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By DAN REYNOLDS, senior editor of Risk & Insurance®

Curt Maloy remembers how unreliable wind turbines were a couple of decades ago because that's how he made his money, or at least some of it.

"You name it, blades were falling off, gear boxes were falling apart, generators were shorting out. ... It was just about everything that you could imagine could go wrong went wrong and so in those days the coverage the insurance community was willing to provide was extremely limited," Maloy said.

But much has changed in the world and with Maloy. He's now vice president of business development for the Newport Beach, Calif.-based U.S. headquarters of GCube Insurance Services Inc., a Jardine Lloyd Thompson subsidiary that is immersed in the business of insuring wind turbines.

GCube Insurance Services, backed by 16 Lloyd's energy syndicates, can offer $650 million in coverage per wind turbine project. Maloy earlier this year said the company was poised to bump that up to $750 million per project.

And his story of increased confidence in an industry that is attracting increased insurance capacity is echoed by others.

"When you look at the risk, it really is a good risk and I think that is driving it as much as the marketplace," said Mark Fishbaugh, the Charlotte, N.C.-based senior vice president and head of the renewable energy practice for Marsh, the global insurance brokerage.

Wind energy technology has improved rapidly, to the point where there is much more faith in the industry and sizable energy producers globally are taking pains to include at least some wind energy in their portfolios.

"You can really start around 2000 was when we first started to see some significant improvements in the quality of the engineering," Maloy said.

Fishbaugh said as a result, the technology will become a permanent fixture in the portfolios of energy companies and those that insure them. "It's here to stay," Fishbaugh said. "I can't imagine being an underwriter and having an underwriting unit yet you're not underwriting this."

Fishbaugh said a lot of the wind energy business is being underwritten by carriers that have dedicated energy units. Those units have on their books things such as 600-megawatt turbines that operate in coal or gas-fired power plants, so the loss of an individual wind turbine, whether it has two megawatts in capacity or even as much as seven, just doesn't stack up as something quite as severe; thus the appetite from carriers.

"No question about it, I think within the last year, year and a half there have been a lot of carriers that have really jumped on board and want to write this stuff, " Fishbaugh said.

That's part of the reason why Selina Hinson, the insurance manager for Horizon Wind Energy LLC in Houston is smiling these days. At her renewals, Hinson nailed down a two-year deal with a premium reduction in the 20- to 25-percent range. "I think the response from carriers has been positive," Hinson said.

She said capacity in the $600 million range is available now and that's a big improvement from where things were just a couple of years ago.

"I think that the pool of insurers has improved and their capacity has improved," Hinson said. "Three years ago, maximum was probably $300 million so we are definitely seeing some improvement in that area."

R.L. Trailor, a risk manager with Renewable Energy Systems Americas Inc., a wind developer based in Broomfield, Colo., agreed that pricing is much more favorable than it used to be.

"In the mid to late 1990s, it wasn't uncommon to have rates in the 35-cent (per $100 of insured value) range," Trailor said. "In the early 2000s, rates were under 25 cents and today's rates are even lower with continued soft trends," he said.

A DIFFERENT KETTLE OF TEA

Horizon's Hinson is in a happy place, but her company focuses on onshore wind projects, which are one thing. Offshore wind energy development is being eagerly sought by many nations and utilities but is an entirely different "kettle of tea" from a risk perspective, as one observer put it.

"There is no question, you can't compare the two exposures, they are as different as night and day," Maloy said. "And as a consequence the cost to insure an offshore farm is between three and five times the cost it would be to insure an identical farm onshore," Maloy said.

From his desk in Munich, Robert Maurer, the global head of renewable energy for Allianz Global Corporate & Specialty, has had the chance to review numerous offshore projects in Europe and he said they are as varied as Europe's many nationalities.

"It all starts with the framework of how far away are you from shore?" Maurer said.

In the United Kingdom or Ireland or Denmark, Maurer said that offshore wind farms tend to be around eight to 10 kilometers from shore and their foundations are being built at depths of between 15 and 25 meters. In the offshore German projects that are being established in the North Sea, turbines can be as far away as 80 kilometers from shore and at depths of 40 to 50 meters.

It seems Germans, like citizens of many other countries, are all for green energy as long as they don't have to look at it. And that distance from shore that the German citizenry requires sure adds costs.

"Offshore wind parks that I recently saw on my underwriting desk the majority of them we're talking about investments of between ?400 million to ?500 million ($510 to $635 million)," Maurer said.

Offshore wind farms, because of the lack of interference from hills and other onshore obstacles, can also expect to generate 20 percent more electricity per turbine than onshore farms.

But that offshore investment is a lot money to put in harm's way. Because as Maurer points out, wind farms tend to get built in places where there is wind, and those very same places are prone to storms.

There is the property risk should one of those turbines be damaged in a storm and there is also the business interruption risk should the cable that carries the wind farm's electricity be damaged.

"The Achilles heel is the collector system where the electricity from each of the turbines is collected and eventually gets moved to a single cable which goes onshore somewhere and is connected to a grid," Maloy said.

Cut or damage that cable and you are out of business until it can be repaired.

"If you have a problem with the sea cable and you don't get any electricity on land you have a total business interruption," Maurer said.

If, for example, a fishing trawler dredges up that cable or even if one wind turbine is taken out of commission offshore, the logistical challenges to make things right are immense. One has to have a boat that can transport the turbine's blade or gear box back and forth for repair and the weather has to be right, and that can take weeks in some cases.

"And all the time we as insurers are sitting there paying the lost revenue and that is a huge exposure for us," Maloy said. In his company's book of business, the way Maloy describes it is that the risks in the alluring but expensive realm of offshore wind are balanced by the technology improvements and relatively low risk environment of onshore wind farms.

The United States, with some 36,000 megawatts in place, is the current international leader in wind energy capacity, soon to be passed by China, Maurer said. But backers of the industry in the United States feel frustrated by the lack of a federal renewable energy standard, which if passed could call for 15 percent of U.S. energy output to come from alternative technologies by 2025.

According to the American Wind Energy Association, a trade group based in Washington, D.C., the lack of federal support has led to a slide in installations. Installations of wind energy in the U.S. in 2010 could amount to between 25 percent and 45 percent less than that established in 2009.

"We are hostage at the moment to politics as many if not most industries are," GCube's Maloy said.

"An inconsistent environment exists surrounding wind energy in the United States," RES-America's Trailor said in an e-mailed response to questions.

"Production and investment tax credit programs have been implemented over the years, certainly a beneficial action, but this also creates cyclical development and construction trends," Trailor said.

But globally, going forward, Allianz's Maurer has good feelings about the health of the wind energy business. In his view, offshore wind farms that can generate as much as 500 megawatts of power are a viable alternative to nuclear power plants, one example of which generates 1,000 megawatts.

"We expect that this will remain a growing industry for the next 20 to 30 years," Maurer said.

October 15, 2010

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