Howden Re calls on reinsurers to refine underwriting to realise $237bn renewables opportunity

Howden Re has called on the reinsurance market to develop more sophisticated products that address the unique risks associated with renewable energy projects, with the broker estimating the sector will generate $237bn of cumulative premiums up to 2035.

In a new report, Howden Re noted that renewables will account for 74 percent of the growth in global primary energy consumption by 2030.

The shift towards cleaner energy sources presents significant growth opportunities for the (re)insurance sector, the report continued, with particular premium potential in solar, onshore and offshore wind, and battery energy storage systems (BESS).

Howden Re argued that the growth trajectory of the renewables market and the impact on premiums is “reminiscent” of trends seen in the other expanding lines of business, including cyber.

According to estimates, if every national renewable energy target is achieved the sector could generate approximately $237bn of cumulative premiums between 2022 and 2035.

However, Howden Re warned that greater strides must be made in transparency and collaboration to ensure that risks are appropriately placed and managed.

Reinsurers should refine their view of risk to align with the specific risks associated with each renewable asset to provide greater value to cedants.

Typically, solar has been purchased to the full total insured value (TIV) limit, although insureds have recently seen constraints from reduced nat cat sub-limits. BESS coverage is also purchased to the full TIV limit, although it is increasingly integrated with other renewable technologies.

For onshore wind, insureds often buy to full value on a single asset, with some purchasing a physical damage limit as well as an additional business interruption (BI) limit if required. On the other hand, offshore wind insurance is typically based on the largest estimated maximum loss (EML) scenario, with this limit typically between 10 and 30 percent of the TIV.

“Quota share has been the preferred product for cedants operating in the renewable energy market due to the horizontal risk profile and its potential long-tailed nature,” said the report.

“Achieving competitive ceding commissions has nevertheless become increasingly difficult in the current market, forcing cedants to either purchase specific XoL protection and/or embed it in their marine, energy, power, property XoL programs, depending on purchasing efficiencies.”

Future underwriting considerations

The way in which cedants purchase renewable energy insurance is largely dependent on the type of asset. Given the nature of the class, likely loss scenarios typically fall below retentions, and reinstatement costs are potentially higher than a standalone placement.

The report therefore urged (re)insurers to consider the design and technology of projects to a greater degree during the underwriting process. This includes risk mitigation measures by BESS developers to minimise the risk of thermal runaway, as well as more powerful wind turbines with megawatt capacities.

As the industry enters a new era of standardisation for technological advancements, stabilising the design of renewable energy projects will enable stakeholders to focus more on profitability and sustainability, Howden Re argued.

Risk profile is also key, with offshore wind projects geographically presenting more horizontal exposure than vertical. For example, a North Sea oil and gas platform has a high concentration of exposure in a small area, while a North Sea offshore wind farm has exposure spread across a large spatial area.

The peak EML for an offshore wind farm would usually be a total loss to an offshore substation, resulting in a loss of revenue and triggering BI coverage, whereas an event on an upstream energy installation risks a total indemnity equivalent to the full TIV.

“The reinsurance market should prioritise a granular understanding of the specific risks to each renewable technology to align their view of risk with the distinct exposure and experience profile, which differs significantly from traditional energy and power assets,” said the report.

Other considerations include extended policy periods, greater likelihood of claims during the construction phase, and the potential systemic nature of serial losses.

“Given the increasing complexity and frequency of serial loss events in renewable energy projects, it is imperative for the reinsurance market to proactively support cedents,” Howden Re concluded.

“By offering tailored reinsurance solutions, the industry can better protect against the financial impact of serial loss claims, ensuring the sustainability and resilience of renewable energy investments.”