Improving supply chains, lower costs for clean technologies and the growing urgency for the energy transition have propelled clean energy into a mainstream industry. While global investment in the sector is set to double fossil fuel inflows this year, this vital but relatively embryonic industry has been fraught with challenges. As carriers increasingly write clean energy assets, can the infrastructure that’s needed to combat climate change rise to meet the challenges?
Uncover valuable insights from Gallagher Re's experts as they delve into the challenges and opportunities of insuring sustainable infrastructure in the renewable energy sector.
Q: How is the renewable energy sector faring in reinsurance?
Keith Lippman: Renewable energy technology assets have performed in the insurance market. It's been a very challenging space, though, from hail damage to solar panels and issues with the cabling and turbines that power offshore wind. But many carriers look beyond profitability challenges to write industry assets, whether they’re motivated by incentives, to support the energy transition or their own ESG agendas. Renewables comprise just a small percentage of overall energy assets, but at current standards carriers are aware that they often lack the quality and engineering required for long-term profitability. Alternative energy assets will become more and more dominant within our energy infrastructure, but they’re often built quickly and cheaply, and not necessarily sustainably.
Q: How is this playing out in insurance?
Steve Bowen: From an insurability standpoint, we have all seen and read about the challenges resulting from increasingly expensive and impactful hailstorms. But if we’re simply looking at solar farms or panel installations on individual properties, we have seen examples of success and failure. Following Hurricane Maria’s landfall in Puerto Rico, we witnessed numerous solar farms which were impacted but most damage was from flying debris and not the wind itself. Even in Florida after Hurricane Ian, we were pleasantly surprised that virtually every newer constructed structure had extremely limited – if any – damage to their solar panel. Where we did see damage was at properties with older construction or instances where panels hadn’t been properly installed.
Q: How are insurers managing this?
SB: It really depends on the type of risk, peril, and location. In most instances, the risk should be fairly obvious, and you can plan or underwrite around it. Addressing risk uncertainty is where the challenges arise. By properly assessing varying layers of direct or indirect risk, it should allow some room to maneuver around any complexities that arise from whether an asset is insurable or not. Another challenge is that not all renewable energy types are the same. Assessing the risk of an asset for a solar panel is going to be quite different from that of a hydroelectric plant.
KL: Another important distinction to make is size and scale. Roof-mounted solar on someone's home and massive solar farms operated by Powergen operators are very different entities with distinct risk profiles. From my experience, when things are installed correctly, by and large, they're resilient. But the hit ratio on things being installed correctly is suspect, as regulation differs by region and so will the implications of this.
SB: That’s a great point. As we know, there are often major differences in how states mandate building codes and enforcement. If you have a multi-state or multi-national portfolio, that will require much more bespoke underwriting analysis to assess the totality of risk in some areas.
Richard Rudden: And if the insurance sector doesn’t get things right, it will create a lack of confidence, which is critical in this area. So, while the industry is right behind the energy transition, both manufacturers and insurers need to partner, to get it right and to get it right the first time. This includes, amongst other things, underwriting discipline from insurers and sharing of information from insureds to create a sustainable market.
Q: What should the industry be doing to combat this?
RR: The way I see it is we need to balance the scales between using the energy transition to assist in tackling evident climate change while ensuring that transition moves at a sustainable pace in partnership between asset operators and insurers. Globally there is a massive effort to deal with the problem faced around rising emissions and a large part of that is by rolling out extensive infrastructure around renewable energy and energy transition. If we go too quickly, we risk getting it wrong. Take the recent floods in the Middle East, where there was a year's worth of average rainfall in a day and there were some really bad solar panel losses. You've got this dynamic around the price economics and making sure that a project can get off the ground or not, but as a market, we should be creating something that can stand up to the future.
Q: Is the industry equipped to do this?
RR: Absolutely. Many of the coverages required are well understood but the information to understand and to properly rate those appropriately must be a prerequisite, guessing isn’t going to end well. Where coverages are required but aren't necessarily homogeneous and need extremely specialist expertise, there are markets who can and want to grapple with those in order to find a solution to, what ultimately, a client needs.
