Renewable Energy Comes of Age
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.
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.”
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.
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.
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.
“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.
“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.
Private Label Coverage
In an increasingly interconnected business environment, it is no wonder many companies are taking a closer look at the changing nature of their liabilities — and seeking tailored coverages to ensure none of their unique exposures slip through the cracks.
Growing demand from clients and brokers in a tough environment is forcing underwriters to innovate in order to win business and squeeze extra margin from their books. The result is a proliferation of specialist professional liability policies that runs the full gamut of industry sectors, from health care to construction.
The move towards specialization has developed to the extent that now it is possible for various stakeholders within the supply chain of the same industry to each enjoy their own tailored coverages. There are no doubt more niche products to come.
“The trend is being driven by both a willingness from underwriters to look for margin where they can, and also demand from insureds,” said James McPartland, class underwriter, professional indemnity, at ArgoGlobal.
“We now live in a much faster-paced world than even 10 to 15 years ago. The way businesses interact and bring products to market is very different now, and companies can significantly change from month to month.”
Uniquely positioned with their fingers on the pulse of their clients’ evolving risk profiles, brokers play a huge role in identifying coverage needs and driving the development of bespoke wordings.
“Agent feedback is crucial; they are the catalysts of change,” said Greg Leffard, president of professional liability at the Hanover Insurance Group.
“As businesses change, exposures change, and so should our coverage.”
He added that brokers see the development of new products as a way to differentiate themselves from their competitors just as carriers do.
“It is easy to compete on price, but agents want more than that. They want private label coverages, available only to them.”
“It starts as one client with a specific need, then before long three have asked the same question in a different way and we know there is a trend and we have to find a solution,” said Elisabeth Case, commercial E&O product leader for Marsh, who added that newcomers to the PL space are often the underwriters willing to concede the most ground in the design of new products.
“We have carriers we know are willing to go the extra mile, both in the U.S. and London. It really does come down to individuals at certain organizations trying to keep their companies at the forefront, or trying to build a book. There are new entrants in the PL and cyber liability space coming into the marketplace all the time, so they often have to offer something unique to get their foot in the door.”
According to Cynthia Evanko Olinger, senior vice president of construction at JLT Specialty USA, modifications to standard PL coverage can often be obtained from underwriters “for little or no premium.”
Whereas a decade ago a $2.5 million PL line for accounts “meant you were a player,” now it is common for insurers to put down $5 million or $10 million. — Brian Braden, vice president, professional risk, Crum & Forster
“We argue, for example, that the technology services are part of the core business that the underwriter is insuring, and our request to affirm coverages for these services should have no premium impact,” she said.
Brian Braden, vice president, professional risk, at mid-market underwriter Crum & Forster, noted, however, that the most flexibility is often likely to be given on larger risks due to the negotiating power of big brokers who control a lot of premium dollars.
“Those changes are usually advantageous to the client and a little adverse to the carrier. Sometimes we follow those changes on an excess basis, but if we’re writing primary we won’t,” he said.
He added that underwriters are offering bigger lines. Whereas a decade ago a $2.5 million PL line for accounts “meant you were a player,” now it is common for insurers to put down $5 million or $10 million, he said.
“Plus there are many more players, which drives the price down.”
Hanover’s miscellaneous PL group writes over 100 different classes of business, each with its own unique exposure.
“This creates challenges to ensure we provide appropriate protection for all the various sectors, as well as competitive coverage in the marketplace at a reasonable price,” said Leffard, while McPartland noted that the cost of doing business is increasing and pricing new bespoke coverages can be “haphazard” due to the lack of historical data.
As McPartland pointed out, not all clients are interested in a new bespoke PL product, as such products are often purchased out of regulatory or contractual obligation.
“When you strip a PL policy back, 99 percent of all claims would be covered under the negligence clause. Add-ons enhance the product to make it more attractive, but the fundamental driver of purchase is price, and people are prepared to move business around a lot quicker nowadays,” he said.
McPartland added that while brokers could until recently rely on existing clients to remain loyal at renewal, clients are now more interested in what the broker can do for them going forward than what they’ve done for them in the past.
“We are having to work harder to retain our business. The book churns quicker and as a result our modeling becomes more volatile and pricing gets more difficult.”
Nevertheless, said Leffard, many professionals are becoming more knowledgeable on the benefits of insurance and the true cost of a claim.
