Wind Turbines Slow Down Hurricane Winds
Off the New York coastline would be a perfect place for an array of wind turbines, according to a Stanford professor. It would not only offer clean energy to the Big Apple but it would protect it the next time a Superstorm Sandy comes calling.
“If you have a large enough array of wind turbines, you can prevent the wind speeds [of a hurricane] from ever getting up to the destructive wind speeds,” said Mark Jacobson, a professor of civil and environmental engineering at Stanford University.
Computer models demonstrated that offshore wind turbines reduce peak wind speeds in hurricanes by up to 92 mph and decrease storm surge by up to 79 percent, said Jacobson, who worked on the study with University of Delaware researchers Cristina Archer and Willett Kempton.
“The additional benefits are there is zero cost unlike seawalls, which would cost about $30 billion,” he said, noting that the wind turbines “generate electricity so they pay for themselves.”
The researchers studied three hurricanes, Sandy and Isaac, which struck New York and New Orleans, respectively, in 2012; and Katrina, which slammed into New Orleans in 2005. Generally, 70 percent of damage is caused by storm surge, with wind causing the remaining 30 percent, he said.
That’s why onshore wind farms would not be as effective, he said. While they would reduce the wind speed, they wouldn’t impact storm surge.
In 2013, one of the “most inactive” Atlantic hurricane seasons on record, insured losses totaled $920 million, according to Guy Carpenter, which relied on information from the Mexican Association of Insurance Institutions. The most noteworthy events were Hurricane Ingrid in the Atlantic and Tropical Storm Manuel in the Pacific, which displaced thousands as they caused excessive rainfall, flooding and mudslides.
According to the Insurance Information Institute, Katrina was the costliest hurricane in insurance history, at $48.7 billion, followed by Andrew in 1992 at $25.6 billion and Sandy at $18.8 billion. Economic losses, of course, were much higher.
Wind turbines, which can withstand speeds of up to 112 mph, dissipate the hurricane winds from the outside-in, according to Jacobson’s study. First, they slow down the outer rotation winds, which feeds back to decrease wave height. That reduces the movement of air toward the center of the hurricane, and increases the central pressure, which in turn slows the winds of the entire hurricane and dissipates it faster.
The benefit would occur whether the turbines were immediately upstream of a city, or along an expanse of coastline. It could take anywhere from tens of thousands to hundreds of thousands of wind turbines off the coast to offer sufficient hurricane protection.
At present, there are no wind farms off the U.S. coastline, although 18 have been proposed for off the East Coast. Proposals have also been made for off the West Coast and the Great Lakes. There are 25 operational wind farms off the coast of Europe.
“Overall,” Jacobson and his colleagues concluded in the study, “we find here that large arrays of electricity-generating offshore wind turbines may diminish hurricane risk cost-effectively while reducing air pollution and global warming, and providing local or regionally sourced energy supply.”
A Possible New Market
Government regulation is often portrayed as the bane of free markets, but in the case of new rules governing electrical power generation in the Northeast and Midwest, regulation is actually creating a new and specialized insurance market.
After a series of electricity shortfalls over the past few years, two regional power wholesale organizations in the eastern U.S. now have federal approval to institute a system under which generators that fail to provide the power they have promised at peak times will pay for the cost of replacement power. In one interesting twist, it is not so much the risk that is emerging, but rather the risk-transfer market itself.
Last year, ISO-New England (ISO-NE) got approval from the Federal Energy Regulatory Commission (FERC) to institute a system of charges and payments. In July of this year, PJM, the regional transmission operator for a wide swath of the Middle Atlantic and eastern Midwest, also got FERC approval for a similar system.
The United States and Canada are divided into regional independent system operators (ISOs) and regional transmission organizations (RTOs), which differ only in a few legal senses.
It is straight cost of replacement for non-delivered goods, in this case, electricity.” — Matthew White, chief economist at ISO-NE
At present, ISO-NE and PJM are mandatory markets, where all power providers must participate and mandatory charges are in place. Others are voluntary.
