BMS Australia Renewable Energy - The impact of claims activity on insurance market dynamics
Renewable Energy The impact of claims activity on insurance market dynamics January 2021
Market outlook
Throughout 2020, the renewable energy insurance market continued to harden with restrictive terms & conditions and increased premium rating being imposed across the board, driven by sustained claims activity in the sector. Essentially, the insurance industry is driven by a simple formula, premiums in need to be greater than claims paid out and the reality is the renewable energy sector has been underperforming for many years due to a sustained period of claims activity. Claims in the sector have occurred from a variety of factors and across all stages of the project life-cycle driven by:
● Contractor error during construction; ● Mechanical and electrical failures; ● Defective equipment / workmanship; ● Aging / out of warranty technology; and ● Natural Catastrophe events including flood, hail, lightning and windstorm losses. In this paper, we have partnered with leading renewable energy underwriter GCube Underwriting ( “ GCube ” ) to provide a deep dive into the key claims characteristics and what is driving underperformance in the sector. Our goal in providing this analysis is to raise awareness of the types of claims impacting the industry to all interested parties, including Developers, Owners, Operators and Financiers involved in the development of Australia’s renewable energy sector.
Figure 1: Renewable energy insurance market outlook 2021
Factor
Trend 2021 Outlook
• Limits are typically financier driven and for full Repair & Replacement so remain fairly constant • Insurers rate exposure on expected project loss scenario not full limit so changing limits will not materially impact premium • Deductible / excess levels assessed to ensure reflective of technological, asset age and location risk • Projects with high natural hazard exposures incurring higher deductibles to manage insurer’s updated catastrophe models • Coverage levels amended to reflect revised underwriting guidelines • Defects exclusion aligned to technological exposures: • Maximum LEG2 Defect Exclusions on project risks • Maximum LEG1 on prototypical / unproven technology • Natural Catastrophe sub-limits imposed • Increased exposure to “split terms & conditions” from insurers on program panel • Capacity fairly stable with combination of: • Existing insurers managing line size exposure across portfolio ensuring no oversupply of capacity • New insurers entering renewable energy market • Trend towards increased number of insurers to complete program placements • Continued global claims activity across Power & Renewable Energy sector impacting sector profitability • Renewable Energy losses in Australia continue to dominate global claims activity • Increase in premium rates throughout 2020 anticipated to continue into 2021 • Insurers seeking to differentiate clients / projects based asset age, warranty / O&M Agreements, NAT CAT exposures and claims history
Limit of Liability
Deductible / Excess
Policy Coverage
Insurer Capacity
Claims Activity
Premium Rating
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“From an Underwriter’s perspective, the renewable energy market has been underperforming due to the combination of the continuous downwards trend in rate and deductibles combined with the widening of cover and increased claims activity.”
Adam Hearn, Senior Underwriter, GCube
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Claim trends in Australia: 2016 to 2020
The claims data provided includes:
● A high level claims overview – The number of claims and percentage quantum of claims split between wind and solar projects; ● A breakdown of the claims activity over the project life-cycle – A review of claims activity occurring during the construction (including marine) and operational phases of the project life-cycle; ● A review of the internal and external claims perils – A categorised analysis of the internal and external perils that have driven claims activity; and ● An analysis of claim types – A detailed breakdown of the proximate cause of claims.
The data outlined over the coming pages provides a detailed breakdown of the claims activity in the Australian market over the period 2016 through to 2020. The data has been provided by GCube and is based on their client portfolio performance. Whilst this data will not capture all claims activity in the Australian Renewable Energy market, as a major global insurer in the sector and one of the early participants in the Australian market, their data provides a broad representation of the market losses as a whole.
High level claims overview The following graphs provide a high-level overview of the claims activity in Australia between wind and solar projects over the 2016-2020 period.
Figure 3: Percentage (%) of claim quantum incurred (AUD) split between wind and solar projects*
Figure 2: Number of claims split between wind and solar projects*
20 25 30
20% 40% 60% 80% 100%
10 15
0 5
0%
2016 2017 2018 2019 2020 Solar Wind
2016 2017 2018 2019 2020
Solar % Wind %
Figure 2, shows how claims activity increased over the period between 2017 to 2019 which correlates to the increased project construction in the sector over the 2015, 2016 and 2017 periods. Similar to the split of number of claims between wind and solar projects, claims arising from wind projects generated the higher percentage of monetary loss to insurers as seen in Figure 3. This is reflective of the per-unit cost of major components for wind projects including generators, gearboxes, blades and towers, as well as the higher revenue at risk for what are generally larger projects.
