contractors are speeding up the construction of Offshore Wind projects. The price of wind turbines is increasing, due to the inadequate production of wind turbines manufacturers; furthermore, the shortage of offshore installation vessels has also added to the cost and might delay the completion of Offshore Wind projects in China.
The total power capacity of Solar in China reached 215.82GW by June 2020. However, due to the impact of COVID-19, new installed solar projects fell 24% in Q1 2020, but then picked up from April onwards. As at the end of Q2 2020, 11.52GW of new Solar farms have been installed. The insurance industry has experienced a difficult time with regard to Solar in 2020, as its loss ratio is getting worse. Due to the severe weather and poor flood season in Southwest China, some insurers suffered substantial Solar losses, particularly with regard to Floating Solar plants. Ping An Insurance has withdrawn from the Solar market since 2019; Huatai Insurance ceased writing Solar with effect from Q3 2020; and other major insurers have begun to reduce capacity or imposed low indemnity limits for natural perils. Solar premium rates are therefore increasing, due to the reduced capacity.
Hydropower is the biggest renewable energy sector in China, contributing more than 17% to the national energy structure. New Hydropower capacity of 8.89GW was installed in 2020, however, because of climate change and reduced rainfall, the electricity generated by Hydropower reduced by about 4.7% in 2020.
The attitude of the Chinese insurance market is polarized between large and small Hydropower plants; underwriters prefer to provide cover for medium and large Hydropower plants, which have better resistance for natural hazards. Similarly to the Solar market in certain areas, some small Hydropower plants in Southeast China were seriously damaged by flood, debris flow and landslide during the summer of 2020. The majority of Chinese insurers have suffered losses on small hydropower plants in that area, so premium rates have been increased by 30-50% for small Hydropower projects featuring high natural hazards or poor loss records. However, rates for larger Hydropower plants remain either stable or slightly increased.
The Chinese domestic insurance market is still relatively soft by international standards. More Chinese domestic insurers with an international rating are willing to offer capacity to the international markets where there are Chinese interests abroad, as they see the harder international market conditions as offering a good opportunity for growth at better returns than in the domestic market. If overseas renewable energy projects have a Chinese interest, the Chinese market can provide significant capacity and competitive rates, terms and conditions for both the construction and operational phases of a given project. Meanwhile, different insurers have various definitions of what constitutes a Chinese interest, as well as various appetites to writing overseas risks.
Ray Zhang is head of Power and Renewable Energy, Construction, Power and Infrastructure, Willis Towers Watson China. ray.zhang@WillisTowersWatson.com
While Dubai continues to represent a considerable gateway to insurance company and Dubai International Financial Centre (DIFC) capacity for renewable energy projects in the Middle East and the wider North Africa, its fortunes are often inextricably linked with those of the non-domestic parent company. While the market as a whole has been suffering with detrimental combined loss ratios, a function of a hard market is to draw back capacity to the centre. This reduces support for Managing General Agents (MGAs) either by closing long established satellite offices or reducing their authority levels and drawing back capacity to the more heavily controlled head office.
More recently, we have seen a number of UK, European and American insurers change their operating model, particularly for Renewable Energy in Dubai:
However, Dubai and the DIFC is a place of innovation, a gateway to Middle Eastern (and often Asian) markets which would not otherwise be accessed from other hubs in London and Europe. ADNIC, Africa Re, IGI, Kuwait Re, Oman Re and Trust Re all have strong positions for regional business interests. However, most placements still attract a mixed appetite and will ultimately be completed utilising a broad spread of capacity from the London, Middle Eastern (sometimes African) and Asian markets.
The Renewable Energy market in Dubai as a global hub is still developing; to-date, many of the projects developed have been from larger well-established power, utility or other corporations that have their own agenda, relationships and often captives which have driven insurance placement structures. However, there is strong pipeline of projects coming through and it is widely anticipated that there will be a strong desire to ensure the continued involvement of Dubai and DIFC hub offices, even if not technically underwritten in Dubai.
