Peter Draper, Founding Partner, answers questions about NAT CAT risks following another challenging year for (re)insurers.
Q. What kind of year was 2022 for insurers with exposure to natural catastrophe?
Last year was a busy and expensive year for natural catastrophe (NATCAT) losses. Insured NATCAT losses were at least 42% higher in 2022 compared to the 10-year average.1 Losses from hurricane Ian account for roughly half of the $115 billion (as of 1 December 2022) in insured losses. Other notable events from last year include losses from hailstorms in France and the US, flooding in Australia and European winter storms.
The US continues to dominate. If we look back over the last decade, five of the top 10 biggest NATCAT events all took place there and all in the last five years.2 We are still waiting for loss estimates to come in for the recent ‘blizzard of a century’ at the end of 2022.
The spate of losses in this decade (compared to the previous) could also just be a result of natural volatility in the NATCAT market. According to Verisk (formerly AIR Worldwide), the recent bad years, including Hurricane Ian, is in-line with modelling. Over the last five years the average annual loss (AAL) from cat is lower ($100 billion) than the modelled AAL ($125 billion).3 Severe storm is the leading peril, making up 36% of the AAL. Other, notable shares include tropical cyclone (25%), earthquake (10%), flood (6%) and wildfire (4%).
Anthropogenic climate change is set to increase the severity and frequency of NATCAT events. But not all events will be more severe and the impact differs by location.4 Weather attribution studies analyse NATCAT events and assess if anthropogenic climate change altered their likelihood and intensity. For example, temperatures greater than 40°C were recorded in the U.K. for the first time in 2022 (classed under the European heatwave in the above list) with human-induced climate change making it 10 times more likely.5
Q. What does this mean for NATCAT modelling?
NATCAT modelling is an exercise in representing the complex, real physical world in statistics to estimate the damage from different types and severities of weather events. It relies upon a data baseline and an historic dataset of NATCAT events. Each year models evolve to reflect changes to the underlying data and assumptions.
Since 2019, the global aggregate AAL for cat has increased by 34%. Some of this reflects the number and change in values of insured properties. But some of this also reflects changes to the models for each peril. For example, in 2022 in North America the AAL increased due to a change in the underlying severe thunderstorm model.6
Humans are still changing the climate. We are still using carbon-based fuels for power, travel, industry and heating, meaning the emissions count is still rising. In 2030, emissions are set to be around 10% higher than in 2010.7 NATCAT events will continue to be different to before, be it in severity, likelihood and, or location.
Q. What does this mean for wind and solar projects?
More and more projects are needed to decarbonise the energy sector. Resource (wind, sun) is important but proximity to load (demand) even more so. Space is limited and prime locations are occupied, shifting new projects to more danger-prone locations. In the U.S., demand is concentrated on the East and West coast and coincides with the most severe NATCAT events mentioned above (wildfires – west, hurricanes – east). Financing projects is getting more difficult.
Lenders in a project finance structure are risk averse. In 2021, around $50 billion was invested in renewables in the U.S.8 Assuming half was equity financed, it leaves $25 billion. With an assumed gearing ratio of 70% it leaves lenders stumping up around $18 billion (in one year). For this, lenders will seek full-limit insurance policies for all perils where possible. The reality is that insurers are more reluctant than ever to give full-limit cover for exposed projects. When full-limit is unavailable we can structure standalone NATCAT solutions to bridge the gap.
Base cases are changing for operational projects, too. Normally renewable projects have at least a 25 year lifetime. With a changing climate, however, risk mitigation strategies will have to evolve over time. For example, solar projects now exposed to greater heat stress than expected will now have to design a vegetation management plan for wildfire – even in Europe, even in the U.K. Here, a specialist broker can add value. We can guide a client through best practice using examples of good risk mitigation from previous placements.
Q. And what about offshore wind?
The Biden-Harris administration announced a 30GW by 2030 offshore wind target.9 Most, if not all, of the gigawatts will be on the East coast and that means exposure to hurricanes.
The North-eastern states will host most of the projects and underwriters are divided on the hurricane exposure. Some believe the projects will be far enough North to fall outside of a typical hurricane track – it’s been 30 years since a hurricane made landfall on Rhode Island.10 Others disagree. By the time superstorm Sandy struck North-eastern land in 2012 it had been downgraded to a category 1 hurricane. The IEC wind conditions design standard, IEC 61400-1, has evolved to incorporate hurricane conditions with a category 1 likely to be contained in the design. But with a big construction pipeline, it’s onshore components in laydown areas that are vulnerable. The science suggests hurricanes will form in a broader range of latitudes in a warming climate than in the past.11
At the moment, most U.S. offshore wind projects are stalled in the permitting stage of development. Others have underestimated costs versus a high inflation economy leading to renegotiations on offtake agreements. Until a smooth route to financing is cleared, the delivery of offshore wind will be erratic.
