Peter Draper
Securing adequate insurance cover for severe convective storms (SCS) is a new risk for finance directors and asset managers. Since 2019, when one of the first significant claims from hail damage to solar was recorded at the Midway project, severe convective storms (SCS) have wrought havoc in Texas. Earlier this year, Swiss Re reported1 that U.S. hailstorms accounted for 50 – 80% of the $54.4billion total losses from severe convective storms in 2023. The trend of increasing losses to Texan projects from hailstorms looks set to continue, with 2024 already seeing an estimated $50m loss2 from the Fighting Jays project.
It’s a supply and demand dynamic that’s becoming sharper—not only for developers trying to place new cover, but also for those with large portfolios seeking annualised protection. Yet, the pipeline for new solar projects in the ERCOT market shows no sign of slowing, with reports3 from SEIA4 and WoodMac predicting 100GW of new solar capacity in the next decade. But this growth is coming at a time when insurance capacity has responded to SCS losses by scaling back underwriting for natural catastrophe cover, driving premiums higher to reflect an evolving risk paradigm.
At risk of breaching contracts
When developers or operators typically seek insurance, lender contracts have been signed, or are about to be signed, committing the insured to procure minimum levels of insurance cover for Nat Cat events. A number have tax equity or other financing partners that will require a certain amount of insurance capacity to be secured before making a financial commitment. Failure to secure adequate insurance protection is a risk of breach of contract for insureds not planning for the turbulent market for SCS insurance cover.
It’s scenarios like this which mean NARDAC has seen a spike in demand for our advisory and broking services, supporting insureds in defining precisely what they need to transfer, what they can afford to retain, and working with underwriting capital to give them confidence in projects and portfolios.
Understanding the rules of the game
If you want to (re)insure operational assets, or secure cover for a new project, then being aware of the parameters governing insurers will help secure the cover you need.
Aggregates: From a policy perspective, it is the maximum amount in aggregation that an insurer will reimburse a policyholder for covered losses during a fixed time period. From an insurer’s perspective an aggregate is the sum of its exposure to a given peril, for example, SCS. Rather than being a bottomless pit of capital seeking opportunities, insurers are limited by an aggregate that is reset annually, normally at the start of each new year. It means insurers have to be selective, and insureds can suffer, or benefit, from timing.
Sub-limits: Insurers are imposing sub-limits on Nat Cat claims – that is, insurers will pay claims until a certain ceiling is reached. For example, a recent, high-profile hail event saw an insured suffer near USD 100 million of damage but its insurance cover for SCS was sub-limited to USD 50 million. It left the insured absorbing the difference.
Furthermore, insurers charge more premium when there is less Nat Cat capacity available to provide – again supply and demand. This means it’s crucial to understand ‘when’ to look to place cover. Buying early in the year when insurers are renewing reinsurance treaties and resetting natural catastrophe aggregates can mean access to cheaper insurance capital.
How NARDAC creates additional capacity for operating portfolios
For our clients with non-recourse financing, we often use specialist multi-peril (re)insurers to address inadequate coverages on primary insurance policies, such as by topping-up sub-limits and/ or securing deductible buy downs, for clients. It helps to do this ahead of wind, tornado, and hail season – even if the primary policies have different renewal dates.
For clients with assets in more exposed locations, we are likely to require a larger panel of insurers as individual capacity providers take smaller line sizes. As specialist brokers, our role is to place policies with those best suited to understand and competitively price the risk. For high peril locations, we can be creative in sourcing unconventional insurance capacity, alongside working with new conventional energy insurers that are entering the renewable energy markets.
An example enquiry came from a 2.6GW portfolio of operational solar in Texas, which although it had been able to secure Nat Cat cover to 50% of its insured value, was missing the remaining cover to ensure adequate protection of its assets. In the event of a claim, this would mean the difference between covering a percentage of loss on the project balance sheet, versus having complete cover.
Working with key underwriting partners, NARDAC was able to secure the shortfall in natural catastrophe cover for the project owner without breaking the owner’s profitability metrics. NARDAC also worked with the client’s in-house insurance team to support determining the optimal levers it has available to source more competitive premiums, such as running a higher deductible, or amending specific terms.
Guidance for asset owners
While projects will continue to be affected by the supply and demand equilibrium described above, there are steps project developers and owners may take to increase their chances of securing the right cover at the right time and at the right price.
In the first instance, project owners and developers can increase their chances of complete cover and improved premiums by giving brokers and underwriters confidence in proactive measures that have been taken for enhanced risk mitigation. This could include implementing robust protective structures, such as thicker solar panels or equipment that enables vertical panel stowage during hail events to lessen direct impacts.
One crucial piece of advice is to engage with brokers and underwriters, early. By engaging early and frequently with insurers to discuss project-specific risks and explore tailored solutions, insureds enable brokers to create customized policies that address Texas’s unique climate challenges while ensuring adequate protection. Innovative risk protection mechanisms or alternative risk transfer solutions are two key routes to explore with brokers when approaching underwriting capacity.
Furthermore, as the data, technology and the AI revolution continues to bring better predictive weather forecasting, adopting enhanced monitoring to track storm patterns and predict potential impacts on projects becomes a new risk management tool. Sharing this data with insurers can help in assessing risks more accurately and in structuring policies that reflect the actual exposure levels rather than overpricing using broad assumptions.
Sources:
- https://www.swissre.com/press-release/New-record-of-142-natural-catastrophes-accumulates-to-USD-108-billion-insured-losses-in-2023-finds-Swiss-Re-Institute/a2512914-6d3a-492e-a190-aac37feca15b ↩︎
- https://www.insuranceinsider.com/article/2d296o0ybx709h2j9qebk/london-market/renewables-market-braces-for-50mn-texas-solar-hail-claim?zephr_sso_ott=nDTtRq ↩︎
- https://www.reuters.com/business/energy/texas-kicks-with-solar-storage-developers-eye-profits-2024-04-11/ ↩︎
- https://www.seia.org/state-solar-policy/texas-solar ↩︎