BI’s Article search uses Boolean search capabilities. If you are not familiar with these principles, here are some quick tips.
To search specifically for more than one word, put the search term in quotation marks. For example, “workers compensation”. This will limit your search to that combination of words.
To search for a combination of terms, use quotations and the & symbol. For example, “hurricane” & “loss”.
The alternative, or renewable, energy sector is expected to continue its rapid growth rate in coming years. While this industry sector poses its own technical and business interruption challenges, good risk management can make a big difference to the cost and extent of insurance cover that is available, insurers and brokers say.
Renewable energy projects are not new, but the recent and predicted growth in this sector have led at least two insurers and one broker to launch alternative energy practices in recent months.
Wind power generation is by far the most used of the renewable technologies, although other alternatives are becoming mainstream, experts say.
"Financial investments have so far been mainly in wind, but we are starting to see more solar," said David Jones, London-based chief executive officer of Allianz Specialized Investments, a unit of Munich, Germany-based Allianz S.E.
Mr. Jones, whose unit owns and operates three wind farms in Germany and is developing another in Italy, expects that as the renewable market grows, it will adopt more technologies and expand into new geographical regions. While wind power is well-established, alternative energies are spreading quickly into other technologies--in the near term, solar and hydro, and in time, biofuel--will become more mainstream, he said. Long-term marine technologies such as wave technology also will gain ground, he added.
Europe has embraced renewable energy, with Germany, Spain and Denmark proving to be the most advanced adopters of renewable technologies--mainly wind generation--in Europe. A limited number of solar power generation plants have been developed in Spain and Portugal.
Also, the United States--where investment has been encouraged by state and federal incentives--has become the largest market for wind power generation, experts said. According to Rick Gibbons, executive vp of AIG Global Marine & Energy in New York, part of American International Group Inc., there are two factors that drive growth of renewable energy in the United States. These are the desire to become energy self-sufficient and legislation, both state and federal, that could cap emissions of greenhouse gases and further encourage the adoption of alternative energy technologies.
"The market has grown globally--wind power has grown 20% year on year for a long time--as technology has improved and the cost of producing electricity (from wind generation) has reduced. It is becoming increasingly attractive to utilities," Mr. Jones said. He added that he expects growth to continue along similar lines, although growth in more mature markets such as Germany will slow, he predicted.
Ken Norgrove, London-based chief executive of Royal & Sun Alliance Insurance Group P.L.C.'s recently launched global renewable energy division, said the sector is set for massive growth. The European Union has a target of 20% of energy from alternative supplies by 2020, up from 6% recorded in 2003, he noted.
There are risks for operators associated with the industry's rapid growth and adoption of new technologies, most experts agreed. As renewable technologies develop, venture capital backs prototypes that in time are taken up by utility companies, said Mr. Jones. "Clearly there is a lot of technical risk in wave power at the moment, as it is relatively underdeveloped. But for wind, the challenge has been as the scale has increased. Scaling up has its problems and is an ongoing challenge."
"In the race for scale, the industry needs to be careful not to lose reliability," Mr. Jones said.
But most experts agreed that established renewable technologies like wind and biofuels are well-established and do not pose a particular technical challenge. "There are always the normal risks of operating industrial equipment--but (for renewable energy) these are probably lower than conventional power plants," Mr. Jones said.
"There are always new technology issues, but (wind turbine) manufacturers are getting better--they are bigger companies with a lot of experience under their belts," AIG's Mr. Gibbons said.
But underwriters do look at whether a renewable technology--such as a type of wind turbine--is "proven, unproven or prototype," according to Michael Buckle, executive director of international global markets and part of the utility industry practice group at London-based brokerage Willis Group Holdings Ltd. Rates, deductibles and coverage will differ depending on the technology--from not getting cover at all to having different underwriters offering coverage, he said.
The most prevalent risk, cited by experts, was the capacity of wind turbine manufacturers to supply the products. "Turbines are getting larger and the manufacturers are making more--there is a risk in that," Allianz's Mr. Jones said.
Mr. Gibbons does not believe the sector's rapid growth will pose a problem. But he acknowledged that there are some risks. "The risk is more on the availability of parts and repairs--there is a longer than usual downtime," he said. "And for older models, spare parts are not readily available," he added.
Availability of parts has important implications for business interruption, which is an important risk consideration for many owners and operators, especially for those with commitments to investors, experts said. "Private equity funds are becoming a much bigger player in the renewable sector," said Tom Sexton, London-based co-head of the recently formed dedicated renewable energy team at New York-based brokerage Marsh Inc.
"Smaller wind farms are more risk-averse and tend to buy more cover and equity funds look to buy as much cover as possible," he said. "Finance houses look more carefully at risk and insurance implications," he added.
And according to Marsh's Mr. Sexton, clients now take on more of the warranty risk as manufacturers of wind turbines have leveraged the supply and demand situation. Through hard negotiation, warranty periods have been pushed from five to 10 years down to an average of two years. "This is an opportunity for insurers to fill that gap and we are pushing insurers hard. There are insurers out there with the technical ability to offer and some recognize that," he said.
Spare parts are also an important consideration for underwriters, said Mr. Buckle. "Clients with spare critical parts and maintenance agreements get treated better by underwriters," he said.
He added that machinery breakdown is the single biggest risk faced by companies in the wind power generation sector.
Good risk management in the renewable energy sector can really pay off when it comes to buying insurance, brokers and insurers said.
"Exposure comes down to how good your maintenance is and this directly correlates to the terms and conditions you will get from the marketplace," Mr. Buckle said.
Most underwriters are from an engineering background or sit with an expert who has worked in the renewable energy field and has a good understanding of the role maintenance plays in wind power generation, he explained. "Underwriters are looking to see if units are maintained on a regular basis and in line with manufacturers' guidelines. As long as you follow manufacturers' guidelines, you will be fine, but if you deviate, you will find (insurance) much more expensive or carry a bigger deductible," Mr. Buckle said.
He added that risk inspections are very much welcomed by underwriters. "You will get a lower price if you present yourself as a better risk," he added.
AIG looks at the type of equipment, management of facilities, loss history, maintenance records and where the risk is located, Mr. Gibbons said. "There are owners and operators that have evolved into good risks and there are those that have not," he said. "As a class in general, the (risk management) bar has been raised," he added.