Mark Hiles is Head of Power and Utilities, CEEMEA, Willis Towers Watson. Mark.Hiles@willistowerswatson.com
More than half of Latin America´s power generation comes from renewable sources1. Hydro generation plays a major part in that; however, Wind and Solar has taken the largest share in renewable investment in recent years and this tendency is expected continue. Latin America has vast potential and abundant resources to grow further in the area of non-hydro renewables: Wind and Solar (especially in Colombia, Brazil, Argentina, Chile and Mexico) as well as geothermal.
A recent report from the International Development Bank (IDB)2 includes the following graphic:
Clearly there is room to increase the penetration of non-hydro generation in Latin America. In order to achieve this, it would help if certain governments, who have returned favoring generation on oil & gas instead of renewables, would concentrate again on renewable sources for new investments, to keep a stable contractual environment for the renewable projects already in operation or about to come on line. They also need to ensure that sufficient energy storage is built into the grid and, importantly, that sufficient transmission capacity is built-out to facilitate export from the often-remote location of generation plants.
Due to the pandemic and decreasing demand, there have been delays in the renewable auctions in several countries. However, for 2021 following auctions are planned; Colombia leads the renewable initiative in Latin America, with the announcement to allocate around 5GW of renewable energy in the upcoming auction in Q1 20213. It also announced that it is going to collaborate the green hydrogen roadmap for the country in collaboration with Chile4. Here, a supply tender for the regulated sector will be held in 20215.
So these are clearly challenging times for renewables in Latin America; however, there are various initiatives on a country or multi Latina level to promote renewable growth in the long term.
In respect of the Latin American insurance market, the key underwriting expertise and capacity continues to be concentrated in Miami, together with the other established underwriting centers for Latin American risks (mainly Brazil and Colombia).
Especially for wind turbines, there is an increased technical scrutiny from insurers on the type/model/age of turbines and on their respective global performance; this is a determinant factor for price, capacity offered, deductibles and scope of cover. Some markets show signs of centralizing their underwriting operations towards their headquarters. Timely preparation, together with solid engineering information, will ensure the best possible outcome for a renewal.
Furthermore, natural catastrophe exposure has become a very challenging area for renewables in Latin America due to the loss record. A revision of the exposure and required limit can help to manage cost increase or capacity issues in that respect.
Despite such market hardening, insurers maintain a long-term interest in renewable energy, as it fits with most large insurance organization mission profiles, moving away from underwriting traditional generation with high carbon dioxide emissions.
Marc Vermeiren is Head of Power and Renewables, Latin America, Willis Towers Watson. Marc.Vermeiren@WillisTowersWatson.com
In the LatAm sector, local Construction/Erection “All Risks” (CAR/EAR) treaties are becoming more restrictive, retaining less and becoming more facultative-driven, even in those countries with traditionally broad local capacity such as Brazil and Mexico.
In respect of the Latin America CAR/EAR reinsurance market, which is concentrated in Miami and with underwriting centres in other Latin American countries like Brazil, Mexico and Colombia, the conditions are undergoing hardening - maybe with a slight delay effect compared to London and other European and International markets.
Rates in the Construction market have been increasing by 35-40% and in some high Nat-Cat and hurricane hit islands in the Caribbean, we are seeing increases of over 50-75%. This follows a number of capacity withdrawals from insurers that have been active in the region over the past 18 months, including AIG, Beazley, Brit, Talbot and most recently Axa, among others. This has also resulted in difficulties agreeing project policy extensions or increases in Sums Insureds where required.
A range of other insurers are undergoing restructuring and reconsidering their appetite for certain risks, including which industries and locations to avoid, as well as imposing stricter conditions. There are fewer lead insurers, particularly for large, complex and high Nat-Cat-driven risks. In particular, insurers are imposing restrictions related to testing and commissioning, LEG Defect/Design, maintenance and Delay in Start Up (DSU) coverages because of concerns about certain types of technologies and work methodologies. We are seeing extremely restrictive appetites and even total refusals to underwrite or support tunnelling works, wet risks, hydros, coal fire, underground mining and tailings dams, beachfronts and prototype equipment, particularly those with LEG 3 and DSU.
