Insurance Market Trends and Key Issues

Many insurance companies have been contributing to the growth of the renewable energy sector, supporting it with insurance products. However, despite the increasing awareness of climate change and continuing expansion of the renewable energy sector, the insurance market for renewable energy began to harden toward the end of 2018. Some insurers withdrew from underwriting specific sectors, whilst others closed their books entirely. This trend has continued throughout 2019 and into 2020, according to major insurance brokers Aon, Marsh and Willis. 

A survey of the insurance industry conducted by Allianz showed that business interruption, natural catastrophes, changes in legislation, cyber incidents and new technologies were the top five business risks in the renewable energy sector. Willis’s 2020 renewable energy review and Marsh’s renewable challenge research confirmed Allianz’s findings citing “several new realities” that the sector needs to embrace. These include geopolitical issues, new risks emerging from climate change, the acceleration of the renewable sector, a hardening insurance market and the increase of index-based solutions. Aon’s renewable energy market outlook 2020 report also confirmed a hardened insurance market where “a sustained period of competitive pricing and increased claims” reduced insurers’ appetites. According to Aon and Marsh’s research, component vulnerability, defective designs, extreme weather damage, large claims at project construction phase, and increasing fire and theft claims are the main drivers for increasing premium rates. Natural catastrophe limits, catastrophe model review, equipment warranties and obsolete technologies are also key issues in the industry.

Icebreaker One for Innovation

But risks and challenges bring forth innovation. Icebreaker One’s “Standard for Environmental Risk and Insurance (SERI)” project works with insurance industry partners and leading research organisations to bridge the data gap between insurance and climate change. The project incentivises climate-ready behaviours and a net zero transition through innovative insurance products. 

Renewable energy plays a central role in the UK’s transition to net-zero. The challenges of the sector and the underlying insurance industry can be translated into use cases for the SERI project which in turn can incentivise the wider adoption of net-zero initiatives and innovative insurance products. 

Use Case 1 – Insuring Flexible Energy Storage Services

Unlike traditional fossil fuel energy, renewable energy depends on natural resources that are out of human control, resources like sunlight and wind bring up availability and stability issues. Limited by high cost, energy storage also presents an obstacle for the industry with some firms being forced to turn off their generators when the grid exceeds its capacity. 

Flexible energy storage services offer a solution allowing renewable energy systems (home or commercial) and electrical vehicles (EV) to fully utilise their energy storage systems (hydro, thermal and batteries) by exchanging energy with the grid.  They act as individual suppliers or virtual power plants, storing electricity in their system at low demand periods and supplying electricity to the grid during periods of high demand. 

Aon and Marsh have reported large claims caused by construction errors, poor maintenance and bad risk management in renewable energy projects. This largely limited insurers’ appetites in the sector, especially in battery energy storage systems (BESS), Anaerobic Digestion (AD) projects. While the concept of a virtual power plant is still in its infancy, large claims and unknown risks are preventing the uptake from the insurance industry. 

An innovative insurance product for flexible energy storage services that utilises open data and shared high quality data between stakeholders (such as manufacturers, contractors, operators and insurers) could potentially break through the obstacles faced by the industry and help the renewable industry to better transfer risks and attract more investment for future development.

Use Case 2 –  Data-driven insurance products

Large claims and unclear performance of new technologies but upward pressure on the premiums of the renewable energy insurance policies are hardening the insurance market and driving away investment. This is especially true for small and medium-sized projects.

Claims can be caused by the unclear robustness of new technologies and increased failure rates of relatively untested components. Limitations in the skills and knowledge of people working in the industry, such as lack of awareness of correct installation practices also contribute to claims. 

Many of the lesser-known risks associated with renewable energy projects are present at all stages of construction and operation. The long list includes the reliability of catastrophe models, manufacturer designs and test results of assets, training and capability of construction contractors, critical updates of technologies, assets operation and maintenance procedures.

The inability to access key data lies at the heart of the problem. The insurance industry is unable to access essential asset-level data in the renewable energy sector such as breakdown data that may only be shared within a closed industry group.

Working with our partners and stakeholders in the renewables sector, we have outlined a  process to develop data infrastructure and data standards for innovative data-driven insurance products. These products will allow stakeholders to collaborate, collect, process, and share more reliable data, feeding this data into catastrophe models for more reliable outputs. The data will also aid in producing more realistic underwriting, fairer insurance cover and contribute to the softening of the renewable insurance market.

Use Case 3  Insurance products for older and smaller renewable firms

Renewable energy innovation is progressing at a rapid pace and older legacy systems, especially small systems, now are facing little or no insurance coverage. This is partly due to manufacturer insolvency, lack of parts or the ending of manufacturer warranties. 

