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A Q&A with New Energy Risk CEO Tom Dickson

There’s no doubt that a sustainable future will be fueled by new technologies, including those that generate energy and products using biological material or recycled waste, thus minimizing their carbon footprint.

Despite the need for cleaner industrial processes, however, innovative technologies sometimes fail to attract enough investor confidence simply because they are new, unproven, and not well understood. Somewhere along the way, the potential of these new technologies gets lost in translation, garbled by an incomplete comprehension of performance risk.

New Energy Risk (NER) sees itself as the technology translator that can help lenders and insurers get comfortable with the risk/benefit balance of cutting-edge projects. The company, which conducts complex assessments of technology performance risk and provides insurance solutions, wrote its first policy in 2013 for Bloom Energy, a provider of clean electricity, and helped Bloom by validating its technical performance to gain the access it needed to large scale debt financiers. In 2015, NER became an XL Innovate company.

Today, they are setting their sights on new types of technology and new markets. We sat down with NER CEO Tom Dickson to talk about the future of their custom technology risk solutions, and the crucial gap they fill in the marketplace.

Q: What types of projects has NER traditionally focused on, and what new technologies are you branching into?

Tom Dickson: We originally focused quite narrowly on clean energy technology, including fuel storage cells and the waste-to-fuel market, primarily because we wanted to validate our expertise and capabilities in those areas. We had to prove that we had a product that made a difference, and that we could actually deliver it.

Seven years since writing our first policy, we have gained the confidence of almost a dozen leading insurers and reinsurers in the market to support what we do, we have the execution capability working with AXA XL, and now we have distribution capabilities on a global basis.

Broadly speaking, we’re focused on any industrial processes using some technology or innovation that is a little early for customers, lenders or owners to commit capital to without some level of insurance around the performance of that asset.

 New Energy Risk

It’s a gap that exists beyond energy. It’s a challenge in medical technology, in water treatment, in industrial chemicals, in smart agriculture, to name a few. So, we’ve been pursuing opportunities as demand rises in these sectors around the globe.

Q: What are your plans to expand to new markets?
Most of the markets that we play in are global markets. We closed our first international transaction last year in Korea, and we have others in the pipeline in the UK and Europe.

We’ve found that when we work on successful projects, it generates a surge of interest in the area, because other companies can see what’s possible. It sparks more and bigger ideas and creates more demand for our solutions. We had about 350 new opportunities presented to us this year, so we know the ideas are out there and the need is out there for a better approach to technology risk management.

We’ve developed a strong network of partners, including technical engineering experts, developers, investors, and insurance brokers, that help us capitalize on those ideas and capture opportunities internationally. In every aspect we’re experiencing the growth we’ve been planning for over the last 18 to 24 months.

Broadly speaking, we’re focused on any industrial processes using some technology or innovation that is a little early for customers, lenders or owners to commit capital to without some level of insurance around the performance of that asset.

Q: How do you select the right opportunities to pursue?
We want to focus on the opportunities that are most likely to close, but also where we can have the greatest impact. In our selection process we’re looking for that intersection of practicality and ingenuity.

The first thing we consider is, do we believe we have the experience and expertise to fully assess and evaluate the technology? We will bring in outside expertise if needed, but we must feel confident we’ll be able to assess the technology’s performance fairly and accurately.

The second thing we consider is our prospective client’s commercial readiness. In the next nine to 12 months, do they have everything they need to pull their project together and grow? Because we want to support that growth and be a part of something that will last. We also are keen to work with clients that become repeat customers, as many of our clients already are. A technology that can expand its application is very attractive to us.

Beyond that, it comes down to the data. Do they have the pilot or demo data we need in the right format to be able to do the analysis?

Q: What makes your approach to technology performance risk unique? Where does the insurance industry as a whole fall short in evaluating this risk?
What makes us different is we integrate pure technology risk with financial risk, and expertise in those two areas typically are siloed.

There are great engineering firms out there with detailed models to evaluate a new technology, but their analysis stops at the water’s edge. It doesn’t include the context of what that tech is being used for, or how it is being financed.

That’s where the lenders pick it up. The lenders are great at evaluating credit risk and pricing risk, but it’s not within their purview to evaluate technology risk. The two don’t meet up. So we developed a technoeconomic model designed specifically to address that gap.

We integrate engineering and performance data with the financial profile of the owner. We look at the impact of a given engineering risk on the performance of the technology, and the subsequent effects on asset value, cash flow, and insurance coverage.

Perhaps most importantly, we evaluate risk using the same metrics and vocabulary that insurers use in their own capital and portfolio analysis, so we’re translating unfamiliar risks into a format they can understand.

Q: Can you give us a peek under the hood of your model? How do you connect the tech performance risks with financial risks?
The front end of our model takes in engineering performance failure modes in a very detailed way, based on a technical engineering review. We might have dozens and dozens of those failure modes, and each one has its own probability, specific impact on performance, and associated costs to repair.

Normally, that would be the end of an engineering evaluation, but we take those outputs and feed them into a financial risk analysis to evaluate the impact of each engineering risk on the financial health of the project, considering the insurance coverage available. We run simulations of probably a couple hundred thousand scenarios, including really severe tail events, to produce a distribution of potential outcomes.

That’s where we transform technology risk into something relevant and familiar to lenders, bankers and insurers.

Q: You must need a diverse set of in-house expertise to integrate technology and financial risks effectively. How do you bring it all together?
Expert engineers typically don’t think of the insurance industry as the place to be, but we represent an opportunity to bring more interdisciplinary knowledge and perspectives to the industry. We rely on a team of engineers, scientists, actuaries, financiers and underwriters – each person on our team represents a particular discipline that is central to our end-to-end risk assessment process. And we don’t silo that expertise.

For example, the person who leads our business development is a PhD engineer, because being able to understand at first presentation what the technology does and whether we can address it is critical early on. We have to understand what they’re claiming they can do and how they’re going to do it. He can identify the good prospects much more easily than someone with a strictly business background.

We have what looks like unusual backgrounds in certain roles, but that has helped us attract the talent we need to keep growing the way we want to. And speaking of attracting talent, we’re hiring for four roles in Q1 2021! (To see the postings visit www.newnergyrisk.com/jobs)

 
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