The Construction market generally is seeing a lack of infrastructure and mining projects due to financing and economic/social instability, and a slowdown in construction activity due to COVID-19. As a consequence, contractors are struggling, which will decrease premium volumes; so we expect Latin American market reaction to this to result in a further hardening effect on rates.
For Solar and Wind, we are expecting many projects to begin construction activities in 2011, particularly in Chile, Brazil, Central America and in some Caribbean Islands. For all territories (but less so in Brazil) we expect conditions to be more restrictive than 2020; some markets will impose loss limits for Nat Cat and increase in deductibles including DSU. Latam insurers also struggle to offer one-year operational cover and even TPL during Construction cover within the same policy.
Maria Sanchis is Executive Director, Latam Construction Industry Leader at Willis Towers Watson. Maria.Sanchis@WillisTowersWatson.com
Amidst this global pandemic and worrying times, the Singapore renewable energy insurer landscape has remained relatively stable, with little to no significant changes from 2019. Total working capacity from local markets is largely unchanged too, and is currently available up to US$500 million, with available capacity depending on the type of renewable energy, onshore or offshore, and so on. Major players in the local market include AGCS, Swiss Re Corso, HDI, Axis, Chaucer, Markel, Canopius and MS FCIL.
Given Singapore’s relatively small Renewable Energy market, the overall insurer leadership panel remains relatively stable, experiencing little volatility in player movements. Underwriters tend to be conservative in their growth plans, maintaining constant involvement with operators, and are not looking to gain significant market share overnight.
While the criteria for assessing risk in the Renewable Energy sector remains unchanged, underwriters have either limited line sizes or have elected to deploy capacity only if it meets minimum premium levels as defined by new underwriting guidelines.
Underwriting guidelines have tightened amidst a hardening market, with insurers conducting a tougher, rigorous, and more selective process when assessing risk, before committing any capacity. In addition, renewal or new applications by energy operators for coverage are likely to be met with stricter scrutiny through underwriter assessments or peer reviews.
Small to medium sized operators with single or multiple sites of total sum insured of less than US$10 million continue to be unattractive to underwriters. Given the small Renewable Energy market in Singapore, small to medium sized operations - especially single location operations - do not interest underwriters, since premium pools are small; one small loss can easily affect the entire portfolio profitability.
In addition, high acquisition costs in new year participations, associated with onboarding small to medium operations, further downplay the attractiveness of small to medium sized operations as profitable coverages worth the risk exposure for insurers.
Indeed, we have already seen premiums increase by as much as 50% to more than 100% for small-scale solar and onshore wind operations from last year, and the imposition of a minimum premium to apply. Liability limits are generally low, with increases in the range of 10% to 20% from last year. We expect these premium increases to continue into the next year.
Global losses continue to plague major insurers, impacting their bottom lines; this has translated into the development of tighter underwriting guidelines and stricter internal controls to improve profitability across their portfolios. Many insurers are already reexamining their portfolio to reassess their risk exposures in different markets and sectors.
As a result, underwriting processes have become more inflexible, with stringent underwriting guidelines and criteria that must be satisfied before insurers are willing to elect any capacity. On top of this, we foresee a continual rise in premium rates in the renewables sector, with restricted coverage and more exclusions as insurers focus on the bottom-line in this hardening climate.
To be adequately prepared for this stricter underwriting process, operators should have technical information about their operations readily available to answer questions from underwriters, engineering teams, or peer review teams to facilitate a smoother renewal or coverage process. Specifically, operators should prepare technical information about the management of safety, security and risk in their operations.
To ensure a smoother process of insurance renewal or coverage seeking, operators should commence the quotation process with insurers earlier (at least 6-8 weeks prior to inception, up from the previous period of 4 weeks). Operators should also be open to share technical information about their operations quickly, and be prepared to accept restrictions in cover, or consider higher retentions.
Siew Hui Lim is Director, Natural Resources Asia, Willis Towers Watson Singapore. SiewHui.Lim@willistowerswatson.com
The Australian insurance market for Renewables in terms of construction projects has experienced challenges during 2020 following the trends of the general Construction market. Insurers have increased rating levels, tightened terms and conditions and have reduced their capacity for this sector. This has been driven by a combination of ongoing loss trends, a perceived lack of experience by EPC Contractors, the increased exposure to fast moving technological changes and issues around grid connection.