Uninsured assets could potentially be abandoned due to the heavy financial burden caused by maintaining breakdowns. These abandoned assets can be costly to remove and most of the materials will end up in landfills according to Inside Energy. What’s more, they could risk becoming a potential blot on the landscape, adversely influencing people’s view towards renewable systems

For example, small onshore wind farms older than 5-7 years in the UK can struggle to get any insurance cover, despite the average lifespan of a wind turbine is 20-25 years. The cause for this issue may be linked to the warranties of the wind turbines. In the UK, 12% of the total 737 operational onshore wind farms are over 10 years old and with less than 1MW capacity. This problem is not just limited to wind turbines. Many older biomass energy systems located in British farms are facing similar challenges. There is an urgency to resolve this problem.

A solution lies in a government-backed scheme or insurance product that encourages small renewable project operators to upgrade components such as new wind turbines and more efficient power generators. If system components are upgraded then system warranties can then be extended. 

Use Case 4 – Government Policies to spur long-term growth

Both the renewable energy sector and renewable energy insurance industry structure their business and underwrite policies within the legal framework shaped by government policy and regulation. Long-term policies, therefore, have the power to secure the future of the sector.

We hope our work on data infrastructure and data sharing standards can provide a better insight into the mechanisms of both the renewable energy sector and the insurance industry and how they interact.

This insight can inform the UK government and aid it in forming more effective long term policies to sustain the growth of the renewable sector. Reciprocally, the renewable energy sector will assist the UK government in delivering its net-zero targets in a safe and productive manner.

We are currently collecting use cases in the renewable energy sector. If you can help us with our research or would like to learn more about Icebreaker One’s SERI project please contact us: partners@ib1.org

1. To work with our partners in the insurance industry in developing climate-ready insurance products, and 
2. To develop the shared data standards and infrastructure that will underpin the data requirements arising from these products. 

What does climate-ready mean?

There is a lot in there, so let’s start by defining what “climate-ready” means in this context. Icebreaker One’s definition of climate-readiness is twofold. Firstly, climate-readiness translates into delivering net-zero by stopping new emissions and balancing out, or offsetting, all prior and current emissions. Secondly, it means that we need to  address the consequences of climate change, by adapting and becoming more resilient to its impacts

What are climate-ready products?
Building on this explanation, we have defined a climate-ready insurance product as one that incentivises certain behaviours in the business models of the companies and individuals buying insurance. This includes incorporation of net-zero objectives and outcomes into their business model and operations, and demonstrating greater resilience and adaptation in response to climate and environmental risks.

What does a climate-ready product look like?
So far, so good. But how do we begin to identify the set of potential products that can best deliver climate-ready objectives? How do we work with our partners in order to test the appetite of insurance buyers and market participants, and to understand the challenges – both in general and those specifically data-related – associated with creating these? 

The ideal climate-ready insurance product has something to offer to everyone involved – reducing premium costs for the buyer whilst also incentivising climate-ready behaviours, and reducing the risk to the insurer and also helping them to manage their own transition risk, and giving brokers a clear choice and opportunity to present to buyers. 

From an insurer’s perspective, how does the ability to demonstrate climate-ready characteristics impact the risk assessment and pricing of a client’s insurance? There are obvious impacts, in addressing the consequences of climate change, on climate and environmental risk – i.e. catastrophe insurance.  However, there are also potential impacts in terms of the client’s credit rating and business continuity risk. A client having a sustainable, net-zero supply chain is arguably one that is more likely to have a robust ability to cope with the potential risks to its business continuity that arise from climate and regulatory change.

Where SERI comes in 
We want to find use cases that already exist, and where the absence of appropriate insurance solutions is holding back progress towards climate-readiness. For example, we can look at new and innovative technologies that can help advance a climate-ready agenda in sectors such as the built environment, shipping and agriculture. Are there some technologies for which a lack of insurance coverage is holding back adoption? How can SERI help address the challenges in providing insurance cover for these technologies, through the availability of shared data standards and infrastructure?

We can also collaborate with other existing green finance initiatives, in order to understand the challenges they face in developing their own plans, and how insurance may be able to help address those, or where the development of data standards can solve multiple problems at once. Are there incentives that can be created on a wider scale, in terms of receivables and project financing, if we can demonstrate that climate-readiness has a material impact on a company’s credit risk, and hence its trade credit insurance costs?  

Our goal is to internalise the externalities – turning climate-readiness into a material impact for risk assessment, in terms of both financial and non-financial risks. We also need to unravel and address the data requirements that are needed to support the process of moving climate-ready insurance products from theory into reality.

You can help!
The SERI Policy Working Group will be looking at all of these questions and challenges, and will identify the levers of change required across the industry, policymakers, legislators and regulators in order to solve them. If you’d like join us on either the SERI Policy Working Group, the SERI project more generally, or to find out more about Icebreaker One’s work and plans, please contact us.