* Source: GCube
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“..... more than ever we’re seeing repeated incidents across the globe from certain OEM’s in both wind and solar ….. there will be a time when these incidents are no longer fortuitous.”
Fraser McLachlan, CEO, GCube
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Claims during the project life-cycle Claims can occur at any phase of the project life-cycle, however, the data shows claims tend to occur during the mobilisation, transportation and construction phases of the project as there is a heightened risk during construction activities. As Figure 4 shows, approximately two thirds of claims occur during the construction phase of wind and solar projects. These claims are driven by all perils associated with the marine and inland transit of equipment to site and the construction of the project, testing & commissioning, balance of plant and grid connection activities. The split of claims between construction and operational phases is reflected in insurers’ allocation of premium rating between these stages - construction phase activities attracting the highest premium rating over the project life-cycle. Figure 4: Number of loss split between construction and operational phases*
Internal and external claims perils GCube also analyses claims split between Internal (Machinery / Equipment failures) and External (Contractor / Natural Catastrophe) Perils. Figure 5 illustrates how Internal and External Perils impact wind and solar projects differently. The higher weighting of claims arising from External Perils on solar projects is reflective of their location in more flood prone, hail and/ or wind exposed locations. As a result of this, information requirements relating to asset location and project design specification have increased so that insurers can ensure that terms and conditions reflect the risk accordingly. Conversely, wind projects incur a more balanced spread of claims from Internal and External perils which aligns to the increased exposure to “moving parts” associated with wind turbine equipment driving more Internal claims activity. The evolution of turbine size, especially in Australia, is having a direct impact on this data point and prompting insurers to review Defects Exclusions and Serial Loss Clause coverages.
Figure 5: Internal and external perils driving claims (AUD amount incurred)*
0% 20% 40% 60% 80% 100%
34%
72%
Solar
Wind
External perils Contractor error Flood Transit Lightning Vermin
Internal perils Mechanical breakdown Electrical failure Equipment fire Defective design
Operational
Construction
* Source: GCube
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“It’s not just about wind turbine certification ….. we’re more interested in learning about uninterrupted, incident free, commercial operating hours ….. and not just in the factory.”
Adam Hearn, Senior Underwriter, GCube
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Claim types The next two graphs provide a further breakdown of the types of insured losses that have led to the increased claims activity since 2016. Claim types are show by volume and quantum.
Figure 6: Solar claims by type
Vermin
Vehicular
Transit
Storm
Software Failure
Mechanical Breakdown
Flood
Fire
Electrical Failure
Defective Design
Contractor Error
0%
10% 20% 30% 40% 50% 60% 70% 80%
% of Amount Incurred
% of Number of Claims
Figure 7: Wind claims by type
Cargo Damage Contractor Error Course Of Construction Defective Design Electrical Failure Employers Liability Fire Flood Gear Box Failure Lightning Mechanical Breakdown Other Theft
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
% of Amount Incurred
% of Number of Claims
7
* Source: GCube
As illustrated in Figure 6 and 7 , the data demonstrates that significant claims activity across both wind and solar projects originated from Contractor Error which has accounted for ~68% of claims quantum for solar projects and ~36% for wind projects. This risk has been a major focus for insurers and for new construction projects insurers are seeking increased information on whom are the contracting parties involved in the projects and their experience on projects of a similar nature. Figure 7 also shows that Mechanical Breakdown - driven by wind projects - is the highest claim type by volume with ~46% for all losses. According to GCube’s data, as turbine size increased over the 2016-2020 period, general Mechanical Breakdown losses grew as a result. GCube further noted in their data that one of the biggest contributing factors of the high Mechanical Breakdown claim volume arose from blade damage as a result of lightning strikes and blade failures as this data point is captured under Machinery Breakdown, hence the volume if a lot higher as a part of the whole.
Whilst Contractor Error and Mechanical Breakdown losses account for the majority of claims activity for wind and solar projects, losses from these factors are compounded by claims occurring from Natural Catastrophe events including Flood, Hail, Lightning and Storm which accounted for ~22% on solar projects and ~10% on wind projects. Whilst the claims data provided by GCube is not supported by premium and loss ratio data showing actual sector underwriting performance, it does provide a background to the adjusted underwriting process that insurers have implemented over the past 12 to 24 months. Insurers continue to focus on increased levels of underwriting information, notably contractor / sub-contractor experience and site location data / project design specification, to support their revised underwriting guidelines and to drive profitability back to a sector that has underperformed for a sustained period of time.
“Contractor error has been a major contributor to portfolio claims experience over the past 3 years.”
