New Policies Fill Gaps in Green Energy
Ambitious underwriters are learning to make hay while the sun does not shine. And when the wind does not blow, and the rain does not fall on watersheds.
For years, the intermittent nature of nature vexed the green energy industry. Until recently it was addressed as a technical problem of storage and backup generation.
But recently, several insurers developed coverage that offer a financial recovery approach. To be sure, the demand is coming primarily from lenders and capital investors that back green power projects. The effect, if the markets grow, will be to help normalize both power and profitability.
While the mechanisms for the new programs are new, financial weather instruments are not, said Michael J. Perron, senior vice president for Northeast property placement at Willis Towers Watson, and a 2016 Risk & Insurance Power Broker® in the alternative utilities category.
“Wind productivity was down over the last couple of years, and banks are requiring some type of protection from insureds. The industry has these wind curves and they are just not performing.”
Generators themselves are not yet asking for coverage, said Perron, “but banks are saying, ‘your charts are nice but we need protection.’
“Risk managers at the generators may feel very comfortable with the long-term performance, but banks are asking for more. In some cases the lenders or investors are named as loss payee.”
In general, Perron said, the new demands from backers and the coverage being offered to meet them is beneficial in direction, if not always in degree.
“We do push back on occasion,” he said.
Using an analogy from earthquake coverage, he noted that “we had one client for which the bank demanded $100 million of protection. We modeled the case and found that the 500-year event would cost $20 million so we suggested buying $35 million in coverage.”
Weather Risk Transfer
Underwriter GCube brought its “weather risk transfer mechanism” to North America to respond to “increasing demand from U.S. project-financed wind operators, notably those refinancing or going through acquisitions,” the company stated.
“Utilities and independent power producers have directly cited below-par wind resources as a contributing factor to net losses in 2015 and the first quarter of this year,” it said.
“This financial underperformance, if left unchecked, threatens to undermine the reputation of wind energy as a low-risk, reliable investment — particularly with the emergence of new investors with less tolerance to lower returns.”
“There can be a straight trigger payment, or more complex arrangements more like a cash flow swap or collar.”– Bill Hildebrand, executive vice president, GCube
The basic concept, said Bill Hildebrand, executive vice president of GCube Insurance Services, is a contract with wind or hydro power generators. If the wind or rain is insufficient for the generators to provide the power that they have contracted to deliver, then parametric triggers would result in a payment under the contract.
“We are seeing increased requirements from insureds on behalf of their capital providers for revenue certainty,” said Hildebrand.
“At the same time, we have had carriers come to us with contracts they would like to distribute. Weather insurance has been around for a long time with the same interest in consistency and smoothing of revenue. What is new is this type of flexible contract that we are bringing on behalf of the capacity behind us.”
GCube is using Lloyd’s syndicate papers for backing. As a result contracts can be made on different terms.
“There are options,” said Hildebrand.
“There can be a straight trigger payment, or more complex arrangements more like a cash flow swap or collar.”
The contracts are being offered only to wind and hydro generators, not solar at this point. That is for two reasons: Solar has not seen the dips that the other green energy types have, and because the performance data on solar is not as extensive.
Early in May, a consortium of carriers executed a 10-year proxy revenue swap with a large U.S.-based wind farm. The arrangement allows for hedging wind volume risks for wind farms, to try to ensure stable revenues despite uncertainty of intermittent wind.
Advances in risk modeling and maturity of risk appetite were credited with making the deal more long-term in scope.
The 10-year agreement is designed to secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 100-plus MW farm.
But solar is not being neglected. Early in May, specialty insurer Sciemus launched a policy to protect the owners of solar farms against a lack of sunlight.
The policy pays if levels of sunshine fall below an agreed amount, and it is available as a hedging instrument for solar farm operators for up to 10 years.
Other lack of sun insurance schemes are available, but they are tied into property damage programs, experts said. The Sciemus insurance can be purchased as a stand-alone.
The insurance is index-linked and pays a fixed price per unit of lost sunlight at the end of each 12-month period. It is calculated on the sunlight either at the solar farm or at the nearest weather station.
The coverage is available in Europe and North America, and Sciemus plans to roll it out into the Middle East and North Africa later this year.
Are Cyber Limits Sufficient? It Depends
Several cyber insurers recently announced new cyber facilities with up to $100 million limits per placement and additional new cyber capacity.
This has increased the generally available stand-alone cyber limits from traditional insurance carriers from approximately $200 million to approximately $300 million for most organizations in most industries.
Add in the potential reinsurance capacity for some large organizations seeking catastrophic coverage and we’re looking at $500 million to $1 billion cyber insurance programs.
2016 studies indicate dramatic growth in cyber insurance purchases, including small, middle and large revenue organizations.
We are seeing small entities purchase $1 million, $3 million or $5 million as first-time buyers, and middle market and large organizations increase cyber limits from single layer $10 million and $20 million limit policies to multi-layer programs.
There are over 67 different cyber insurers with 67 different applications, submission processes, underwriting, policy forms and claims handling processes.
However, 92.5 percent of organizations that purchase cyber insurance buy less than $100 million limits and less than 5 percent are willing to consider paying the going premium rate excess of $300 million. Therefore, current capacity satisfies more than 95 percent of the current cyber insurance environment.
Is There Room for More Cyber Insurance Capacity?
There are more than 67 different cyber insurers with 67 different applications, submission processes, underwriting, policy forms and claims handling processes.
Most of the carriers target middle market accounts, where there is quite a bit of aggressive competition on price, coverage and limits. However, there are cyber capacity gaps in a few areas
• Large data aggregators with massive personally identifiable information, including personal health records, such as retail, health care, financial institutions and hospitality (hotels & restaurants, etc.);
• Organizations with the potential for bodily injury and/or tangible property damage from purely cyber perils (driverless cars, the Internet of Things-connected devices, etc.);
• Unauthorized transfer of funds via some combination of hacks (malware on a system) and social engineering (employee is tricked into sending a wire transfer at the request of an imposter CFO or CEO), such as the Bank of Bangladesh heist via the Federal Reserve of New York;
• Industries where business interruption is of greater concern than breach of personal information, such as transportation, agribusiness, energy, utilities, power, and manufacturing; and
• Industries where the value of the lost information is most critical, which is generally excluded from today’s cyber insurance policies, such as law firms (think Mossack Fonseca breach), investment banks involved in mergers & acquisitions, defense contractors and research labs.
A few insurance carriers realize the future success of cyber insurance depends upon more creative solutions that combine the capacity and damage cover offered under property, general liability, crime, and kidnap and ransom policies, with the underwriting expertise of cyber insurance.
A number of entities are building actuarial models and cyber resiliency best practices rating assessments, which will facilitate the acceleration of the cyber insurance market.
However, it is important that insured organizations and cyber insurers understand a few important items prior to jumping in, including identification and quantification of the unique cyber exposures facing each specific organization; modeling, financial statement impact and priorities and risk appetite of the insured (i.e., smoothing of earnings, ERM).
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.