Gregory DL Morris

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

Alternative Energy

Renewable Energy Comes of Age

No longer a niche market, loss histories for renewable energy are reworking how green is insured.
By: | November 8, 2016 • 6 min read
Wind turbines at sea

Renewable energy can no longer be called alternative energy, now that wind and solar electricity are providing large percentages of total power in several North American wholesale markets.

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As a result, underwriters and brokers who serve green power producers have enjoyed growth, but have also been vexed by what can best be described as the challenges of an adolescent industry.

For example, when wind farms and solar arrays first began to grow in the middle 2000s, carriers made their best guesses in underwriting because there was a lack of historical loss and performance data.

Going on a decade later, there is plentiful data, but prevailing softness in the market limits what underwriters can do with it.

“The early wind farms in particular are going on eight years old, and we are starting to see failures beyond what was anticipated,” said Geraldine Kerrigan, managing director at Beecher Carlson.

The frustration, she said, is “there is a now a rich volume of loss data, but because there is so much [underwriting] capacity the market is very soft. Carriers’ hands are tied in underwriting trying to tighten terms and conditions. It is probably one of the few industries where you just can’t use trend data.”

After a shotgun start in the previous decade with many operators and investors trying a variety of generating options, some clear business models have emerged. This has also proved to be a mixed blessing for insurers.

Drivers of Solar Power

“Solar is more attractive to investors because that usually involves multiple smaller sites,” Kerrigan said. “That presents more of a challenge for underwriters. It is more of an administrative burden and a lower profitability profile from an insurance perspective.”

Geraldine Kerrigan, managing director, Beecher Carlson

Geraldine Kerrigan, managing director, Beecher Carlson

One important driver of growth in solar has been the rise of aggregators. Those companies will tie together several developments, their own or others’, and secure a single power-purchase agreement (PPA) from a utility.

That fosters the development of solar power as a viable commercial operation, but vastly complicates insurance and risk management, especially when the aggregator may lease actual assets or just space on a roof.

Similarly, insurers underwriting wind energy are grappling with higher-than-anticipated losses in equipment. They are also having to get vertical in a hurry as first-generation battery arrays are now being designed into second-generation wind farms, and being retrofitted into first-generation wind farms.

“Solar is more attractive to investors because that usually involves multiple smaller sites.” — Geraldine Kerrigan, managing director, Beecher Carlson.

“Lithium battery technology has reached the point that it is viable [commercially and operationally] to be a benefit to wind generation,” said Kerrigan. “Carriers are writing the new batteries, but they are not entirely happy about it.”

In effect, they are back to square one having to make underwriting decisions with little performance, loss or operations history.

Renewable Energy Surging

Despite the growing pains, renewable energy is now off the porch and running with the big dogs. In September, the Sabine Center for Climate Change Law at Columbia University in New York held a seminar on energy markets including coal, natural gas and renewables with a focus on regulation, and global supply and demand.

At that seminar, Anthony Yuen, director of global energy strategies at Citi Research, presented findings that renewables have grown from about 40 gigawatts in 2001 to about 75 GW today, and are expected to pass nuclear power — flat at about 100 GW — in about 2025.

Meanwhile, coal has fallen from about 230 GW in 2001 to 150 GW today. Citi’s projections show renewables catching a falling coal at about 120 GM by 2030 (see chart).

“The surge in both wind and solar against no increase in overall demand has definitely put the squeeze on both coal and gas.” — Anthony Yuen, director of global energy strategies, Citi Research.

“The surge in both wind and solar against no increase in overall demand has definitely put the squeeze on both coal and gas,” said Yuen.

Several other presenters supported the outlook that the gains in gas-fired generation at the expense of coal has mostly played out, and that as coal use declines further, the beneficiary is expected to be renewables.

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David Schlissel, director of resource planning analysis at the Institute for Energy Economics and Financial Analysis, said that wind provided 32 percent of the energy in the northern region of the Midcontinent Independent System Operator (MISO) in the seven months from October 2015 through April 2016.

The high point was 42 percent of the energy in April 2016. MISO covers all of Manitoba, Minnesota, Wisconsin and south to Arkansas and Louisiana.

Schlissel also reported that 48 percent of the system load in the Southwest Power Pool (South Dakota, Nebraska, Kansas, and Oklahoma) was served by wind on April 5. Also, 48 percent of the load in the Electric Reliability Council of Texas was served by wind on March 23, and 45 percent on Feb. 18.

Coverage Matures

As renewable power has gained maturity, so has insurance. “There are new types of coverage that were not available as recently as just a few years ago,” said Charles Long, area senior vice president at Arthur J. Gallagher & Co.

“Questions about gaps in coverage and what exposures to retain or transfer are happening in the early stages of a PPA,” he said. “We have seen some standardization in forms, but that is also a result of standardization in equipment.