KL: It’s a bespoke solution, and one that will drive broader cooperation and knowledge sharing across the ecosystem. The knowledge gap is large, and the industry needs to look outside for the right level of expertise to play this game right.
RR: Exactly. Our Renewables team have had great traction advising reinsurance and insurance carriers on what they should be looking at, in simple terms. People appreciate guidance from specialist engineers with the expertise they are unlikely to have at this stage. There’s a growing dynamic of companies starting to split their reinsurance treaties away from composites and this means the performance of cover is more transparent, which again drives confidence.
Q: How is Gallagher Re helping clients?
KL: We are supporting our clients to access the renewables business if they're not already and, in the way that cyber got pulled out of property treaties beginning several years ago, be ready should renewables get stripped out and reinsured separately from traditional fossil fuel energy assets.
RR: Technology is changing at such speed and this renewable world spans areas that we are not so familiar with, for example underwriters who might not be so familiar with cat might not be looking at what certain regional nuances might be. We are encouraging clients to tap into our internal engineers, third-party engineers, and manufacturers to understand the market. More losses mean there is more acceptance of the need for closer control of the underlying risk and the controls needed in areas where you're going to get hail, as an example.
Q: What are the risks with alternative sources?
SB: One unique area of risk keeps arising with hydro. We have seen some examples of facilities that have been dependent on hydro energy generation that end up being affected by extended drought. This has led to a reallocation of some renewable project investment strategies to other renewable types. If we are expecting more prolonged and intense droughts, for instance, this may not only reduce energy productivity but lead to structural impacts to the asset itself. Prolonged heat can enhance land subsidence and erode structural foundations. Climate change brings a lot of considerations to the table, even when trying to determine which renewable type might be most effective for your home or business.
RR: It’s about finding that equilibrium where you're doing as much as you can as an insurance and reinsurance market to facilitate enough speed to tackle the problem, but not so much that you move too quickly, and it becomes an issue and there is a loss of confidence.
Q: We’ve seen an increased demand for standalone renewable energy contracts and treaties. What’s driving this?
KL: The market is motivated by the differentiation in the risk as well as firms’ own ESG targets. These assets are different. They perform differently. The level of transparency that's currently being provided by wrapping them into large, otherwise energy or property treaties is not sufficient because they behave differently. There are also incentives for carriers to report on the level to which they are supporting the energy transition.
RR: Businesses are managing investors, shareholders as well as running their own product P&Ls. So, from the insurer and reinsurer point of view, the risk should be right and rated in a way which is accretive to a portfolio. There is also a new pressure coming from capital providers who want to see activity within the space, so the market needs to consider where and how you find that balance. Take renewables, where we've probably fallen foul of too much pressure, too much interest to get involved with something, and not enough scientific underwriting or understanding. And therefore, we find ourselves challenging market where there's a lot of pointing of fingers going on.
Q: What should the market be doing to stay ahead of this?
SB: The reality is that this is a quickly evolving space. It is going to continue to require the insurance industry to stay at the forefront of the technology and working to understand which new renewables may become a dominant force as we continue to see the global transition away from fossil fuels. We’ve largely entered a new normal where cleaner energy sources are taking on increased share of energy production. The market always adapts, and there is no doubt that adaptation is already occurring. How our industry further innovates to not only come up with ways to insure the renewable energy transition but also guarantee protections around carbon credits or offsets that may come with these transition projects will be key. The more our industry has a seat at the table with engineering firms and regulatory bodies to seek continuity in building and construction practices will be important in understanding and managing the risk.
KL: Look back at cyber which was not so long ago immature as a line of business. There are many parallels with the energy transition. This is a massive challenge that has to be tackled, but in order to create a sustainable insurance reinsurance market, we have to ask the right questions and partner with each other to answer them. The industry may not feel ready but needs to position itself to support the energy transition and do so in a profitable way.
RR: We need to understand risk as best we can and to price it in a way that means that as a market we’re well positioned going forward. And that means sharing information between insurer, reinsurer, manufacturer and operator. Then we must provide the products that are needed but do so in a sustainable way, that stands up to the future.
