Underwriting the transition to renewable energy
The increasingly rapid growth in renewable energy presents a mix of opportunities and challenges for property insurers. AXA XL’s Spain-based senior underwriter for the energy sector has the story.
According to BloombergNEF, global investment in 2021 in what has been dubbed the “energy transition” totalled $755bn, a 27% increase over 2020. BNEF also reports that “renewable energy, which includes wind, solar and other renewables, remains the largest sector in investment terms, achieving a record $366bn committed to it in 2021, up 6.5% from the year prior”.
Sharply falling costs have played an important part. The International Energy Agency says: “Thanks to rapid technology improvements and cost reductions, a dollar spent on wind and solar photovoltaic deployment today results in four times more electricity than a dollar spent on the same technologies ten years ago.”
A steep learning curve
A familiar pattern is at play here: as demand for new, beneficial technologies grows, manufacturing improvements and ongoing technological innovations drive costs down and utility up. These conditions also tend to be self-reinforcing. As costs continue to fall and more innovations succeed, a virtuous circle emerges whereby the new technologies move from the periphery to the mainstream.
However, the process isn’t always all upside. In the case of renewable energy, the development of what is essentially a new market segment presents a mix of opportunities and challenges.
For energy insurers like AXA XL, the opportunities include supporting our existing clients’ ambitious plans to generate more energy from renewables while developing new relationships with companies looking to capitalise on this sector’s rapid growth. At the same time, we also face significant challenges in enabling the transition to more sustainable energy sources.
During the past five years, for instance, working with limited historical data, energy underwriters had to develop coverages for increasingly complex and valuable facilities – some located in areas exposed to natural catastrophes. Likewise, property risk engineers had to become familiar with new designs and systems. Meanwhile, claims handlers needed to develop the requisite expertise to resolve covered claims quickly and efficiently.
Given these and other challenges, the property insurance market for renewable energy installations has been understandably volatile as insurers acquire the necessary knowledge, expertise and capabilities to underwrite and service this business.
Another familiar pattern
Recent experiences in this insurance market illustrate another familiar pattern. That is, when new business opportunities emerge – especially those with the size and scope of the renewable energy market – insurers often respond by offering more capacity at a lower cost and with less stringent terms and conditions.
Then, the losses start to hit.
With renewable energy operations, the most common losses include:
- Damages to onshore and offshore wind turbines from fires or lightning
- Machinery breakdowns
- Damages to offshore windfarms from cyclones/hurricanes as well as the general hazards associated with operations in marine environments
- Solar panels damaged or destroyed by severe storms featuring high winds and/or hail.
Also, since these are revenue-generating operations, clients face business interruption (BI) losses whenever equipment damages take their facilities offline. And given the long lead times needed to repair/replace specialised components, these BI impacts can be substantial. In addition, the widespread supply chain disruptions caused by the pandemic are exacerbating BI losses (this is not unique to the energy sector).
An often more consequential issue relates to the electrical substations. If, for example, a few wind turbines or solar panel arrays are damaged, the financial impacts usually aren’t excessive. However, when substations are affected and electricity from undamaged turbines or solar panels can’t be funnelled into power grids, the BI losses can quickly run into the millions, if not tens of millions.
When confronted with mounting losses, insurers naturally – and predictably – could begin to restrict capacity, raise rates and impose stricter terms and conditions, such as by requiring higher deductibles. Clients, in the meantime, could find it harder and harder to secure adequate coverages for affordable rates.
Supporting the transition
The situation outlined above roughly corresponds to the period from about 2014 to 2021. In short, the insurance market for renewable energy facilities has been challenging for insurers and clients.
Nonetheless, as scientific evidence continues to mount, transitioning the global energy system to sustainable sources is imperative. And governments, energy companies, investors, the corporate sector and consumers are all doing their part. Governments are adapting regulatory frameworks to promote investments in renewable energy projects. Many legacy energy companies have adopted ambitious targets for transitioning their portfolios to renewable sources. And demand from corporations and consumers for clean electricity is adding even more momentum.
AXA XL also continues to support this transition. We now have an extensive, balanced portfolio of onshore wind farms, and a growing portfolio of offshore wind farms and solar plants. Although the past few years have been challenging, we’ve learned from these experiences. We now have a much greater understanding of – and expertise in – different types of renewable energy operations.
While underscoring AXA XL’s commitment to the renewable energy sector, I must also note that these technologies and the risks associated with them are continually evolving as they are improved, upscaled and made more efficient. Thus, we will continue to evaluate potential opportunities carefully while working closely with clients and brokers to develop relevant, affordable solutions. And to innovate! For example, some clients could benefit from parametric coverages created by AXA Climate – a unit dedicated to these programmes – to cost-effectively mitigate losses that occur when the sun doesn’t shine or the wind doesn’t blow.
In closing, I want to highlight the implications of the current macroeconomic environment for our clients and would-be clients. In particular, the ongoing war in Ukraine and the lingering effects of the pandemic are fuelling a broadly inflationary environment. That isn’t news; businesses and consumers worldwide are having to cope with higher prices for virtually everything.
Also, given this inflationary climate, clients should carefully review and update their valuations at renewal. I can’t stress this enough. That is because when an asset is insured for less than its current replacement value, the ‘average clause’ can apply if it is damaged or destroyed. Under the average clause, the client is only compensated for a portion of the policy limit. In other words, in an inflationary environment, clients that don’t update their asset values face a sharply increased risk of being underinsured.
Contributed by Susana Huete Santos, senior underwriter-energy, AXA XL