Brave new world


Massive public concern, government papers and an ever-increasing presence in the media have all meant that renewable energy is gaining acceptance as an alternative source of power, and the opportunities it has afforded insurers are being seized upon quickly, writes Jamie Dunkley

With the UK's energy crisis at the forefront of political, social and media debates it was not going to be long before the insurance industry became involved. Insurers have had to adjust their focus as the country begins exploring ways of using renewable sources of energy and the need to protect the associated risks they bring becomes increasingly apparent. This has been noticed in recent months through a host of insurers showing their interest in the sector by launching a range of dedicated insurance products to help support this growing industry.

Renewable energy as a concept is one of contrasts, being both simple and complex in equal measures, and has a broad number of natural sources to generate power including sunlight, wind, tides and geothermal heat. According to the British Wind Energy Association, there are currently 149 working wind projects throughout the UK, with 1874 turbines producing 2186.235MW of power.

The BWEA says it can serve the equivalent of 1 222 431 homes when they are only 30% operational. In comparison, a well-designed, active solar energy heating system should contribute to between 1500kW to 2000kW of power, or about 40% to 50% of a households needs. These are all likely to become more important to the UK during the next few years, with North Sea oil reserves having peaked in 1999.

These figures were reflected in a recent government energy paper that sought to address the country's energy targets. The paper commits the government to cutting CO2 emissions by 60% by 2050, to maintaining the reliability of energy supplies, to promote competitive markets in the UK and to ensure that every home is adequately and affordably heated.

As part of this, the government has set an initial target of 10% of electricity to be supplied from renewable energy by 2010, promising large scale investments to ensure that companies have a number of renewable options to choose from. The European Union has also set stringent targets for 20% of energy supplies to come from renewables by 2020, up from its level of 6.5% last year.

Naturally, insurers have been quick to follow the government's lead and announce product ranges supporting these sectors and their businesses. For example, Royal and Sun Alliance launched its global renewable energy business four months ago and announced it was hoping to tie up £100m in premium in the next three years.

Chief executive Ken Norgrove explains: "In May this year, we launched a new global renewable energy offering to support each of these energy industries as they develop and provide one-stop insurance solutions for clients, backed by our specialist market knowledge and technical expertise."

Wind energy was launched as the new division's first product, and Mr Norgrove says the global insurance market for this sector in 2006 was worth £250m gross written premium. He adds that RSA expects this to grow by £1bn by 2015.

Marsh also launched a new renewable energy team in April. Joint leader Tom Sexton says renewable energy gives insurers an exciting new challenge: "For insurers, this offers the chance to generate extra premium. There's also quite a lot of private equity money going into the sector as well, which, coupled with government incentives and high power prices, offers insurers quite significant revenue."

One-stop shop

Another entrant to the market is Ascot Renewco, which started trading this month. It believes the sector needs a one-stop shop to cater for all project types from start-up to full operation.

David Wright, senior underwriter at the company, says: "It certainly seems to be the case that this sector is in vogue at the moment, and the spate of recent announcements by a number of carriers reflects the growing interest of the insurance world in the area. As far as we are concerned, Ascot Renewco is the fulfilment of a long-held strategic goal to provide the dedicated resource that the renewable sector needs.

"We felt that, until now, insurers in the sector were often dealing with diverse, different departments, dictated not only by the stage of the project but also by the project type. There is, therefore, a real need to have a professional, one-stop shop catering for all project types from their start-up to full operation."

Mr Wright explains that, globally, renewable energy premium income is substantial if all of the various classes of insurance are combined. "Strong development in the renewable energy industry looks set to continue for many years ahead," he adds.

Paul Dowling, XL Insurance's underwriting manager for energy in Europe and the Asia Pacific region, agrees: "There is obviously a lot of development in the sector given the public belief that something needs to be done to curb global warming. This has lead to an increased focus on renewable energy both as an industry and as an insurance or risk transfer opportunity."

Ultimately, it seems the attraction to renewable energy is founded on growing social awareness and government support. Alistair Macintyre, UK product development manager of Ace Europe, which also launched a product - Ace Renewable Energy - earlier this year, argues: "People have become socially aware about these issues, which from our perspective was one of the key reasons we decided to enter the fray."

Planned growth

"Renewable energy is also planned growth, an element not many industries have. It's impossible to judge our premium income targets, but the government's white paper targets suggest its growth will be significant," Mr Macintyre says.

While it is clear that a number of insurers are entering the renewable energy sector, it is not always clear which types of risks they will be covering. RSA says it covers a "full customer experience", from "plan to operation", and its onshore and offshore wind cover protects against transit, construction and operational phases, including marine transit, general liability, machine breakdowns and business interruption.

Mr Norgrove adds: "We have a broad range of clients - including manufacturers, developers, contractors, operators and finance companies - offering cover for every stage of a project from development and planning to site testing and construction, through to on-going operation."

According to Mr Sexton, Marsh is looking to support renewable energy projects including onshore and offshore wind, waves and biomass, although its cover will focus on property damage, start-up delays and machinery.

Mr Dowling adds his firm will go for a traditional approach: "We offer traditional risk transfer with cover for physical damage and BI, both of which are typically found in the London and global markets. For package policies, we can offer marine and marine delay in start-up, erection all risks and EAR DSU. We also offer operational material damage and BI cover for single projects or multiple projects, as well as the above mentioned operational risk transfer coverage on multi-year deals.

"In addition, we have the ability to offer environmental insurance cover, weather hedge-related coverage and specialist long-term policies that dove tail with the longer bank loan periods."

He adds: "We are interested in any reputable renewable energy company or developer worldwide. Where possible, we seek to offer a portfolio approach to insure all assets under one policy, or at least group all assets within one territory into one policy."

And other firms cover non-standard energy sectors. "Our targets are the traditional waste energy markets and non-traditional, such as biomass, woodchip, cereals and poultry litter. We also cover onshore wind energy and solar power, biofuels and waste management, such as recycling," Mr Macintyre explains.

The energy sector is not all plain sailing, however, and insurers face numerous challenges. "There are a number of difficult technicalities that people need to understand, it's quite a diverse portfolio" Mr Sexton explains. "When it comes to risks beyond the technical risks, it becomes relatively straightforward. Potential risks might not be as large as other risks, but it's still a hard area to judge and requires a broad understanding of the different requirements."

Growing demand

For Mr Dowling, difficulties arise from the diversity of the portfolio, and he argues the point that no two risks are the same: "All the different types of renewable energy power generation have different characteristics.

"With the growth in demand for energy production from renewable sources, developments in design and manufacturing methods inevitably will see new products with new designs, or variations of existing designs, come on to the market. A technically focused and specialist underwriting department is well placed to evaluate such technology."

Wright agrees that although the types of energy are often put together under the green banner, they are all different products: "The renewable spectrum is made up of a diverse range of energy types, where the sole common point is often the green badge. So the range of asset and project types and the different perils that can befall them is very broad. Aside from the diversity, it is generally the case that new technology is an ever-present feature, with some sectors remaining around the prototype stage, as opposed to the more proven technologies of others."

Many insurers entering the renewable energy market seem unwilling or unable to pin down exactly how much business they expect to add to their books, but they are keen to stress their commitment to the sector. With government support and social pressure firmly behind it, the insurance sector has realised just how important it is to grow in this area. Observers will be keen to watch how they manage to do this.

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