60 March/April 2012 | Renewable Energy Focus

focus:InsuranceInsights on renewables

New insurance entitiesPrimary insurer – pooling clean energy risk and expertise

Establishing a new primary

insurer focused exclusively on clean

energy technologies would encourage

more capital to fl ow directly into the

clean energy sector. This would avoid

some of the diffi culties faced in con-

vincing existing insurers to commit

to underwriting new, non-traditional

products.

Satellite developers faced similar

fi nancing hurdles as their technol-

ogy approached commercial scale

and as a result, speciality insurance

and reinsurance markets began to

take form. The fast pace of technol-

ogy and market changes, along with

the absence of a meaningful history

of launch and in-orbit data made it

diffi cult for insurance companies and

their actuaries to determine the prob-

ability of satellite-related losses.

Dedicated clean energy insurance

providers would primarily market

non-traditional products, so they

would have a strong incentive to

develop thriving niche off erings and

risk control expertise; whereas, a large

existing insurer would have numer-

ous new opportunities competing for

internal resources and management

attention.

However, to support the issuance

of meaningful limits of liability, a new

insurer would either have to raise

large amounts of capital or purchase

reinsurance from existing reinsurers,

which in turn must be convinced that

pricing adequately refl ects the risks.

A new insurer’s off erings would

include component warranty; system

performance insurance (SPI); and

other custom products designed to

meet clients’ specifi c needs. War-

ranty and SPI, especially for emerg-

ing technologies, will be considered

risky and historical loss information

will be relatively sparse. As a result,

the insurer’s required capital levels

will likely be high; CalCEF’s white

paper estimates that the amount

needed to support emerging tech-

nology effi cacy insurance across the

industry is in the range of US$125

million to US$300 million (based on Figure 2 on page 23 of the full white paper). This represents total

capital needed from the insurance

A helping hand for emerging renewable projects

THE CALIFORNIA Clean Energy Fund (CalCEF) has proposed a new generation of

insurance solutions for emerging clean energy

technologies. These target the fi nancing gap

between pilot project and the initial buildouts

at commercial scale. In the last issue of Renewable Energy Focus (see Jan/Feb, pages 46-49), part 1 looked in detail at

the risk management problems that can make this chasm

quite severe. Part 2 now covers the key elements of potential

solutions: new insurance mechanisms and supporting policy.

Navigating the Valley of Death – from demonstration project to scale up: Could an innovative type of insurance that would transfer specifi c performance and technology risks help companies through the so-called “valley of death”? (Image shows Death Valley National Park in California).

Insights on renewables

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61March/April 2012 | Renewable Energy Focus

Insurance

industry—both existing and new

insurers.

A single insurer could build a

diversifi ed portfolio with US$40 mil-

lion of risk capital, along with suffi -

cient reinsurance support.

While an insurer could be capi-

talised to meet these needs, investors

without direct interest in mitigating

clean energy risk may not be quick

to enter this market. Instead, the

signifi cant capital required is more

likely to come in the form of a mutual

or captive insurer, which on one hand

could assess policyholders with limited

additional premiums if extra capital is

needed, and on the other hand could

share in underwriting outcomes and

pay out dividends from excess profi ts.

Reinsurance – building a foundation for primary insurer participation

Primary insurers that off er non-

traditional products for the renew-

able sector are challenged to obtain

reinsurance for new product lines due

to uncertain underwriting outcomes.

This lack of reinsurance capacity

prevents some insurers from off ering

products altogether, and causes oth-

ers to set limits of liability too low to

meet customer needs.

A new reinsurer dedicated to

renewable energy insurance products

would increase gross underwriting

capacity to end customers, mitigate

primary insurers’ concerns regard-

ing loss severity, and encourage entry

and innovation by primary insurers

to serve the industry. The creation of

a reinsurer would also allow existing

primary insurers that have adequate

credit ratings to then provide assur-

ances to project fi nanciers.

