The transition to a low carbon economy means that industries are innovating to find ways to reduce their greenhouse gas emissions against a backdrop of increasing demand for electricity.
Non-traditional insurance solutions can help to drive the transition by supporting clients as they change the way they operate to ready themselves for the future.
According to the International Energy Agency (IEA), The global demand for electricity is expected to increase by 4%– or the equivalent of an economy the size of Japan – every year. At the same time, where relevant, industry sectors across the globe are taking action to meet greenhouse-gas-emission-reduction targets. This transition to a low carbon economy while increasing energy supply is prompting investment in renewable energy projects and innovation in technology and design.
Risk insights and insurance coverage play a key role at every step of an energy project’s phases – design, construction, operational life span and decommissioning.
Cross collaboration between specialists means that we can devise risk mitigation and underwriting solutions that enable clients to innovate, adapt and evolve to meet the challenges of transitioning to a low carbon economy.
As well as sharing risk engineering and underwriting expertise, we are working to provide our clients with non-traditional insurance solutions that will help enable them to make their desired changes.
PRCB solutions to fuel transition
One area in which non-traditional insurance is helping to enable clients’ energy transition plans is political risk, credit and bond – or PRCB. This can cover risks associated with expropriation, currency inconvertibility, political upheaval like strikes or riots, contract frustration and trade credit. These are all risks that can pose challenges for renewable energy projects around the world.
Commercial surety bonds are often bought by clients that are involved in the financing of infrastructure projects, including renewable energy development, for example. They can support performance and/or payment and give buyers protection against default, give coverage for right of way – often vital for renewable energy projects that can span hundreds of miles, and can include power-purchase agreement coverage, among other things. Renewable energy projects are typically long in duration – sometimes seven, ten or even 20 years – and confidence about funding is vital to ensure they can be scaled.
PRCB projects in action
About 15% of our PRCB gross written premium now comes from climate-related projects, and this is an area we expect to continue to grow. PRCB coverages can help to enable a wide variety of projects that will contribute to a global reduction in greenhouse gas emissions.
We have underwritten non-payment coverage to finance a project to bring energy from a hydro-powered plant for example. This is a large, complex and long-term project and a credit insurance bond to cover the risk of non-payment has helped to give investors confidence.
The energy transition is taking place at different rates in different countries across the world. Some emerging economies remain highly dependent on fossil fuels and sources of GDP are sometimes still highly carbon-intensive. PRCB insurance coverages can help to provide financing for projects that shift economic investment and fuel growth in other areas, like agriculture, for example.
Non-traditional insurance solutions can help to drive the transition by supporting clients as they change the way they operate to ready themselves for the future.
PRCB insurers often work with international development agencies to help support projects that will support the transition to a low carbon economy. Credit insurance solutions not only support the implementation of these projects, they also help to mobilise and attract capital that will enable those projects to become self-sustaining over the longer term.
Many industry sectors are looking for ways to reduce emissions and PRCB insurance can help secure funding for the development of new uses of technology that will aid the transition. Recently, a client has used credit insurance to help secure financing for a project to develop cargo ships that are propelled by wind power, for example.
Parametric coverage for energy projects
Parametric insurance is a non-traditional solution that can be used to great effect to support investment in renewable energy projects. Parametric policies, which pay out when a pre-defined trigger is met, can give renewable energy projects coverage for underperformance caused by adverse weather conditions.
A parametric policy can payout if, for example, windspeeds fall below or exceed a pre-defined threshold causing underperformance in power production. Parametric coverage may also be relevant for projects that are subject to solar irradiance; if sunlight drops below a certain level because of storms or prolonged cloud coverage, for example. A parametric policy would be triggered prompting a payout to a solar project to cover the loss of energy production. And in cases of heavy rainfall or flooding, parametric policies can offer coverage for hydropower facilities or solar installations that suffer damage and output is affected.
Because they are based on pre-determined triggers, parametric policies can provide much more rapid payouts than more traditional coverages since they do not require onsite inspections and loss adjusting. They are tailored, transparent and objective and can be cost effective for all involved since they have a far reduced claims process compared with other types of insurance. They also incentivise risk management and mitigation by encouraging the use of tracking and monitoring technology.
Collaborating for solutions
Our underwriting teams have developed solutions that can be tailored to a variety of energy transition risks. Technical Performance Insurance, which covers risks specifically associated with the failure of the technology, can be particularly beneficial for projects that convert waste into a product or that develop fuel or battery energy storage system (BESS) capabilities, for example. Often lenders will lack in-house expertise about the new and developing technology and be cautious about investing as a result.
Meanwhile, the project owner has a clear interest in the technology being successful to enable expansion to scale.
A Technical Performance policy helps the project owner to take a project forward to the commercialisation stage while giving lenders greater confidence about their investment.
M&A coverage can also be useful in areas where companies are expanding to fulfil renewable projects. The policy can provide coverage for contract disputes, retention of key employees, IT integration risks and post-deal tax issues, among other things. Structured risk solutions (SRS) coverage with limits of up to $150 million can help renewable energy clients to manage risks retained within their captives.
Underwriters must be aware of the specifics and challenges of the various countries in which they might be providing coverage and the industry sectors involved, which is why the cross-collaboration we aim to foster is so powerful for us and for our clients.
Renewable energy projects have a vital part to play in the low carbon economy of the future and by collaborating with colleagues around the world in teams with diverse expertise we can help support those projects and fuel the energy transition.
* The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. This summary does not constitute an offer, solicitation or advertisement in any jurisdiction, nor is it intended as a description of any products or services of AXA XL.