Paul Nicholls, Senior Claims Adjuster, GCube
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Mitigating the impact of current market conditions As the renewable energy market continues to harden, being aware and addressing the key underwriting criteria that impact insurer’s appetite for the risk will be the difference between delivering a successful or poorly constructed insurance program. As part of the insurer engagement process, presenting the project in the best possible light will assist insurers to make informed decisions around their potential participation. BMS recommends a structured approach to market engagement based on the following: ● Early preparation and planning – from the outset of a project development or an annual renewal, setting out a timeline of key milestones will ensure the market engagement process is the most effective and delivers the best outcomes. ● Risk workshop – a risk workshop with the project team will provide the foundation for identification of key risks in the information gathering and underwriting review processes for the development of an optimum insurance program for the construction and/or operational phases of the project. Identification of key risk exposures and understanding of loss scenarios will assist insurers in deploying their maximum available capacity. ● A focused engineering & operations approach – A key element of the market engagement process is encouraging insurers to engage with the technical experts within their underwriting team, through the provision of an extremely high standard of technical data. Insurers are increasingly influenced in their decision-making process by their internal engineering department’s review and analysis of the key risks; therefore, we will actively promote a channel by which Insurers can be informed to aid this process. ● Risk prospectus – to positively differentiate the project to insurers our Risk Prospectus (co-developed by BMS and the Project Team) will contain detailed information based on the key underwriting criteria, as highlighted in Figure 8 below. ● Insurer engagement – Even with the best information, unless you can articulate this effectively to insurers, you may not get the best outcome. In respect of larger or more technically challenging projects in particular, the most effective way to articulate and differentiate your risk to the market is by way of Insurance market presentations, both locally and internationally to a selection of potential insurers. This process supports the Risk Prospectus / Underwriting Submission provided to insurers and provides further opportunity for insurer / client engagement.
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Figure 8: Key underwriting criteria
● Natural Catastrophe exposures ● Geotechnical Conditions ● Site accessibility ● Bushfire & vegetation management
Project Location
● Proven / prototypical technology ● Product / Type Certification
● Wind rating & design ● Lightning protection ● Reliable supply chain ● Robust Warranties
Technology
● EPC and O&M Contractor experience / track record in sector ● OEM support / involvement in the project & appropriate warranties ● Proven quality assurance & control system ● Distance to connection points ● Bottleneck exposures ● Acceptable equipment redundancy & configuration ● Overhead / buried transmission lines ● Number of other projects using non-owned substation ● Established risk management procedures ● Float / time contingency in project schedule ● Standard Liquidated Damages regime ● Critical spares holding ● O&M agreement in place with asset management strategies and maintenance plans
Experience
Grid Connection
Risk Management
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About us
BMS is a leading international, majority employee-owned, specialist insurance broking group with over $2.9 billion in annual premium throughput. Established 40 years ago and headquartered in London, BMS has 22 offices around the world including the US, Canada, Bermuda, Latin America, Australia, Singapore, Hong Kong and Spain. Our size, structure and culture provide an attractive environment for brokers and clients. Put simply, each new client matters enormously to us and will receive the requisite attention all the way, with unfettered access to every part of the business. The Australian BMS Energy team , founded by Richard Nunny and Ben Humphries , has a combined four decades of risk advisory and insurance placement experience in the industry and over their career have been engaged in various capacities on over 10 GW of renewables in Australia across wind, solar, battery and hydro projects. The team provides market leading insurance advisory and broking services to developers, asset owners, financiers, contractors and other stakeholders involved in the development, construction and operation of power & renewable energy assets.
GCube has been in the renewable energy insurance business for 25 years, having pioneered tailored made insurance solutions for the renewable energy market. GCube writes cross class insurance that supports all aspects of the renewable energy industry from Marine Transit, to Construction and Operational All Risks including Loss of Profits and Business Interruption alongside Liability and Casualty Cover. With USD300 million in capacity any one single project GCube is the largest provider of renewable energy insurance globally. GCube writes risks in over 40 countries and has offices in London, New York, Newport Beach CA, Amsterdam, and Mumbai. GCube services its clients through a network of brokers based around the world. GCube Underwriting and GCube Insurance Services (GCube) were wholly acquired by Tokio Marine HCC on 1 June 2020 and operate as part of that group.
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Contact us
Richard Nunny Head of Energy – Australia Mobile: +61 450-047-478 Email: richard.nunny@bmsgroup.com Ben Humphries Client Director – Construction & Energy Mobile: +61 476-100-105 Email: ben.humphries@bmsgroup.com
BMS Risk Solutions Pty Ltd is registered in Australia, ABN 45 161 187 980. AFS Licence 461594.
This is a marketing communication Formal terms of engagement must be agreed to secure the services of BMS Risk Solutions Pty Ltd.
www.bmsgroup.com/au/renewable-energy
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