“Mature businesses are willing to pay more for a solid form compared to a basic form that just meets contractual business requirements,” he said.
“Established marketing firms, advertising and public relations agencies, technology firms and home inspectors are also good examples of sophisticated, educated insureds. They are more likely to understand their professional liability exposures and ask for the right coverages.”
The health care sector is ripe for specialist PL covers. According to Faye Chapman, medical malpractice underwriter at ArgoGlobal, quasi-medical practitioners including beauticians and masseurs are seeking PL cover due to the increasingly invasive nature of treatments (such as injectables and laser treatments), which goes beyond the scope of some general liability underwriters’ appetites.
Practitioners offering one-on-one patient treatment may also require abuse of patient cover, she said, though there is some debate within the insurance industry over whether abuse would fall in a liability or medical malpractice policy.
Meanwhile, medical devices including implants present another potential liability exposure as practitioners could find themselves facing a claim if they recommend the use of a substandard or dangerous product.
Chapman noted that insurers are offering extended reporting periods, effectively transforming covers from claims-made to occurrence basis policies, across a number of specialist health sector products.
More broadly, fundamental business themes demand that old coverages be revisited across almost every sector — most notably concerning the proliferation of cyber risk and the evolving use of technology.
“Professionals such as lawyers, accountants and even engineers and architects who are holding personally identifiable information are beginning to realize that negligence could be deemed to be the main trigger for a breach of privacy,” said McPartland, noting that cyber liabilities are increasingly being written into PL, professional indemnity (PI) and errors & omissions (E&O) policies.
Braden said cyber liability risk has “changed the landscape” on a number of products. “Our tech product, for example, used to just be E&O coverage for tech professionals, but over the last four or five years if you don’t offer full first-party coverages including credit monitoring, notification costs, extortion and business interruption, you are dead in the water.”
“It’s an exciting market,” said David Smith, professional indemnity underwriting manager (UK & Ireland) for Lloyd’s underwriter Hiscox, which writes 20 profession-specific PI products.
“In the past it was traditionally professions such as surveyors and architects that bought PI cover, but in recent years we’ve seen the evolution of people being asked to buy PI for their contracts with third parties and interest from a host of new professions — and we see that trend continuing.”
Smith noted that many of Hiscox’s PI products now cover insureds against claims arising from their own websites, such as the unlicensed use of images, in addition to third-party damage.
“Ultimately, what clients will start to want more is an all-in-one E&O and cyber liability policy with potentially some physical loss/damage related to a cyber event if the systems they rely heavily on to deliver their products or services are interconnected to others,” said Case.
Similarly, advances in electronic technology are changing the way many professions operate, and are creating new exposures that need to be written into specialist PL products.
Car parts, for example, increasingly include tech components, which is making auto suppliers seek cover against component malfunctions that could lead to manufacturer recalls, noted Case.
“We are getting lots of requests from various types of manufacturers who have both a manufacturing and design element, who are sometimes confused about what type of cover they should buy.
“People mistakenly think they need an architects and engineers policy if their engineers are designing products, but in fact they need manufacturers’ E&O,” she said.
The tech industry itself is a complex area when it comes to PL. “Tech clients are very specialized and there are sub-sectors of the tech world that need even further differentiating,” said Case, noting that FinTech companies are often unable to find E&O solutions that cover their entire exposures, so Marsh is creating bespoke coverages by aggregating multiple policies in order to obtain adequate coverage.
McPartland predicted the next area for specialist PL cover could be 3D printing.
“This printing will speed up repair processes but it is also an opportunity for people to make mistakes,” he said. “If someone prints the wrong valve for an oil rig, for example, it could result in a significant oil spill. It’s an area to watch over the next 18-24 months.” &
Mind the Gap in Global Logistics
Manufacturers and shippers are going global.
As inventories grow, shippers need sophisticated systems to manage it all, and many companies choose to outsource significant chunks of their supply chain management to contracted providers. A recent survey by market research firm Transport Intelligence reveals that outsourcing outnumbers nearshoring in the logistics industry by 2:1. In addition, only 16.7 percent of respondents stated they are outsourcing fewer logistics processes today than they were three years ago.