“The industry has settled on a handful of key suppliers so when we go to market for a placement those components are well known.”

One of the insights gained from operational and loss history is a pattern in claims.

“Incidents with wind turbines are low in years 1, 2 and 3, then there is a spike in years 4 through 8, then a huge drop in claims years 9 to 12, and then an increase again year 13 and out,” Long said.

He stressed that operators and underwriters are still examining the newly emerging patterns to mitigate those losses.

Another interesting development has been the relative rarity of natural catastrophe claims.

Jatin Sharma, head of business development, GCube Insurance Services

Jatin Sharma, head of business development, GCube Insurance Services

“When wind generators first sought markets, they went to the Nat CAT carriers because they had the wind models,” Long said. “With wind power you want lots of wind, but not too much.

The Nat CAT covers were designed for low occurrence, but high loss. What we have seen in practice is higher occurrence of smaller losses. Gear box wear, blade issues — cracks, separation, bird strikes, even being shot — fires, even tower collapses. The least frequency has been Nat CAT.”

That creates a bit of a dilemma for underwriters, said Jatin Sharma, head of business development at specialist renewable energy underwriter GCube Insurance Services.

“Generators have achieved savings by doing their own operations and maintenance, and moved away from relying on manufacturers for that. The insurance sector has been naïve about operators doing their own maintenance.

“It is very different having a utility do its own, versus having it done by the manufacturer who knows the unit and maintains hundreds of them.”

As a result, carriers that are geared for CAT-scale losses have suffered instead from a thousand cuts.

“There are some underwriters seeing claims for just $100,000 to $300,000, but a lot of them,” said Sharma. “To handle that frequency and volume you have to have a claims team built for it.

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“At the same time, I sympathize with the risk managers. Buyers are coming out of a utility mind-set, likely mutuals, and are setting low deductibles to satisfy lenders or joint-venture partners. Risk managers’ staffs have been reduced despite the fact that they are managing a different risk profile than what they are used to. That makes them heavily reliant on brokers.”

GCube announced in October that it now provides coverage for more than 4GW of wind assets in Canada. As of last year, and following the installation of 36 new wind energy projects, Canada is seventh in the world in terms of total installed capacity.

At just under 12 GW, wind energy currently caters for approximately 5 percent of Canada’s electricity demands. However, the country has a long-term aim to reach a capacity of 55 GW by 2025, accounting for 20 percent of its total energy needs.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]
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Long-Term Care

Underwriting Reassessments Drive Long-Term-Care Reform

Carriers offering long-term-care coverage have been rocked by low lapse rates in a low-interest environment.
By: | October 21, 2016 • 4 min read
Happy healthcare worker walking and talking with senior woman

After years of public scorn for massive premium increases and internal wrangling over mispriced contracts, new forms of long-term care (LTC) coverage are seeing a notable uptick in sales.

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Professional and public organizations are digging deeply into the underwriting and actuarial assumptions that were behind traditional LTC policies in hopes of avoiding the same mistakes for the newer hybrid or combination contracts that are based on annuities or permanent life insurance with riders for LTC and disability.

There is, however, not yet any good answer for what to do with the traditional policies that remain in force.

“The cost has never really been a low as people wanted it to be, and carriers were never able to capture the [younger and healthier] people looking ahead.” — Robert Kerzner, president and CEO, Limra, Loma and LL Global

Robert Kerzner, president and CEO of Life Insurance Marketing & Research Association (Limra), Life Office Management Association (Loma), and LL Global, said that traditional LTC coverage was caught between multiple mandates.

“The cost has never really been a low as people wanted it to be, and carriers were never able to capture the [younger and healthier] people looking ahead,” he said.

“The LTC contracts sold were primarily to those close to the age where they would use them. So the business never really got off the ground. There were never a lot of carriers and also not a lot of distribution.”

External factors exacerbated the struggles of traditional LTC coverage. Two in particular were killers: low lapse rates and low interest rates.

“What were the lessons learned?” Kerzner asked rhetorically. “The industry did not have a lot of historical data. We all want to be innovative. I push the industry to innovate. But consumer behavior is not always logical. Another factor was medical breakthroughs. Those changed the game.”

The ideas for LTC 2.0 — hybrid or combination contracts — came from research as sales and premiums for traditional policies shriveled.

Long-Term Care Solutions

“People don’t like paying for insurance and getting nothing back,” said Kerzner. While one of the criticisms of traditional coverage was that they were too complicated, he said, the riders and options on combination contracts are seen as adding value.

Bruce Stahl is vice-chair of the LTC Reform Subcommittee of the American Academy of Actuaries, which expects to publish its analysis and recommendations of LTC by the end of the year.

