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Renewable energy sector requires traditional risk transfer options

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Insurers should focus on providing traditional risk transfer options to the evolving renewable energy sector rather than trying to come up with exciting new products, but they have already taken steps to adopt parametric insurance policies to deal with some of the more challenging exposures such as weather risks, according to experts.

The renewable energy sector has grown rapidly due to technological progress and policy incentives and will likely make up a large fraction of future infrastructure investments, according to a report published last week by Swiss Re Institute. However, the sector, which is highly capital intensive and mostly funded by private or institutional investors, has significant risk exposures, including operational vulnerabilities from weather risks, according to the report. 

Offshore wind in particular is becoming more and more competitive from a pricing perspective, with windfarms growing in size as more advanced technology is used, including through the use of drones, which will require the insurance industry to adapt to cover these risks, said Hanne Aaboe, director, group insurance for Dong Energy in Fredericia, Denmark, which was previously a “hard core” oil and gas sector company, but has shifted in the last seven years to become a major offshore wind energy producer and will divest its coal assets by 2023. 

“It’s not enough to look at what we have now,” she said at the Federation of European Risk Management Association Forum 2017 conference in Monaco on Tuesday. 

“You really, really have to be open minded because this just continues.”

Very few insurers are investors and shareholders in renewable energy companies, but insurers cover renewable energy risks and are strategic risk management partners, Ms. Aaboe said.

“Insurers should be even better at providing traditional insurance products,” she said. “It’s fine that you want to come up with exciting new products, but you still need to be able to have the traditional and basic products and provide that for an industry that evolves all the time and I must say that’s not always the case.”

For example, certain exposures do not have available insurance products, including a risk she called contingent property damage, she said, referring to the fact that windfarm owners do not typically own the transmission cables so if something disrupts the transfer of energy, that can cause revenue issues for these owners.  

“If something happens to the export cables, we bear the entire revenue loss,” she said. “The problem is that the entities owning the transmission assets are usually not very financially strong and they have very little to lose when it comes to revenue so they don’t have any incentive to make any kind of precautionary repairs. We would like to have a non-damage trigger to provide property damage coverage for something we don’t own. That’s on our wish list.”

The insurance industry has developed a suite of index-triggered products to protect renewable energy stakeholders against earnings volatility and facilitate investment in the sustainable energy sector, according to the Swiss Re report. Compared to traditional indemnity-based insurance, the index-triggered solutions offer faster pay outs, low transaction costs and increased transparency in the settlement process, according to the report. 

Weather risk is a major threat to the sustainability of renewable energy investments, with revenues impacted by a lack of or low sun, wind or precipitation causing low energy production, said Tanguy Touffet, AXA Global Parametrics chief executive officer based in Paris. Wind storms or other catastrophic events can damage renewable energy infrastructure and the maintenance costs can be driven higher by adverse weather conditions, he said. 

But technology and data are at the heart of parametric insurance, with data gathered via weather stations or satellite images and monitored in real time so once the trigger is hit, the payout is activated and the insured receives payment within a few days, Mr. Touffet said. 

“One of the beauties of parametric insurance is that the claims process is very simple,” he said. “As soon as we get the data, we are going to process the payment.”

Currently, there is about $50 million to $75 million in capacity for these projects, which is “more than enough” as the typical wind farm has a few million dollars in coverage, he said. “Most of my clients are in emerging countries so my number one market by far is China.” 

The insurance industry has adopted a range of clauses to cover risks such as serial losses, defects and maintenance issues for wind farms, but the application is challenging, said Andrew Norris, senior engineering underwriter and vice president for Swiss Re International SE based in London. 

“Offshore wind is moving incredibly fast,” he said. “Offshore wind is the Formula One of renewables.”