Renewable energy and insurance - all you need to know

Bryce Aquino, principal engineer - renewable energy, and Sam Walsh, head of US renewable energy, both of AXIS Insurance, offer their insights on the renewable energy sector and how it has developed over the last 12 months. They also explain how to get the pricing right when underwriting, how to support owners of older projects, and offer tips for insurance professionals operating in the space.


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Paul: [00:00:13] Hello everyone and welcome to Insurance Business TV. And how you feeling? Maybe you're watching this on a Monday and you've got the blues at the start of the week. Maybe it's a Friday and you're just ready for the weekend. What you need is an energy boost. And I know two men who are going to give that to you, but not that kind of energy boost. No instead, they're looking to provide an energy boost to your book of business. That's because they are both experts in the renewable energy sector, one of the most fascinating and rapidly developing lines of insurance today. They're going to provide you with the tips you need to succeed in this market. So who are they? Well, thanks to Axis Insurance, we have two of the very best. They are Sam Walsh, head of US Renewable Energy at Axis Insurance, and Bryce Aquino, principal engineer, renewable energy also at Axis Insurance. So, gents, welcome to IB TV. To get us started, talk to us about how the renewable energy sector has developed over the last 12 months. Sam, I'm going to come to you.

Sam: [00:01:23] 2021 was a record setting year for renewable energy capacity growth worldwide, and that was on top of a previous record year in 2020 where even though it was a little bit of a blip from COVID, it proved to be a very resilient marketplace and growth really continued in an extensive way. And more than half of that growth over this past year was solar energy. The International Energy Association, the IEA, predicts that by 2026, renewable energy capacity globally will likely be equivalent today's fossil fuel and nuclear capacity combined. So there's certainly a lot of robust growth expected over the near future. But at the same time, when you have that sort of demand, there's real impact on the industry as well, as well as external issues that are facing the global economy right now. Soaring shipping and transit costs, high commodity prices, as well as higher energy costs across the board are all factors that can act as threats to this rosy forecast for renewables over the near and medium term. For example, spot prices for polysilicon, a major component in solar panels, is about 3 to 4 times higher than it was a year ago. In recent months, wind turbine manufacturers have been ringing the alarm about the unsustainability of pricing for their equipment. After years of competing for market share with very thin margins, you know, the uptick and component cost, the bottlenecks are really squeezing them. And battery energy storage technology and installations have really taken off in the past few years. But that's also happening at the same time where there's a lot of competition with the electric vehicle market. So again, you're just seeing a really drive up of costs over the past year after a real decade of prices falling quite considerably over that period of time, we're now facing headwinds where costs are going up.

Paul: [00:03:21] I think you set the scene for us brilliantly there Sam, thank you very much. And of course, you talked about some of the threats that are emerging. This has altered the risk landscape without a doubt. Bryce, if I can come to you, tell us about the the new exposures and how the insurance industry has responded.

Bryce: [00:03:38] Paul. First of all, thank you for having us. Yeah. So I guess with the change that's been going on for the past year, I think a lot of the insurance industry has really focused on personnel as far as in-house engineering expertise with a lot of the changes that have been going on, whether it's due to COVID or logistically because of the past 12 months of supply chain issues, we've had, we've been seeing a lot of new developments within the renewables field, say, in wind. Now we have the idea of using two place two piece blades or like modular cells that can be, you know, certain parts can be replaced without intervention from major corrective teams. Having the know how and how to do the investigation and the due diligence on those is really important for the insurer to understand the risk, especially when there's not much operational data behind it, to actually put risk numbers and financials behind it. Being able to understand how these things work and working with a manufacturer, working with the developer is how I think you get ahead and try to be a little bit more risk averse and acceptance accepting of the risk that you're taking on with these new technologies.

Paul: [00:04:58] Yeah, thanks for that. And you're talking there about moving the move towards in-house engineering. Sam, the engineering side has had a real impact on insurance.

Sam: [00:05:07] No, it certainly has. You know, I really take the view from an underwriting point of view, and I oversee the team that does that. And I think we would all feel that we'd be in a real tough position if we didn't have folks like Bryce that we could lean on to give us that, I think extra comfort around some of this new technology that's being deployed. You know, as you said, we're here in the risk management space. We're working with our insureds, we're off laying that risk. But at the same time, we need to make sure that we're writing risk responsibly. We're we're meant to be in this for the long haul. We're one of the few insurers that's been around for over a decade focusing on renewable energy, but that has included many years where it's been really hard to return an underwriting profit, even some loss making years driven by large catastrophic events, equipment failures. And we need to be in a position where we can respond to that. At the end of the day, we're here to cover fortuitous risk, and when certain things emerge that show is real trends or things that you can expect, it becomes very difficult for insurers and insurers alike. We're not going to look to cover something that is a known issue or a defect. And then it also puts insurers in a really tough spot where they may already be committed to the equipment that they've purchased. They may have already constructed the project and are two years in and discovering that their lightning protection system isn't suitable for the location that they're in or that they wish they had a tracking system for their solar project because of hail risk in the area. So yes, engineering has been to become a really important thing that informs our underwriting process and make sure that we can ultimately be in this for the long run.