Q. What does climate risk look like for the supply chain?
The solar supply chain is vulnerable to a single NATCAT event. Unlike the wind supply chain, key parts of processing and manufacturing are concentrated in a few factories and locations, largely in China. Served by both western and Chinese manufacturers, the wind supply chain is more resilient. Factories for wind components are spread around the world, in both exposed and benign locations.
Today, most of the material processing and manufacturing for solar is done in China.12 A closer look reveals that the Chinese province of Xinjian hosted around 40% of global polysilicon processing capacity (in 2021), while one single Chinese factory hosted 14% of global wafer production. One major NATCAT event could cause major disruption to the global availability of solar panels.
Historically, the wind supply chain has been more diversified. Large drivetrain components mean nacelles are often assembled locally. It’s a similar story for towers. Long, cumbersome blades makes local production advantageous when it comes to the new, larger turbine models. But, compared to nacelles (85%) and towers (55-70%), the U.S. domestic capacity for blades is a lot lower (15-25%). Developers of U.S. wind projects import most of the balance from India, Spain and Mexico.13
The Inflation Reduction Act of 2022 is one attempt to break-up China’s manufacturing dominance. Using tax credits, the U.S. government is trying to subsidise manufacturers to set-up factories on American soil. Within a few years, this is expected to build a more resilient domestic supply chain. Globally, its impact will be somewhat mitigated as tax credits for clean energy generators in the U.S. favour local content and therefore discriminate against E.U. suppliers. This could have the effect of just shifting any E.U. supply to the U.S. (albeit only a small % of the overall supply chain).
Unwinding China’s dominance will take years. For now, the supply chain is concentrated in a few locations. Any concurrent events, such as NATCAT events at both project and supply chain hotspots could cause major delays for rebuilding and extended claims.
Q. How will the tough treaty renewal season impact renewable energy policies this year?
A hardening in reinsurance pricing, terms and conditions left most insurers facing a choice of maintaining retentions at higher prices or maintaining pricing at higher retentions. But it is too early to judge the impact on the renewables market.
There is plenty of capacity chasing renewables. Last year’s higher than average losses probably hindering the market softening. Attempts to pass on higher reinsurance costs to the insured in 2023 are likely to undermine any price reductions. It likely leaves the market broadly flat for 2023. But for well designed, risk engineered projects in less exposed locations, securing slight rate reductions is possible.
The initial uncertainty of the impact of tougher treaty renewals could result in a reduction in line sizes, lower sub-limits for NATCAT and higher NATCAT deductibles. Insurers might take a conservative approach in Q1 until the large, cat-exposed accounts test the market. Then, upon review of competitor positioning, insurers will adjust their strategy for the year.
We will know more in the coming months as the repercussions of a tough treaty season materialise and we will inform our clients accordingly.
Q. How does Nardac serve its clients in this challenging market?
For our clients with non-recourse financing, we are finding that more policies for projects in exposed locations are layered in order to provide lender-compliant insurance cover – be that banks or tax equity. Developers of CAT-prone locations are likely to face attempts from underwriters to further reduce natural peril sub-limits. We often use specialist multi-peril (re)insurers to address sublimit adequacy, including 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 need to be creative in sourcing unconventional insurance capacity (for the renewables market). More and more conventional energy insurers are eagerly entering the renewables market, and it will be our task to engage them in a responsible and sustainable manner.
Some insurers may not have appetite to insure standalone assets in high-risk locations – probably more so in 2023 than in previous years. Others quantify the added benefit of a diversified portfolio in terms of location, technology, and peril(s). But all insurers want to work with a responsive, diligent, insured with a long-term growth plan. We’ve been successful in establishing longer-term relationships between buyers and sellers of risk with a portfolio approach that can help overcome challenges with more problematic single assets.
Wildfire, Windstorm, Severe Convective Storm, Flood, and Earthquake are all considered natural catastrophes.
 California wildfires | 2017-2018; Atlantic hurricanes Harvey, Irma, Maria | Aug-Sept 2017; Hurricane Ian, Florida | Sept 2022; Hurricane Ida | Aug 2021; Northwestern U.S. and British Columbia Canada heatwave | June-July 2021
 Verisk | Global Modelled Catastrophe Losses | 2022
 Verisk | Global Modelled Catastrophe Losses | 2022