There is still significant available capacity for renewable energy projects, but insurers’ line sizes are reducing and available lead capacity has been cut, following the exits of AIG and Zurich in 2018 and 2019 respectively. This has left a smaller number of credible lead markets who are becoming more selective with the projects that they are willing to underwrite. Lead line sizes have reduced to no more than 20-25%, with the average follow lines varying between 10-20%.
Natural Catastrophe and weather exposures are driving capacity in numerous ways. With the growth of regional Green Hubs and a rise in concentration of projects in particular areas, insurers are finding that they are exposed to a number of different projects in a relatively small area and are actively managing their accumulations in the event of a localised rain, hail or bushfire event. Another factor which is having a similar effect is that projects are growing in size and scale, so insurers are offering smaller line sizes to manage their exposures to those same natural catastrophe events.
The market has experienced regular losses over the past 12-24 months; trends indicate that the majority of losses are coming from a small number of exposures, Natural Catastrophe and weather being significant contributors to loss ratios following recent flood, localised windstorm and bushfires experienced in Australia over the last 12-18 months. Another significant factor is poor workmanship and installation issues causing regular and significant losses to the market, to the point where insurers are requesting individual CVs and experience of both individual project managers and EPC contractors’ experience in Australian conditions. The insurers’ perception is that this will only get worse, following the exit of many of the experienced EPC contractors from the renewables sector and a number of unknown overseas EPCs entering the market.
The rating of renewables projects has experienced a significant and swift shift during 2020, with rates increasing between 50-75% for solar projects and 50-100% for wind projects compared to similar projects beginning construction 12-18 months ago. Similar to other markets, the choice of technology is a big factor for insurers when rating a project, with the increased use of prototypical technology having a large impact. Projects utilising existing and proven technology are experiencing lower rates than those utilising new and prototypical technology.
Insurers are restricting the policy terms and conditions that they are willing to offer. The market will no longer support LEG3 Defects Clauses, and in some cases will only offer LEG1 coverage on prototypical technology. In addition, we are also seeing restrictions being imposed on open trench limits, IP Ratings of componentry, restrictions around grid connections and microcracking. Along with these coverage restrictions policy deductibles are also increasing, with Major Perils and Testing & Commissioning Deductibles now typically starting from $250,000 per Occurrence.
Moving into further 2021, we expect more of the same market conditions. The current Australian summer experience, with La Niña conditions, is expected to be wetter than normal in some regions and the bushfire season has also commenced earlier in others. The impact of these conditions will be monitored closely by insurers; if they experience another summer with large natural catastrophe losses, we can expect pricing to harden further and policy conditions to continue to tighten.
To ensure that a project can achieve the best possible coverage and rates in the market, we would recommend early engagement with insurers; buyers will need to demonstrate to underwriters that they have robust flood and bushfire mitigation processes in place, that they understand the technology that is being used and its suitability for Australian conditions and that the EPC contractors have relevant experience in the sector.
Mark Thompson is Broking Director, Construction Risks at Willis Towers Watson Australia. Mark.Thompson@willistowerswatson.com
1 https://www.irena.org/-/media/Files/IRENA/Agency/Regional-Group/Latin-America-and-the-Caribbean/IRENA_LatAm_action_plan_2019_EN.PDF?la=en&hash=12D7D12BF816911D9ED12AFEA0F34E73258B18F2, p1 2 https://publications.iadb.org/en/gap-analysis-and-opportunities-innovation-energy-sector-latin-america-and-caribbean, p52 3 https://www.pv-magazine.com/2020/11/11/colombia-to-hold-5-gw-renewables-auction-in-q1-2021/ 4 https://www.pv-magazine.com/2020/11/11/colombia-to-hold-5-gw-renewables-auction-in-q1-2021/ 5 https://www.cne.cl/wp-content/uploads/2020/11/Resolucio%CC%81n-N%C2%B0422-Aprueba-Bases-de-Licitacio%CC%81n-2021-01.pdf