Paul: [00:06:49] Yeah. And Sam, if I can just stick with you for a minute as well. I mean, you touched a little bit there on the risk management side, but I'd love to know how brokers can get involved here as well. I mean, what can they do to ensure that renewable projects are more resilient and future proofed?

Sam: [00:07:04] Yeah, I mean, brokers are the really critical key here because they get to see both sides of it where they understand what's going on in the insurance market and how insurers are reacting. But they're also working with insurers and understanding what is coming down the pike. What are the pipelines looking like? Where is the growth going to be? And I think it's been more critical than ever over the past 2 to 3 years where there was a real shift in the insurance market after a number of years of really large losses, mostly driven by catastrophic events like hail and hurricanes, there was a real shift in terms of pricing, underwriting approach terms have been quite broad, deductibles have been quite low. But I think a number of insurers have found themselves in a position where they were not able to return an underwriting profit and they really had to change their view on the risk that they were writing. So brokers, I think one of the most critical things they can do is start the communication really early when they're working with insurers, make sure that they're setting out expectations, that they're involved in understanding what the insurance requirements will be because of the tax equity financing. For a lot of these renewable energy projects, the insurance terms are going to be dictated by lenders and the financing agreements, and in turn, that takes some of the control out of insurance hands. They don't get to have the risk management approach of what they deem to be the appropriate amount of risk. It's going to be decided for them. And I think what what has been seen over the past 2 to 3 years is that a lot of those requirements were. Very hard to get there were too costly and it really had a tough impact on insurance bottom lines. So, again, a knowledgeable broker who can get out in front of that, who can help push back on terms that are not going to be financially viable, who can help insurers make sure that they get the appropriate level of coverage that they need. That's really critical. And then alternatively, they're the ones who can work with insurers and really help sell the projects. And I think where brokers can really stand up now is how do they put the submissions together? What sort of data are they sharing with insurers to to make sure that we are comfortable with the risk?

Paul: [00:09:14] Yeah. And for me, listening to this, you know, I fold my hands up and say I'm certainly far from an expert. But what's very, very clear is just how how quickly this market is developing and how quickly the technology develops as well. So, I mean, how do you ensure that you're understanding and pricing these correctly and underwriting must be really difficult Bryce?

Bryce: [00:09:36] Yeah. You know, it's it's been pretty difficult. But I think both internally and externally, there's measures you can take to make sure that you're doing things correctly, whether it's from a writing standpoint or from a component knowledge, an extra standpoint. Right. So, I mean, internally, usually within the insurance companies that are in the business, renewables is fairly new to the US, but it's been around. But additionally power generation obviously has been around for decades and decades and decades. And I think the larger that you see these projects scale up, you're going to start seeing parallels to conventional generation. So kind of speaking about how wind turbines are now the four or five, six megawatt range onshore, you're getting to the point where a lot of these components are kind of scalable to things that you see in conventional or if you have those avenues to have those conversations with individuals that do have that previous conventional generation space makes it more comparable for the risk, especially from a financial point of view when it comes to that stage of megawattage. But also, it's really important to communicate with outside sources. And I think that's a big theme between what me and Sam have been saying, having those conversations with developers, with the new technologies, and making sure you have those open lines of communications and working together on a lot of the issues that you're seeing and all the nuances that you're going to see from the operations as they happen, not just after the fact, when defects are covered is really how you're going to get ahead and stay competitive in the game.

Paul: [00:11:15] And I think that's that's terrific advice. And Sam, if you don't mind, can you just give us some some examples as to how this technological advancement is playing into underwriting?

Sam: [00:11:26] Yeah, absolutely. I mean, I think probably one of the most notable fields over the past few years has been the growth of battery energy storage technology. I think we're one of the big shifts over this past year, really driven by some large loss events that have occurred that have really shifted our view as insurers on sort of what is the appropriate risk level we can take. There's two sort of main design elements to battery systems. One is going to be sort of containerized systems that are got to have separation between the units often can be stored outdoors in metal containers, and the other design is usually in a single building or a warehouse. And the real concern around the warehouse, single building design, is that if you were to have a thermal runaway or fire event occur, you're really at risk of losing the entire system. And from our point of view, we like to look at what is the probable maximum loss for for a project. And when you're looking at something where that scale and there's the potential to have that type of loss, it puts insurers in a position where they have to evaluate what is the amount of risk we can take. We've got to change our underwriting approach to make sure that our risk tolerance is being met and we're not exceeding it. So I think that's sort of like an example of where in this past year we've really had to change our outlook and how we underwrite projects like that.

Paul: [00:12:50] Yeah, and given of course these rapid advancements across these classes of businesses, can you just shed some light for me as to how you're able to support owners of all the projects that are using technology designs that are perhaps out of date or no longer adequate. Bryce, can you give me some insights?

