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.”
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.
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.