Those providers in turn take more responsibilities through each step of the bailment process, from processing, packaging and labeling to transportation and storage. Spending in the U.S. logistics and transportation industry totaled $1.45 trillion in 2014 and represented 8.3 percent of annual gross domestic product, according to the International Trade Administration.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management,” said Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin.
Such companies are known as third-party logistics (3PL) providers, or even fourth-party logistics (4PL) providers. They could provide transportation, storage, pick-n-pack, processing or consolidation/deconsolidation.
As the provider’s logistics responsibilities widen, their insurance needs grow.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps,” said Alexander McGinley, Vice President, US Marine, XL Catlin.
A comprehensive logistics form can close those gaps, and demand for such a product has been on the rise over the past decade as logistics providers search for a better way to manage their range of exposures.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management.”
–Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin
A Complementary Package
XL Catlin’s Logistics Services Coverage Solutions takes a holistic approach to the legal liability that 3PL providers face while a manufacturer’s stock is in their care, custody and control.
“A 3PL’s legal liability for loss or damage from a covered cause of loss to the covered property during storage, packaging, consolidation, shipping and related services would be insured under this comprehensive policy,” McGinley said. “It provides piece of mind to both the owner of the goods and the logistics provider that they are protected if something goes wrong.”
In addition to coverage for physical damage, the logistics solution also provides protection from cyber risks, employee theft and contract penalties, and from emerging exposures created by the FDA Food Modernization Act.
This coverage form, however, only protects 3PL companies’ operations within the U.S., its territories and possessions, and Canada. Many large shippers also have an international arm that needs the same protection.
XL Catlin’s Ocean Cargo Coverage Solutions product rounds out the logistics solution with international coverage.
While Ocean Cargo coverage typically serves the owner of a shipment or their customers, it can also be provided to the internationally exposed logistics provider to cover the cargo of others while in their care, custody, and control.
“This covers a client’s shipment that they’re buying from or selling to another party while it’s in transit, by any type of conveyance, anywhere in the world,” said Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin. “When provided to the logistics company, they in turn insure the shipment on behalf of the owner of the cargo.”
The international component provided by ocean cargo coverage can also eliminate clients’ fears over non-compliance if admitted insurance coverage is purchased. Through its global network, XL Catlin is uniquely positioned as a multi-national insurer to offer locally admitted coverages in over 200 countries.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps.”
–Alexander McGinley, Vice President, US Marine, XL Catlin
A Developing Need
The approaching holiday season demonstrates the need for an insurance product that manages both domestic and international logistics exposures.
In the final months of the year, lots of goods will be shipped to the U.S. from major manufacturing nations in Asia. Transportation providers responsible for importing these goods may require two policies: ocean cargo coverage to address risks to shipments outside North America, and a logistics solution to cover risks once goods arrive in the United States or Canada.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures,” D’Alessio said.
In another example, D’Alessio described one major paper provider that expanded its business from manufacturing to include logistics management. In this case, the paper company needed coverage as a primary owner of a product and as the bailee managing the goods their clients own in transit.
“That manufacturer has a significant market share of the world’s paper, producing everything from copy paper to Bible paper, wrapping paper, magazine paper, anything you can think of. Because they were so dominant, their customers started asking them to arrange freight for their products as well,” he said.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures.”
–Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin
The global, multi-national paper company essentially launched a second business, serving as a transportation and logistics provider for their own customers. As the paper shipments changed ownership through the bailment process, the company required two totally different types of insurance coverage: an ocean cargo policy to cover their interests as the owner and producer of the product, and logistics coverage to address their exposures as a transportation provider while they move the products of others.
“As a bailee, they no longer own the products, but they have the care, custody, and control for another party. They need to make sure that they have the appropriate insurance coverage to address those specific risks,” McGinley said.
“From a coverage standpoint, this is slowly but surely becoming the new standard. A logistics form on the inland marine side, combined with an international component, is becoming something that a sophisticated client as well as a sophisticated broker should really be asking for,” McGinley said.
The old status quo method of bolting on coverage forms or additional coverages as needed won’t suffice as global shipping needs become more complex.
With one underwriting solution, the marine team at XL Catlin can insure 3PL clients’ risks from both a domestic and international standpoint.
“The two products, Ocean Cargo Coverage Solutions and Logistics Service Coverage Solutions, can be provided to the same customer to really round out all of their bailment, shipping, transportation, and storage needs domestically and around the globe,” D’Alessio said.
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. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of December 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.