Reinsurers are typically large,

well-capitalised fi rms that con-

struct diverse portfolios of insur-

ance risk. Starting a new reinsurer

would require large amounts of

capital to attain some measure of

creditworthiness, and would require

Government support (see later).The Government has acted as a

reinsurer in a variety of capacities

before, such as in supporting U.S.

property insurers in the event of

catastrophes. Following Hurricane Andrew in 1992 and the Northridge Earthquake in 1994, rates and restric-

tions actuarially required by existing

private insurers were often economi-

cally unpalatable, so States estab-

lished new insurers and reinsurers,

which helped to rationalise prices.

Energy-focused managing general agent – a direct path to dedicated insurance

New energy-focused managing

general agents (MGA) would repre-

sent a simple, powerful step toward

dedicated insurance for emerging

clean energy technologies. They would

require relatively little capital, indus-

try coordination, or regulatory com-

pliance, and could leverage existing

pools of insurance capital. An MGA

is a wholesale insurance intermediary

with the authority to accept policy

placements from retail agents on

behalf of an insurer. MGAs generally

provide underwriting and administra-

tive services, such as policy issuance,

on behalf of the insurers they repre-

sent. An MGA focused on emerging

clean energy technologies could be a

new entity or could be formed within

an existing multi-product MGA or

intermediary.

MGAs could be helpful in introduc-

ing new insurance products to the

clean energy sector by off ering spe-

cialised expertise and focus. They may

also reduce underwriting overhead

costs for insurers and bring confi -

dence that an independent assessment

of risk has been performed. A new

entity would have the fl exibility to

develop comprehensive new prod-

ucts that adequately address perfor-

mance concerns of potential funders

and investors in large-scale energy

projects.

Under the MGA model, risk would

be assumed by one or more existing

insurers, which would receive the pre-

miums and be responsible for claims

payments. Having the risk assumed

by existing insurers is an impor-

tant advantage of the MGA since

such insurers have greater access to

capital, may benefi t from diversifi ca-

tion with other business lines, and

possess credit ratings suffi cient to

meet customers’ requirements. As

a risk intermediary, an MGA has

both volume and profi t incentives to

balance; it can only recover its costs

by executing transactions, but its

profi t opportunity largely relies upon

supplying profi table outcomes for its

insurance partners.

Improving data quality and access – standardising sharing to facilitate insurance growth

Data on the performance of

emerging technologies in commercial

operation off ers insurers a necessary

quantitative underpinning for devel-

oping insurance products. Reliable,

standardized data can reduce under-

writing expenses for insurers and

allow them to insure technologies that

they might otherwise consider too

risky. At present, most industry par-

ticipants do not collect and share such

data consistently or in a standard

format. For little industry investment,

improving accessibility of data on

emerging clean energy technologies’

performance would entice existing

insurers to off er new products.

The collection, analysis, and dis-

semination of such information could

be done by an existing governmental

entity, such as one of the national

laboratories, or by a private entity

compensated by insurers, clean energy

companies, or both. Both public enti-

ties and private companies, such as

About: Paul Frankel is managing director of the California Clean Energy Fund (CalCEF). Before joining CalCEF in 2008, he was co-founder and managing partner of Ecosa Capital, providing expansion fi nancing to growth stage companies in the clean energy, green building and sustainable agriculture markets.

Establishing a new primary insurer focused exclusively on clean energy technologies would encourage more capital to fl ow directly into the clean energy sector...

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62 March/April 2012 | Renewable Energy Focus

New Energy Risk and the National

Renewable Energy Laboratory have

already recognised the need for better

performance data tracking and have

launched initiatives to improve data

sharing.

The information service provider

would accumulate data regarding

emerging energy equipment and

system performance. It could guide

counterparties, such as technology

suppliers and contract operators, on

data collection requirements, such

that insurance underwriters would be

capable of assessing the distribution

of performance outcomes and failure

rates.

Public policy strategiesWhile each of the approaches

described in the prior section has the

potential to improve the availability

of effi cacy insurance for clean energy

technologies, they require public

policy support to function optimally.