Bryce: [00:13:08] Oh, yeah, absolutely. I think that's a great question because I think now we're really in the age of advanced data and visualization. And the new thing that's a really hot topic right now is having digital copies of your turbine. It really helps you understand and assess what's going on, what condition your things are in. But that's obviously not something that we have in older, older assets. So I think having a really good understanding of how the condition of your site is and whether what routes you have to take going forward, whether you're looking at lifetime extension or repowers. There are steps you could take to mitigate the risk, and especially with things like lifetime extension, where turbines are built for maybe 20, 25 years and you're trying to expand that. There's people in the industry you can have conversations with our contract that will really help you change your own strategy to make it more dynamic to something very specific to your site. So you're changing your inspections, your change, your maintenance. Maybe you even change the megawatt output to try to extend lifetime. But you need to be very dynamic the way you go about that, because every site is different, every turbine is different, and you need to properly assess that in order to make sure that you're operating your assets to its optimal. There's definitely people in the industry and companies in the industry that have been doing this for a while and I think reaching out to them, having those conversations really gives a way to maximize the. Meaning a lifetime of your turban or your solar, solar plant or things of that nature.

Paul: [00:14:43] And Sam as well. I would imagine that catastrophic exposure is a big consideration here as well.

Sam: [00:14:49] Yeah, it is. And I think it's probably of the two, it's the tougher one, you know, in terms of price is talking about the technological side. You know, insurance can take steps with spare equipment knowing what sort of alternative replacement equipment they could swap it out with. Are you working with a manufacturer that offers full service agreements for long term where they pick up the exposure sort of as a warranty that certainly is available from a catastrophic side? It certainly is tough because ultimately the best thing you could do is at the outset of construction is build that in. But what do you do if you're five to 7 to 10 years into a project and you're finding that it's just probably not at the sort of the best in class level based on what we know today. And so that is a difficult one. I think it's been interesting where Bryce just touched on repowering for wind turbines. You can certainly make sure that when you do that, when you replace older nacelles, blades and equipment that they're best suited for the site. In terms of the lightning protection system, is the wind regime appropriate for the for the blades being used? And then, interestingly enough, we've just seen what what for me was the first solar project where it's almost sort of the equivalent of a repowering that we've seen on wind, where they're going to keep the original panels on site, but they're going to swap out the racking system from a fixed design to a tracking system. And this is a project that's in Texas, and the focus is on making sure that they can mitigate against large hail exposure. The tracking system allows them to go into a storm mode when they sense that hail is impending and that angle can make a big difference in what is the potential damage to a project. I think the tough thing is, though, is do these projects, are they generating enough money where that can actually be financially viable for insureds? And I would hope that maybe one of the small trade offs here is that by moving to a tracking system, there'd be greater output and hopefully greater revenue. But I don't know that this type of approach will be financially viable for a lot of them. So it's certainly something where you want to build it into your your approach to construction now and take whatever steps that you can to ensure that projects are that are already built can withstand these types of weather events or concerns.

Paul: [00:17:14] So you guys have obviously given us some amazing tips so far. But if you don't mind, I'm going to ask you to give me one more. Could you leave us with a tip for insurance professionals who are operating in the renewable space? How can they have success in this market? Sam, I'm going to come back to you.

Sam: [00:17:32] Okay. I may be sort of reinforcing a point I talked about earlier, but I think at the end of the day, communication is key and making sure that you are knowledgeable about the space, about the equipment being used, but also being able to feed back to insureds where where insurers are in terms of their appetite, their ability to write and setting expectations. I think the biggest difficulty is when you're sort of coming down to the wire on a project and an insurer needs very specific terms and the insurer is not in a position where they're able to grant them. That's never a position that you want any party to be in, especially as you're getting close to a financial close or breaking ground. And so I think brokers are the real ones who are in control of being out in front of developers, in front of owners, and being able to influence the decisions that they're making, as well as then messaging that back to insurers so that they can sell the project in the best way possible and make ourselves more comfortable with it and more likely to write it. So yeah, communication is key.

Paul: [00:18:40] Yeah. Great tip. And Bryce, anything to add to that?

Bryce: [00:18:43] Yeah. I mean, I think Sam really brought up a lot of good points. A very wise guy in the renewable energy space and insurance. So I think additionally, like we've been talking about with having the right personnel within your company, being able to have those early conversations with developers is super important and being able to have the people to ask the right questions is super important too, because a lot of times you get put in front of your the salespeople for the OEMs and they're obviously not going to tell you about all the inefficiencies they've had or any of the issues that they perceive they're just going to try to sell you on what's the newest, latest and greatest technology. So I think having the people in play to ask those difficult questions and making them go back and give you back that technical information is really how you're going to get ahead of these projects and really try to mitigate the risk before they happen. So you don't end up in a situation where you're working for years trying to cover claims that have gone wrong with a lot of new technologies that we don't necessarily have operational data on.

Paul: [00:19:51] Well, I think two very wise guys in the renewable energy sector of insurance. And I think you've given our viewers plenty to work with. Clearly, there are some massive opportunities available in the sector. And if you want to find out more about the renewable energy insurance sector, then be sure to reach out to Axis Insurance. My huge thanks to Sam and to Bryce and we'll see you next time here on Insurance Business TV.