He is frank about the value of what amounts to forensic underwriting in LTC. “It is helpful to understand the assumptions of the ’80s and ’90s. People made assumptions that were at the time reasonable estimates. The assumptions being made now on newer contracts are more conservative,” especially regarding interest and lapse rates.

“In the early ’90s, the assumption was that lapse rates for LTC coverage was going to behave like Medicare supplement policies, which were about 6 percent at the time. Actual lapse rates for traditional LTC contracts have been less than 1 percent. That has had a strong effect because of more benefits paid out.”

“Insurance companies are designed to be profitable. If traditional LTC is not profitable, it won’t be offered.” — Jesse Slome, executive director, American Association for Long Term Care Insurance

Jesse Slome, executive director of the American Association for Long Term Care Insurance, said that it is difficult to document the traction that hybrid LTC contracts are gaining because they are so new, and also because they are spread among permanent life and annuities.

“No one is really tallying the data, but at the Limra-Loma Conference in New Orleans [where he was chair of a panel discussion in September], I was told by carriers that on something between 50 percent and 80 percent of their new life policies, the insured checks the option to get an LTC payout.”

Slome is forthright about the future of the line. “Insurance companies are designed to be profitable. If traditional LTC is not profitable, it won’t be offered. If hybrids are, they will be offered.”

That still leaves the question of what becomes of the early adopters from the ’80s and ’90s, the ones who thought they were being economical and responsible and are clinging to their traditional contracts at the confounding lapse rate of less than 1 percent.

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For years, the financial press has been full of horror stories of premium increases of 50 percent, 60 percent and in some cases more than 100 percent. Carriers have been bombarded with outraged complaints, as have regulators and even Slome’s organization.

“What to do about old policies?” asked Slome. “I don’t know. But I suspect the few carriers remaining in that market are counting on state regulators continuing to approve premium increases, and also counting on interest rates rising. Shares of Genworth [the largest issuer of traditional LTC contracts] have become in effect a type of interest-rate play.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]
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Disaster Recovery

After the Fire

The Fort McMurray community is now focused on recovery, but it will be a long-term effort.
By: and | October 1, 2016 • 7 min read
R10-1-16p32-34_9Wildires.indd

The raging wildfire that roared through Fort McMurray in Alberta, Canada, in May and June was so fierce it burned the entire country’s economy.

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As a result of the fire, Canada’s GDP experienced its worst dip since the depths of the Great Recession. Losses from the blaze resulted in a 1.1 percent economic contraction in the second quarter.  The Bank of Canada cut the country’s economic outlook for the year due to the catastrophe that stopped production at oil sands facilities, forced the evacuation of about 94,000 people and destroyed 2,400 buildings.

The most recent estimate by Property Claim Services puts the insured losses at about $3.6 billion — but while more than 5,000 commercial insurance claims (about $1 billion) are included in that estimate, the hard-hit oil sands producers report few insured losses.

VIDEO: The wildfire had a devastating impact on businesses in the area.

At the peak of the fire, 10 oil and gas producers were temporarily shut down, while work at another one was reduced, said Paul Cutbush, senior vice president, catastrophe management, Aon Benfield Canada.

Even though 1.2 million barrels a day, or about $65 million daily, was lost during that month-long shutdown while the fire was nearby, “no one is talking about any oil and gas claims,” Cutbush said.

That position was made official by Suncor, one of the largest operators that was shut down due to the evacuation, and saw its production reduced by about 20 million barrels because of it.

“The company incurred $50 million of after-tax incremental costs related to evacuation and restart activities,” according to the company’s Q2 earnings report, “which was more than offset by operating cost reductions of $180 million after-tax while operations were shut in.”

It’s not just the lack of damage, said Cutbush. BI policies typically have a waiting period before policies are triggered. That period typically is 60 to 90 days, but since the marketplace is very competitive, he said, it’s possible that some of the oil and gas producers had a 30-day waiting period.

Even so, the evacuation orders issued May 3 that shut production around Fort McMurray — the hub of Canada’s oil sands extraction and processing facilities — only lasted three to four weeks, depending on their location, he said.

“A lot of companies went back online 30 days after the fire,” Cutbush said. “I think if you see any claims, it will be those [insurance] writers who have more competitively agreed to do 30-day waiting periods. But it’s still too early to tell.

“It’s risk management but it’s net retained non-insured risk management.”

The energy companies’ facilities were protected by the effectiveness of the “fire breaks” built to divert the wildfires, he said.

Emphasis on Safety

“The core of Fort McMurray exists because of the oil sands,” said Bill Adams, vice president, Western and Pacific for the Insurance Bureau of Canada (IBC). “There is a strong focus on safety in those operations, and most of the people in and around Fort McMurray have that in their blood.

