05.29.2023
Beyond niche Nat Cat and seismic risk: new trends on the horizon for parametric products
Increasingly mainstream, parametric insurance provides coverage opportunities for the full life cycle of renewable energy projects – from financing or delayed start-up risks, through to operational exposures. Read on to learn how parametric cover is a leading differentiator in renewable energy insurance.
Solar, hydropower, wind, geothermal, biomass – as the energy and renewables markets rapidly evolve across the globe, natural disaster events, driven by climate change, threaten infrastructure and carry significant production impacts. In response, innovations within the insurance sector are helping tap into additional reinsurance capacity and fill coverage gaps left by the traditional insurers.
Over the past two decades, global consumers, producers, & governments have increasingly embraced the use of cleaner energy sources. The percentage of global energy generation from renewable energy sources is projected to increase from just under 28% in 2020 to 30% in 2021 (IEA, 2020) and projections indicate that 49% of global electricity generation will be provided by renewables by 2050 (EIA, 2020).
![]() | To balance the projected energy demand with ambitious climate targets set by member states in the Paris Climate Accord, the share of renewable sources in the global power sector needs to be rapidly scaled up. Thankfully, many countries agree that significant investment in renewable energy is crucial in order to secure a clean energy transition that limits global warming to 2°C. |
Government initiatives in Asia-Pacific for example, such as 20-year-feed-in-tariffs with quality counterparties, have also shown positive signals. In 2018, an estimated USD 150.2Bn was invested in renewable energy in the region and cumulative solar photovoltaic capacity is expected to triple to 35.8 Gigawatts by 2024.
Continued market hardening, Nat Cat exposures, and climate change, however, all pose non-negligible threats that hinder investment and the continued development of the renewables sector worldwide. Recent loss examples – including the collapse and severe damage of all 6 wind turbines installed at a wind farm on Miyakojima Island in Japan following Typhoon Maemi, or the USD 80M in losses for a solar farm following a single hail event in 2019 West Texas – underscore the need for a revolutionary approach in renewable energy insurance to better protect clean energy investments and assets.
Renewable energy projects face different risks throughout their life cycle. This dynamic risk exposure can contribute to a complex insurance environment that necessitates detailed knowledge and understanding from all players involved, from developers and contractors to investors and insurers. Renewable energy insurance faces headwinds especially in the following project stages:
Parametric solutions offer insurance against renewable yield volatility by linking renewable energy input to the price per unit of asset dependent output. Customized precisely to client’s production locations, turbine or power generation technology, and historical yield – parametric renewable energy insurance protects against loss of income due to an excess or lack of natural resource. This new generation of renewable energy insurance operates through a straightforward, index based solution that triggers based on objective, third-party data.
Take for example the construction delays experienced by a wind farm developer due to high wind conditions. While the client had budgeted 20 days of weather delay in an already tight 6-month schedule, wind conditions left cranes inoperable or forced postponement of lifts to a resource-constrained night schedule. Acting as a financial hedge, parametric covers can be structured to payout when weather conditions reach certain thresholds that will impede operations – providing developers certainty of liquidity to help cover additional costs.
With a growing and extensive product offering against all Nat CAT perils impacting renewable energy projects, parametric insurance provides a means to supersede gaps in the traditional renewable energy insurance marketplace. This enables better protection of public entities and businesses against climate change.
How it works
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Challenge: Wind generation output can fluctuate by 20% from one hour to the next, leading to substantial annual variations in yield & revenue. An offshore wind company developing a new site in Taiwan faces typhoon exposure as well as future cash flow uncertainty due to inherent wind volatility. The wind farm must purchase renewable energy insurance as part of the terms set by its financing parties. This includes proof that the new site will be covered against loss of revenue due to lack of wind resource. The traditional market does not offer coverage for lack or excess of wind, thus the company must find an alternative solution in order to continue construction.
Parametric Solution: The wind farm opts for a dual-trigger parametric policy that pays out when power generation does not meet pre-agreed thresholds, or when a typhoon surpasses a particular wind speed at asset locations. The swift payout enables business continuity and guaranties an economic balance towards all financing parties. Exposure of the offshore site is monitored in real-time by satellite data. The policy is customized precisely to the wind farm location, exposure, and turbine technology, and structured based on decades of data. This reduces project risk and leads to increased profit security.
Challenge: A PV plant was recently developed at a remote location where existing hail data maps lack precision due to poor data availability. The traditional market responded by imposing high deductibles and reduced limits after similar PV plants suffered losses in 2019 due to equipment damage and subsequent business interruption following a tennis ball sized hails across Queensland.
Parametric Solution: Regardless of where a given solar farm is located, technology advances related to the reporting and detection of hail events (e.g. doppler radar, satellite imagery, on-site sensors, etc.) enable parametric insurance providers to more accurately model and underwrite hail risk. The parametric approach also incorporates asset-specific factors and models the underlying phenomenon directly, rather than pricing policies based on limited historical loss data. This overcomes shortfalls in the traditional renewable energy insurance marketplace, minimizes basis risk, and provides renewable clients with swift payout and fairly-priced coverage that most closely represents their experience during a hail storm.
Get in touch to learn more about our parametric covers for renewable energy projects
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