Renewable energy growth ushers in new insurance needs
Renewable energy assets are not like other commercial property assets, presenting new underwriting challenges and talent needs.
The shift to a decarbonized economy is the largest macroeconomic revolution of our generation, and insurance has a significant role to play in securing its future. This will require creative and data-driven approaches to effectively price, manage and ultimately mitigate the new risks of the clean energy asset class.
Today, renewable energy insurance has a talent gap and tends to be underwritten by property underwriters and/or energy underwriters. But as a specialized asset class, renewable energy has its own unique loss profiles and technology developments that do not mirror other commercial property or energy assets.
From an insurance carrier perspective, a renewable energy property portfolio should be more attractive than a traditional property portfolio.
For one, renewable energy assets typically are not built in regions where property reinsurers have the most exposure sensitivity: Along the Atlantic coast, in Florida or in the Gulf. They are by design distributed and modular, so it is not uncommon to have a partial loss that doesn’t cascade into a total loss.
In addition, the equipment is largely swappable: You can use replacement parts from one supplier to help address a loss. And although natural catastrophes can impact renewable energy facilities, rapid technology innovation has greatly reduced the risk, and solar has proven resilient during major weather events like Hurricane Ian.
Unfortunately, from a pricing perspective, renewable energy assets are subject to the global reinsurance property markets, where years of significant natural catastrophe losses have made insurance carriers increasingly wary to deploy capacity. Rates and terms will continue to be challenging for any asset class with property or natural catastrophe exposure, including renewable energy.
Nearly all renewable energy assets are financed by a mix of commercial banks and institutional investors. These investors require property insurance as part of their borrower obligations; owners of renewable energy facilities have to purchase coverage to avoid a default. The result is cost-sensitive buyers tied to an obligation to purchase an ever-more-expensive insurance policy that eats into their already thin operating margin.
The market has adapted to these pressures by trying to creatively structure solutions to manage costs, while pushing some risks back to the asset owners. This has led to higher deductibles, natural catastrophe sublimits and stricter policy conditions. At the same time, price increases continue to ripple through the market.
In response, we are seeing a strong push for asset owners to adapt operating and design practices to incorporate resiliency into their processes and procedures.
In the solar industry, for example, there has been rapid innovation in technology to tilt solar panels away from hail (which can greatly mitigate damage), and deploy hail early detection systems. Solar power plant operators in fire-prone regions are heavily focused on vegetation management and are beginning to add in additional layers of protection, such as water on-site, fire breaks and automated mowing solutions.
Similarly, other renewable energy producers exposed to natural catastrophe risks are following suit in adapting design and operations to safeguard assets.
These mitigation strategies have largely happened naturally as a consequence of operators bearing more of the risk, but there is an even more active role insurance can play. In the same way that the finance ecosystem has moved toward specialty renewable energy financiers, it is time for the insurance industry to have specialty climate insurance underwriters.
As traditional carriers tighten their portfolio exposure, new solutions are needed to manage and underwrite risk in the rapidly growing renewable energy industry. Specialty climate insurance underwriters that rely on industry data to better identify resilient assets based on their system design, operating practices, and geographical exposures will be key to securing much needed coverage for clean energy at more favorable rates.
Jason Kaminsky is CEO of kWh Analytics.
Opinions expressed here are the author’s own.
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