Bill Adams, vice president, western and Pacific, Insurance Bureau of Canada

Bill Adams, vice president, Western and Pacific, Insurance Bureau of Canada

“I am not sure any other community in North America could have accomplished the same as that town did.”

From a risk mitigation perspective, Adams said, “this incident really set a new benchmark for what can go wrong when you build a municipality in a boreal forest. We have never seen an event like this that affected so much infrastructure.

“Assessing this fire will definitely give us a new understanding, and many municipalities will have opportunities to avail themselves of the learnings.”

Andrew Bent, manager of enterprise risk management for the Alberta Energy Regulator, also praised the energy companies.

“The operators were fantastic. They knew they were part of the community and they were fast to take in some of the more than 88,000 people who had to be evacuated,” he said.

“As regulator for the industry, we require all operators to have emergency response plans in place.

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“Those plans vary with the nature of the operator from site-specific to more general contingency planning. Even so, we were dealing with an event of unprecedented scale. The fire moved very quickly and behaved very unusually from a risk-management perspective.”

The Alberta Energy Regulator had its own risk to manage as well: Bent said the staff’s families had to be evacuated.

“Once we had that secure, we swung into our role of industry support. We were in day-to-day contact with the operators and coordinating with the provincial command center. We had to understand the local situation for the operators and ask for their specific information.”

From previous smaller forest fires, regulators and operators knew that there was actually little external fire danger to mine lands, if any. Given the wide, if ugly, swathes of cleared land around the processing plants, there was little external fire danger to those either.

Still, regulators gave a general, but not blanket, emergency authorization for operators to build berms around their properties without having to file permits in advance. Actions would be reviewed afterward for environmental and safety compliance.

“The oil sands companies had better fire breaks than the towns themselves,” said Cutbush of Aon Benfield.

In addition to homes and two hotels, the wildfire destroyed three camps used by subcontractors to house oil and gas workers, which should be covered under property policies. Other direct damage from fire and smoke should also be among the covered commercial claims, he said.

Remarkably, no deaths were directly attributable to the fires.

Ethan Bayne, chief of staff for the Provincial Wildfire Recovery Task Force, said the area was “lucky the fire spared major elements of the region’s infrastructure. That includes the major hospital, the water treatment facilities and the airport.”

Ethan Bayne, chief of staff, Provincial Wildfire Recovery Task Force

Ethan Bayne, chief of staff, Provincial Wildfire Recovery Task Force

He credited local officials and industries, notably the oil sands producers, with being responsive and responsible. “The province ran an operations command center for the fire response. In the event, private fire apparatus from industry were deployed.”

In all, about 40,000 claims have been filed from wildfire that began May 1 and was finally declared under control on July 5.

It was the costliest insured wildfire on record in North America, and the costliest insured natural catastrophe in all of Canada, according to PCS, resulting in about double the claims filed after the 2013 floods in Southern Alberta.

Standard & Poors reported that primary insurers “generally have sufficient available reinsurance coverage, adequate capital adequacy, and enough group-level support (for certain subsidiaries) to absorb the losses. However, insurers with a smaller premium base and more concentrated or outsize exposure to Alberta could face some strain and their ratings may come under pressure.”

A number of insurance-linked securities funds were also hit by losses from the wildfire, but it’s unclear as to the extent.

Recovery Efforts

While fires continue to burn — there are forest fires all summer, every summer, in Canada and the U.S. — the focus in and around Fort McMurray has shifted firmly to recovery.

In the near term, the commercial focus is on rebuilding and restoration of the temporary housing needs to get business and industry back to capacity.

The IBC coordinated an effort by 40 or so underwriters handling claims to arrange a single contractor to demolish and clear damaged structures in the area.

The Alberta Energy Regulator recovery team is working with operators on start-up operational plans while monitoring regional air quality to ensure there is no risk to public safety or the environment, according to the agency.

Fewer than 1,000 of the nearly 90,000 people evacuated have returned following the lifting of the provincial state of emergency.

“From previous wildfires we have learned, unfortunately, that recovery is not quick and it is not linear,” said Bayne. “There are unforeseen and unforeseeable complications and delays.”

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Fort McMurray is accustomed to boom and bust cycles, Bayne said, “but what we are facing now is a scale never before seen.”

“At the peak boom time of the oil sands development, the region saw 600 homes completed in a year. But even if we can repeat that, it would take more than three years to rebuild 1,900 homes. The short-term housing need is already being addressed.”

He added that the first milestone in provincial recovery will be a formal recovery plan due to be released in the middle of September. It will include preliminary assessments of the incident, and also a first look at major needs for recovery.

“I cannot emphasize enough our thanks and appreciation of the oil sands industry, the indigenous communities, and the Red Cross,” said Bayne. “Our role has just been to coordinate the work they have done with the regional municipalities.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]
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