Strategic Savings – How Clean Investment Trusts Can Reduce Insurance Costs

While higher interest rates persist in Europe and the US, renewable energy funds have faced some headwinds.  Bond yields have risen and returns on debt in other asset classes have reduced the steady supply of investment capital.  Add in power price risk, and underlying cost inflation in operational expenditure, and it’s not a surprise that some investors have chosen to pause their interest in clean energy.

Additionally, in the UK, some of the major clean energy investment trusts have been hit with new rules on fee disclosures, making them look comparatively expensive, and leading to discounted values, precluding further fund raising.

The long and the short is that under these pressures, trusts will need to look at their existing cash management strategies to sustain their operational portfolios. 

And while insurers might not be the first port of call when deciding on a cash management strategy, working with an insurance broker can set out a number of different pathways to enhancing the balance of risk and cost. 

The obvious place to start is in best practice.  Proactive risk management – such as well documented maintenance, safety protocols and staff training – demonstrates a commitment to minimising the potential for claims.  Equally, keeping on top of operations and maintenance activity to prevent equipment failure, will lead to a favourable claims track record, and by extension lower premiums. 

How else can insurers help?

Minimising current risks and cash liabilities 
If the cash management strategy is to minimise the potential for unforeseen costs from operational equipment failure, then one tactic is to increase the outsourcing of risk protection to an insurer’s balance sheet.  Clearly, there will be more premium to pay in the short term, but asset protection can be enhanced, and any subsequent revenue losses mitigated.

Owners under financial pressure may also wish to reduce the insurance deductible. That, too, will result in an increased premium, but it will ameliorate the risk of a larger short-term liability in the case of a claim.

Increase the share of held risk, but reduce premiums
Conversely, the cash management strategy set in place may require an increase in available operating capital. To that end, there is the option of working with insurance brokers to adjust policies in order to reduce premiums.

In the first instance, setting up regular reviews with your broker to assess coverage alignment against risks and needs prevents ‘over-insuring’ and carrying unnecessary premiums.

Secondly, while deductibles can be reduced to avoid short term cash calls, increasing deductible limits, conversely, can secure a reduction in premium costs while cash flows may be restricted.

Finally, consolidating policies into one provider, if they aren’t already, may also support a discount.

While the economic environment of high interest rates and increased commodity costs persists, clean energy investment trusts are likely to remain under pressure for some time to come.  However, by adopting some of the strategies above, project investors can optimise insurance costs while ensuring robust coverage tailored to their specific needs.  

Written by: Peter Draper

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