Utility industry organizations note that pending federal legislation could recognize the preferability of mandatory participation and payment systems, but that is a long way from being passed and signed into law.
Even though the ISO-NE and PJM regimes were approved at different times, they both go into effect with the delivery contracts starting in June 2018. Those contracts have already been bid and accepted, and in most cases power generators have already figured the costs into their rates.
The purpose for the new rules is to ensure sufficient power at peak demand, especially during hot summer days and winter storms. The charge-and-payment system is a double-settlement contract, standard in commodity markets.
If a supplier fails to provide the commodity — grain, oil, power — in the agreed amount at the agreed time, the supplier has to pay a set compensation, which the buyer then uses to fill the gap on the spot market. It is a straight transfer to ensure delivery.
“These are fully insurable risks,” said Matthew White, chief economist at ISO-NE.
“It is straight cost of replacement for non-delivered goods, in this case, electricity. Insurance is a critical part of our ability to deliver power, and we considered the insurability of the risk in market design whenever we make significant changes.”
It is also important to note that the core purpose of the new regimes is to encourage generators to invest in their infrastructure, operations and reliability.
Seeking a Just System
Both ISO-NE and PJM have said that they would much prefer that all their generators provide every watt they have contracted to supply. But realistically that won’t happen, so the new arrangement, they hope, will enable timely, transparent and fair replacement power.
“There are no penalties in our design,” White said. “This is a true two-settlement obligation, just like any other commodity contract.
“We know that penalties are not insurable, so we were careful not to structure the market that way. This is covering a short position where every party knows the terms.
“The risk can be indexed to a transparent development outside the control of the insured, so there is no moral hazard. Insurers can model the system.”
Insurers are doing exactly that. Manfred Schneider, head of engineering in North America for Allianz, confirmed that fines or penalties would not be covered under standard business interruption (BI) coverage.
“We are working with our alternative risk transfer group looking for financial solutions to this non-typical exposure. We have to find the framework, the limits, the exposures. This is not just something you can lift out of the drawer.”
Schneider said that it could take another six to 12 months for Allianz and other carriers to work through the full underwriting, including assessing the needs, costs and potential size of the market.
A History of Coverage Ambivalence
One important concern for underwriters is that owners may choose not to buy policies after they invest time and effort into developing coverage for generators’ exposure under the new rules.
That would not be unprecedented.
One carrier recalled that BI coverage was not triggered when an ash cloud from a volcano in Iceland essentially locked down all transport in Europe for more than a week in 2010 because there was no physical damage.
Raw materials, inventory and parts could not be delivered, and many operations were halted. Insurers developed new policies, but owners deemed them too expensive and did not buy them.
“This is very new and we are being very careful.” — anonymous electricity industry source.
The same thing happened after Hurricane Ike swept over the Gulf Coast in 2008.
Cities were evacuated and refineries and chemical plants had to close for lack of workers. The storm did relatively little damage, but plants incurred the costs of shutdown, idleness and restart.
Again, at least one carrier developed “spin-down” insurance to cover such non-damage costs, but owners did not buy it.
“Swiss Re has seen a sharp increase from risk managers, CFOs and the heads of power trading inquiring about coverage options for generators participating in binding capacity performance markets,” said Brian Beebe, head of origination in North America for environmental and commodity markets with SwissRe Corporate Solutions.
“Since the magnitude of potential penalties for generator non-performance is extraordinary — millions of dollars an hour for a 500 Mw plant — the risk mitigation topic has been elevated within generation company senior management, including boards of directors.
“In response, generator risk managers and insurance brokers are seeking a variety of forward starting coverage options for key generation capacity.
“Clearly, the evolution of increased transparency and client knowledge of generator capacity prices is underway in deregulated markets. However, in traditional regulated utility markets, I do not see evidence that these areas are adopting any type of market-based mechanism to encourage generator availability.”
