The Big Question: do re/insurers meet the demand for renewable energy cover?

The swift and effective transitions to the provision of renewable energy is at the heart of the world’s efforts to combat climate change.

The desire to limit global warming has seen huge amounts of investment in renewable energy projects, from hydrogen to solar, to wind.  The International Energy Agency say the world added 50% more renewable capacity in 2023 than in 2022 and the next 5 years will see the  fastest growth yet, but lack of financing for emerging and developing economies is a key issue.

The world’s capacity to generate renewable electricity is expanding faster than at any time in the last three decades, giving it a real chance of achieving the goal of tripling global capacity by 2030 that governments set at the COP28 climate change conference.

The amount of renewable energy capacity added to energy systems around the world grew by 50% in 2023, reaching almost 510 gigawatts (GW), with solar PV accounting for three-quarters of additions worldwide, according to the IEA.

However, that growth has come with a demand for insurance protection to cover the risks that are inherent in the energy market and with it the innovative technology that has been designed to deliver renewable energy at scale.

It has challenged the global re/insurance industry to respond to demand, and one which has been rising rapidly and with it exposures.

Ian Summers, Global Business Development Leader, AdvantageGo

For Tom Johansmeyer, global head of index classes, at broker Inver Re the renewable energy markets can take lessons from the way in which the industry’s response to the demand for cyber insurance has evolved.

“New markets struggle to learn from a past they don’t have,” he explains. “The lessons of others, however, help fill the gap left by a lack of experience. For the emerging renewable energy re/insurance market, other emerging risks and new classes of business offer the signposts necessary for sustainable profitable growth.

He adds that Inver Re has found that the development of the cyber re/insurance market over the past decade provides plenty of insight for renewable energy re/insurers seeking capacity to support new projects around the world.

“The growth and optimism of the cyber re/insurance market over the past two years is not indicative of the decade that came before,” Johansmeyer says. “From the advent of the modern cyber re/insurance market (around 2012), cyber insurance was scarce, a problem exacerbated by their heavy reliance on quota share reinsurance. Insurers would fill up fast and cause their reinsurance partners to do the same. A small market relying on a limited set of structures made it difficult for the cyber re/insurance market to find its footing.”

He continues: “This probably sounds familiar. Although there is clearly a market for renewable energy re/insurance, the sector remains niche and in its relative infancy. Capacity is limited, particularly with regard to demand.

“In addition to the ongoing debate over climate change, a wide range of factors have contributed to the proliferation of renewable energy projects, from technological advancements that reshape the economics of such endeavors to evolving views of energy security that favor diversification.”

Johansmeyer explains that among the most important constraints in the market is the availability of insurance to support these projects, and the limited availability of reinsurance lingers in the background.

“Developing new sources of capacity and risk-transfer practices and structures should help the market increase its support for the renewable energy sector without compromising financial performance. To do so, the market will need to overcome a short and nuanced history.”

Johansmeyer adds new classes of business and emerging risks are not easy to insure, and this is particularly true when new technology is involved. A shortage of historical losses frustrates the analysis process, leaving too much to extrapolation and speculation. By virtue of being new, a track record simply isn’t available.

“The experience recently seen in cyber re/insurance should be instructive for the renewable energy re/insurance market,” he adds. “Early quota share relationships between insurers and their reinsurance partners were forged on structural limits on downside, novelty premiums (or ceding commissions), and trust.

“A combination of uncertainty about the risk environment and a series of headline-grabbing losses made such progress challenging to achieve. However, experience began to play a greater role, and it didn’t take all that long. In addition to a better understanding of the losses experienced, cyber re/insurers gained an improved understanding of realistic disaster scenarios helped refine the set of risks that could occur. They simply got to know the risk better.”

According to Johansmeyer a similar dynamic has unfolded in the renewable energy re/insurance sector.

“Increased knowledge and experience have begun to inform structures that were once focused on managing the unknown, and conversations with new reinsurance partners are much easier to start than they were only a few years ago,” he adds. “As with cyber, difficult past losses – mostly involving natural catastrophe risk – manifested in ways less likely to occur today, a bit of nuance neglected by a cursory review of historical loss ratios. Continued dialogue across the re/insurance ecosystem contributes to adjusting for technological progress, as it did for the cyber re/insurance community.”

Looking to the futureJohansmeyer concludes: “Today, cyber re/insurance is a robust and growing market that has seen global take-up, its first four catastrophe bonds, and bullish projections for the next twenty years.  

“Renewable energy re/insurance can – and should – follow the same narrative. A small class of business today, with both market structural factors and elements of the risk constraining growth, renewable energy re/insurance could become an important source of sustainable revenue growth across the global industry.

“Demand for renewable energy is clear. And now it’s incumbent on the re/insurance industry to help the supply materialise.”