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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