The high penalty charges have indeed caught the attention of corporate boards at generators, and they are pressing their risk managers for answers.
None that Risk & Insurance® contacted were willing to speak publicly, given that the situation is in flux and that they have to report first to their boards.
A significant concern among risk managers is not the availability of risk-transfer options, but the price, terms and conditions.
Several large generating companies serve both ISO-NE and PJM. Those contacted did not reply or declined to comment citing “competitive issues.”
One official observed, “This is very new and we are being very careful.”
It is expected that some of the larger corporations will retain the risk posed by the charges. That expectation in turn is making some risk managers anxious that lack of demand will limit participation by carriers and keep rates high.
Only time will tell how broad and deep this risk-transfer market becomes, and where capacity and rates settle. But one other concern raised about the new charge-and-payment scheme can be addressed. There has been a thought that small generators, especially those in renewable power, are essentially shut out, because they cannot commit to large delivery contracts.
That is not the case, said ISO-NE’s White.
“We know the status of every generator, updated every few seconds. If a wind generator cannot make a commitment to deliver, they don’t get the up-front payment, but they can be on standby.
“If the wind is blowing and they can supply during a delivery event, we will pay them the rate same as anyone else.”
5 Steps for Insurance Firms to Recruit Better College Graduates
It’s no secret that most college students simply aren’t aware of insurance careers. Our own research* has found that only 2 percent of millennials consider themselves “very familiar” with the insurance industry, and fewer than 10 percent said they were interested in joining the profession.
That harsh reality means insurance employers can’t just post entry-level job openings online and wait for the applications to roll in — especially if they’re trying to attract the best and the brightest. You need to be proactive if you want to compete with industries that young people know much better.
One effective way firms can get a jump start on the competition is by introducing students to their organization before students graduate. Here are five steps to get started.
Focus your efforts
Nearly 40 colleges and universities offer undergraduate RMI-major programs, and many more offer RMI minors, graduate programs and individual classes, according to a 2014 study by St. John’s University and the International Insurance Society. Many of these schools are also MyPath partners, and you can learn more about them by visiting our site.
But there are other ways to reach prospective applicants, too. Check for business-focused student groups or clubs, especially Gamma Iota Sigma (GIS), the insurance, risk management and actuarial science organization. GIS has more than 65 chapters across the United States with ambitious students who are already familiar and involved with the insurance field. Find a chapter near you by visiting their website, and offer to send a guest speaker or host an informational lunch. (Trust us, no college students are turning down free food.)
Use your connections
Internships are another great way to generate awareness of your company. They truly are the simplest win-win, because you get support for your team, the interns gain valuable professional experience, and there’s always the chance they’ll spread the word about your organization on campus. If you’re looking for high-caliber interns, you can become a MyPath partner and post your internships on our database for tens of thousands of users to find.
Put your best foot forward
Ideally, your social media presence should have a personal feel and give students an idea of what it’s really like to work for your company. As we know, careers in insurance organizations are often misrepresented, so it’s imperative to make that extra effort to show your workplace is rewarding and fulfilling.
Rein in your strongest applicants
If you’re making an offer, specifically refer to topics discussed during the interview process or send a handwritten note. Millennials especially want to understand how they fit in to the mission of the organization and want to feel appreciated as a unique addition to the group. Some firms even ask the CEO or another exec to give the applicant a call extending a job offer. If you’ve done a good job up to that point, that applicant may actually become the CEO one day.
Want more ideas for recruiting young professionals? Visit the MyPath website to get more articles like this, including “How Employers Can Make Their Offices More Millennial Friendly” and “4 Myths About Millennials That Smart Employers Should Ignore.” You can also sign up to become a MyPath partner yourself to connect with millions of young people around the U.S.
*Research from The Griffith Insurance Education Foundation, “Millennial Generation Attitudes About Work and The Insurance Industry” (Malvern, Pa.: The Griffith Foundation, 2011).