How to stay plugged into energy insurance in 2020
Insurance pros who cater to alternative and traditional energy clients must be smart, curious and savvy.
Seasoned insurance pros often advise newcomers to the industry to specialize in a specific type of coverage in order to create lasting value for current and future insureds.
There are few areas in which that need for specialization is more paramount than the energy sector, where operators of both traditional- and alternative-source facilities run complex businesses with distinct risks that require creative, multi-faceted insurance solutions.
The energy sector in general — and the alternative or renewable energy market in particular — is experiencing unprecedented change alongside a hardening unlike anything the insurance industry has seen in nearly two decades. This means that brokers, risk managers, underwriters and carriers must navigate tough market conditions to present insureds with solutions that stitch together property, construction, excess casualty, product and professional liability, multinational commercial and surety policies.
Insurance people who service the energy sector have two things going for them: Energy is an essential product, and the sector is ripe for innovation. Consider that new electric-generating capacity this year will primarily come from renewable energy sources, namely wind and solar, according to the U.S. Energy Information Administration. What’s more, the natural resources insurance experts at Willis Towers Watson say: “It is now generally accepted that renewables are likely to make up the largest share of total global energy supply by 2050.”
It follows that renewables represent the fastest growing segment of power producers, according to Les Lappe, vice president, Energy Division, Starr Insurance Cos. Lappe specializes in alternative energy.
“Right now, alternative energy is responsible for 20% of the U.S. power need,” Lappe says. “The continued rate of growth relies on the ability to find the appropriate space for adequate geographic expansion, the ability to extend tax incentives, and increasing efficiency to allow the power generated to reach the grid.”
Erin Lynch, president of the Energy Practice for Beecher Carlson, agrees that the renewable energy sector is expanding, which can spell opportunity for insurance brokers who know the industry well and can navigate a hard market. “Declining technology costs, rising capacity factors, the emergence of battery storage, and utility decarbonization goals are all contributing to a rapidly scaling and evolving market,” Lynch says.
But risks to the energy sector are abundant and costly. They require insurance specialists who can manage client expectations while solving tough business problems.
Simply uninsurable?
Some risks to the energy sector are well-known. As power plants become more digitized, they face increased cybersecurity threats. And like any industrial site, power plants are vulnerable to construction losses, mechanical failures and fires as well as catastrophic weather events.
“The renewable energy industry has suffered catastrophic hail, wildfire, hurricane and tornado losses, which — combined with impacts in the larger global insurance industry — have led to a swift and dramatic hardening of the insurance market,” Lynch says.
Consider that in February 2019, GCube, a provider of renewable energy insurance services, reported a 15% year over year increase in losses from extreme weather events.
“GCube has seen several losses as a result of inadequate preparation for extreme weather,” the company said in a statement. “In California, solar panels in a parking lot were damaged by burning cars as a result of wildfires. At a solar farm in Texas, unexpected flooding led to damage on fencing and construction infrastructure, causing delays and revenue loss. In Taiwan, incorrectly installed concrete supports led to heavy damage to a solar farm following a storm. In Australia, flooding caused major damage to a wind farm and significantly delayed a project during construction.”
Alistair Barnes, executive vice president and Energy Practice leader at AmWINS, sees opportunity in all of that catastrophe. “Now there’s a lot of opportunity for me to write excess hail or excess tornado or excess thunderstorm (coverage) for both solar and wind projects.” The problem, Barnes adds, is that limited capacity means that smaller alternative energy clients struggle to find the right coverage.
The energy industry also has a unique (and sometimes dangerous) relationship to geopolitics. Consider this statement from the nonprofit Atlantic Council, which recently hosted the Global Energy Forum: “From tank seizures to pipeline politics to oilfield airstrikes, geopolitics played a dramatic role in global energy markets in 2019 and shows no sign of slowing down in 2020.” The Global Energy Forum happened in January in Abu Dhabi. The event took up such lighthearted themes as the role of the oil and gas industry in energy transition, financing the future of energy, and the connections between energy and “a new era of geopolitics.”
In addition to “geopolitical clouds,” Willis Towers Watson’s “Renewable energy market review 2020” summarizes the threats to energy-industry players as follows:
- Increased climate change related risks: “The accelerated renewable energy industry growth brought on by climate change is bringing with it new risks and issues which need to be faced, particularly within sub-sectors such as Floating Offshore Wind and Hybrid Renewable Energy.” Some energy sector weather risks may simply become uninsurable, WTW says.