Such policies could form part of an

integrated clean energy technology

deployment strategy in partnership

with private fi nancial markets. Pos-

sible policy strategies include:

U.S. Department of Energy (DOE) supported “Profi t Sharing” or “Excess of Loss” reinsurer

As a complement to a possible

loan guarantee program, the DOE

could provide reinsurance of primary

insurers who in turn sell system per-

formance insurance and component

warranty insurance. The DOE and

insurer may share in both profi ts and

losses. Losses could be capped at no

more than a fi xed percentage of pre-

mium revenue in order to encourage

participation, limit downside risk and

prevent windfall profi ts. Coverage may

also be structured as more traditional

excess of loss reinsurance, in which the

DOE takes on only the risk of extraor-

dinary individual or portfolio-wide

losses.

New Public-Private primary insurerGovernment could partner with

industry to create a new, non-profi t

insurer that would off er various

types of effi cacy insurance includ-

ing component warranty, installation

performance warranty, and SPI. As a

non-profi t, the insurer would not be

able to raise equity, so its capital would

come in the form of subordinated debt

instruments and retained earnings.

Startup capital could come from a

range of private and public sources.

The government’s fi nancial investment

could be capped by the value of the

capital instrument, but it would be an

essential catalyst to the capital forma-

tion and risk funding process.

Provide capital and/or credit guarantee for insurer

To encourage new entry into this

market, the federal government could

provide a credit guarantee for new

insurers, similar to the loan guaran-

tees once provided to manufacturers,

power projects, and biofuel produc-

tion facilities. If a DOE reinsurance

program were also in place, then the

risk of capital losses would be clearly

defi ned and exposure under the credit

guarantee should be limited.

Next stepsBased on the options described in

the white paper (see link at the end

of the article), CalCEF recommends

a combination of both private sector

actions and public policy changes:

improved sharing of performance

data among the industry, a new

clean-energy technology focused

insurance provider, and a federal

reinsurance program. If suffi cient

industry interest exists, CalCEF

would consider an active role in pur-

suing recommendations and provid-

ing startup resources.

We believe the fi rst and most

addressable step is to build a better

pool of data. Given strong interest

voiced by the solar industry through-

out this research, we recommend

that the data improvement eff ort

focus initially on the solar sector.

CalCEF is in the early stages of a col-

laboration with SolarTech and other

partners—including national labora-

tories, universities, test and certifi ca-

tion companies, project developers

and project fi nanciers—to develop an

industry-wide repository of analyti-

cal tools and performance data for

systems and sub-systems.

Better data will lay the foundation

for a new insurance provider. Clean

energy industry technology companies

and associations should collaborate

to support the launch of one or more

new insurance providers focused on

the specifi c needs of their respective

market segments. We recommend

that a new mutual or captive insurer

off er component warranty, installa-

tion performance, and SPI to both

commercially established and emerg-

ing energy technologies – with an

initial focus on solar given the market

demand and need. A new MGA should

focus on effi cacy insurance for proj-

ects employing emerging technologies.

From government, federal rein-

surance is critical to addressing

the risk involved in emerging clean

energy technologies. The federal

government has dedicated signifi cant

resources to the development of clean

energy technologies through DOE

loan guarantees, ARPA-E, and other

programs, and it has supported the

broader deployment of established

renewable technologies through, for

example, the Production Tax Credit

(PTC) and Investment Tax Credit

(ITC) mechanisms. However, these

programs have not been suffi cient to

bridge a key gap between innovation

and infrastructure.

Federal support for a reinsurance

program dedicated to ”fi rst com-

mercial” technologies could help this

transition.

Finally, industry action and col-

laboration is critical to addressing the

shared risk issues. In support of these

recommendations, CalCEF hopes to

partner with interested parties to

develop and present more detailed

policy rationale and potential struc-

tures for federal insurance reinsur-

ance programs, and to invest in

relevant ventures where appropriate.

Insurance

Online: renewableenergyfocus.com

Crossing the valley of death (part 1)http://tinyurl.com/c3hemmw

Windpower 2011 revisited: innovation in wind http://tinyurl.com/7xtvdlf

Finance for wind farms http://tinyurl.com/7vrkvu2

Scaling clean energy innovation http://tinyurl.com/7nqjqno

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