Climate change to drive up renewable energy insurance costs

Climate change to drive up renewable energy insurance costs | Insurance Business Australia

Climate change to drive up renewable energy insurance costs

The impact of climate change is one of the largest risks that humanity faces today. To minimize reliance on fossil fuels – which is a major contributor to global warming – renewable energy is becoming more popular.

However, the already-present effects of climate change, such as severe weather patterns, are magnifying the risks faced by renewable energy producers, according to Andrew Slevin (pictured), CEO of international risk management and valuation firm John Foord.

“It appears that extreme weather events are causing renewable energy asset owners to submit more insurance claims each year, in turn escalating the perceived risk by insurers and causing them to increase insurance premiums to underwrite these risks,” Slevin told Corporate Risk and Insurance.

Because of this, insurers are paying more attention to weather events, given the amount of claims they have paid out recently. Several examples Slevin identified include a solar panel facility in Texas that filed for over US$70 million in damage caused by a violent hailstorm in 2019. In 2020, the unprecedented wildfires in California caused three solar projects to file large claims due to fire damage.

He cited research by Norton Rose Fulbright, which showed that insurance premiums for some solar projects have increased by up to 400% over the last two years, often driven by perceptions of the potential for damage from extreme weather events.

Meanwhile, insurers have also been raising deductibles and stripping away some areas of coverage.

Aside from direct effects of weather events, Slevin also pointed out that, due to the growth in the renewables sector, its assets are being located in increasingly diverse and remote locations.

“Renewable operators in emerging markets are often particularly exposed to weather-related events like typhoons, flooding, earthquakes, and volcanoes, which damage not only generation facilities but also transmission and distribution networks,” he said.

Varying risks across the industry

Renewable energy production has various stakeholders, and each of these have slightly different needs in terms of risk management, said Slevin.

“Asset owners and financiers have to carefully balance the need to reduce risk and minimize losses while improving governance of their businesses and investments,” he said. “Insurers and reinsurers, meanwhile, are primarily concerned about improving pricing and risk selection, matching premiums to values at risk, and minimizing disputes with the renewable energy operators whose risk they underwrite.

“While we often do not think about the middlemen, brokers are also a key stakeholder group in the renewable energy sector – they want to improve client service and retention.”

Focusing on asset owners, over-insurance is another common problem in the sector, according to Slevin. This is due to the rapid pace of innovation, which also causes asset costs to go down quickly.

“If we consider an example: a solar panel operator purchased his equipment at a cost of US$100 million some years ago and he decides to insure it at the original cost,” he said. “After several years, these same solar panels may only cost US$80 million to replace due to the falling cost of solar panel materials and improved supply chains. If we factor in newer technology, the actual cost to install equipment to replicate the output of his facility may be notably reduced.”

If the asset owner does not provide an updated reinstatement cost to his insurer to reflect these lower costs, he could be paying much higher premiums than necessary, Slevin explained.

According to Slevin, the key challenge in insuring renewables is keeping declared values correct and accurate. If an asset is under-insured, premiums may be too high or declared values may be too low, leading owners to pay out-of-pocket in case of a claim.

“This situation is all too common for many industries especially where owners declare values based on current book values (or worth) of the assets and not on current replacement costs,” Slevin said, adding that keeping track of these price movements and how they may influence insurable values is not easy, and this is where John Foord specializes.

Opportunities for growth

Slevin explained that the effects of recent developments are not all negative for the industry. As mentioned, increased innovation and investment in the renewables industry leads to falling reinstatement costs as across solar, wind, hydro, and other types of renewable energy equipment.

Aside from these, competition in the market, increased government support, and wider geographic coverage also allow owners to insure assets at lower values, potentially reducing premiums, as well as driving down other costs.

“Ensuring that sums insured are updated regularly will go a long way to minimizing the effect of rising insurance premiums across the sector, providing assurance to asset owners, insurers and re-insurers, financiers, and brokers,” Slevin said.