- The hardening insurance market: “The long period of soft market conditions, characterized by an excess of (re)insurance capital and an emphasis on meeting premium income targets, has finally come to an end.”
- Increased cybersecurity threats: “At a recent renewables seminar hosted by Willis Towers Watson in Prague, over 84% of delegates expressed concerns that the industry did not know how to manage this risk effectively.”
It also remains to be seen how this year’s COVID-19 pandemic and subsequent supply chain problems play out for the energy sector and its insurers.
Creative solutions
While some big fish in the sea of energy insurers have pulled back on capacity, other carriers are digging in. Tokio Marine HCC, for instance, recently acquired GCube.
“This strategic investment underlines our commitment to the renewable energy insurance market and our desire to actively address the issues around sustainability, helping us move towards a safe, secure and sustainable future,” Tokio Marine CEO Barry Cook said in a press release. “GCube also adds significant weight to our existing classes of specialty insurance and is in line with our strategy of acquiring businesses which possess real market-leading expertise, complement our existing portfolio and offer opportunities for growth and diversification.”
According to Les Lappe with Starr Insurance Cos., the majority of energy sector casualty coverage is placed within the surplus lines market. “Most of these accounts are relatively small in premium and can be placed within these markets pretty easily. We do not currently see any trend in losses stemming from these risks, however, as this technology is still relatively new. The overall environmental impact has yet to be seen,” Lappe says.
There also appears to be room for new carriers to step in with creative alternative-energy insurance products. Consider Energetic Insurance, a Boston-based startup that aims to address a problem unique to solar energy producers: Counter party credit risk. “We were the customers” of energy insurance products, says Energetic Co-Founder James Bowen.
“We came to insurance because it was the best way to solve a problem that we experienced as energy people,” Bowen says. “There’s a set of different risks that each (energy) project faces. One area is financial risk. We’re addressing that, and we’re the first ones to really specifically address financial risk in solar energy projects.”
There also may be opportunity for carriers among emerging types of alternative energy. For instance, Alistair Barnes with AmWINS is fond of the “trash to cash” solutions that are slowly gaining popularity in the U.S. and abroad.
“They take household refuse and burn it in a very clean way,” he says. “They get tons and tons of recycled metal out of the back end of their facility, which then goes back into tin cans or bridges or cars or whatever that recycled material is used for.”
Tips for success
Barnes came to energy insurance after studying chemistry and management science as well as working at a chemical company. He said clients respond to his technical background and his ability to ask detailed questions about their operations. “I understand the difference between methanol, ethanol and butanol,” Barnes says, adding that this technical expertise “helps me understand the risks and communicate clearly with people about the exposures.”
If you’re not a chemist and you still find yourself working in energy insurance, success will hinge on being curious and detail-oriented.
Because in a hard market, underwriters will insist on a thorough and current accounting of mitigation measures.
“It is imperative to understand the market and to be committed to working with insurers who are also specialists in the sector,” concludes Erin Lynch with Beecher Carlson. “Those relationships are key to ultimately achieving the best outcome for our collective clients.”
The big picture: Renewable energy insurance in 2020
By Erin Lynch, president, Energy Practice, Beecher Carlson
Based on poor property underwriting results in 2017 and 2018, which came on the heels of a long-term soft market, the global property market is in an overall firming trend. The renewal energy sector, specifically, is experiencing decided firming as well. The renewable energy insurance market experienced its largest losses on record in 2018 and 2019. Insurers are retracting coverage for hail, tornado and wildfire as well as traditional CAT coverage such as windstorm, earthquake and flood.
Abundant risk transfer capacity in the form of excess traditional and nontraditional capital remains in the marketplace. However, markets are being conservative in how they deploy their capacity, and pricing has been significantly firming for that capacity over the past 12 months.
Several leading renewable energy property markets are re-calibrating their books, creating uneven results for many insureds as well as project finance partners. Many insurers are not prioritizing top-line growth but rather profitability. Insurers are highly focused on quality risks. Many of them only offer capacity on a syndicated basis in an effort to limit catastrophic losses, which is a shift in the renewable energy market trend.
At Beecher Carlson, we are relying heavily on catastrophic modeling and actuarial analysis to differentiate our clients’ risk profiles. It is imperative to pre-underwrite every submission for our insurance carrier partners so that they can prioritize our submissions, given the massive volume they have on their desks. It also cannot be over-stated that communication early and often is extremely important to our clients. We need to prepare our clients and their stakeholders for the reality of the market and provide them with options that include various retention levels, alternative risk transfer options, and program structure alternatives.
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