For producers and carriers looking foropportunities in the energy sector, one word sums up where a lot ofthe growth is occurring: alternative.

“All signs point to continued growth” of the alternative-energymarket, says Peter Mavraganis, the U.S. renewable energy practiceleader for Marsh.

“There is a lot of money being spent” to build renewable energyfacilities, he adds, especially because of production tax credits(PTC) extended by the federal government in the tax packagerecently passed to avoid the fiscal cliff.

Wind installations that break ground in 2013 would be eligiblefor the tax credits, which can help cut by up to a third the costof making energy from wind. The extension has brought life back toan industry that had sputtered while it waited for Congress toact.

Rob Bothwell, executive managing director of Beecher Carlson andhead of the brokerage's national energy practice, says his firm hasbeen getting a lot of new accounts from energy producers, notingthat some of those projects were waiting for the go-ahead until thePTCs were extended.

With these tax incentives, investments are flowing into theEnergy sector, and construction has ramped up. Jobs are returning.And many industry observers believe today's construction andproduction activity around alternative energy is just the forwardedge of a trend that will continue for decades.

“I believe that renewable energy is positioned to play acritical role in the global power mix of the future,” says DarrenSmall, vice president and underwriting manager of Ace Group'sNational Custom Casualty Energy Unit.

A recent report authored by Small notes total investment inrenewable power and fuels rose 17 percent in 2011 to $257 billion,a six-fold increase over 2004 and nearly double the 2007 level. Inthe U.S., renwable-energy investments grew to $51 billion in 2011,a 57-percent leap over the prior year. Renewable sources supplied20.3 of global electricity in 2011.

Mark Way, a senior vice president at Swiss Re who directs thereinsurer's sustainability efforts in the Americas, adds, “I'veseen figures that predict $38 trillion will be spent on the energysector over the next 25 years. We don't know yet how that will besplit between fossil fuel and alternative energy, but we believeanywhere between 30 to 90 percent of the world's power supply bymid-century will come from renewable sources.

“As these technologies are less mature than those used toproduce fossil fuel, it is reasonable to assume the greater risksinvolved will mean a greater demand to transfer those risks viainsurance,” Way adds. “From our point of view, this is a marketwith real growth potential.”

A NEW SET OF RISKS

But as Way indicates, the growth occurring in therenewable-energy sector is accompanied by new risks for insurers totest their underwriting skills. Ace's Small notes that a “largeportion of renewable-energy companies submitted to insurancecompanies are brand-new entities that don't have an operatingpast.”

The technology being used is also new anduntested—at least in comparison to the tools used in fossil-fuelextraction and production.

Another complicating factor is that many alternative-energybusiness models are unconventional; there are many counterpartiesinvolved, including lenders and investors as well as equipmentmanufacturers, construction contractors and power purchasers—and inmany cases there are contracts binding the energy producer to acertain expected output or other deliverables.

Risk transfer therefore plays a major role as energy companiesand investors look to reduce their exposures around projectcompletion, performance, operations and credit. Warranty insuranceis also essential.

“This is not typical insurance underwriting,” says John Carella,Energy practice leader at American International Group. “Thesepolicies need to be customized. The risk is so high. Thetechnologies are so new. Every budget and contract is different.Each account must be underwritten on its own merit.

Given all these complexities, “the level of comfort andexperience [with underwriting alternative energy accounts] variesfrom carrier to carrier,” says Small.

In terms of pricing and capacity, Mavraganis says thealternative-energy market is “very competitive” these days, withadequate capacity from a number of markets and managing generalagents looking to form “clean-tech” or renewable insuranceunits.

While innovative products are in many cases still beingdeveloped, more standard, well-established products allow otherinsurance players into the game by offering Property, Auto,Workers' Compensation, Environmental, Employment PracticesLiability, General Liability, Umbrella, Excess Casualty andD&O. There are also Marine Cargo and Supply Chaincomponents.

ENERGY OVERALL: EXPOSURE, PRICING & CAPACITYPICTURE

In the trillion-dollar Energy industry, growth is not limited tothe renewables sector.

Rick Gibbons, president of Zurich Global Energy, says “exposuresare increasing” as energy operations expand.

“We're pretty optimistic,” adds Bertil Olsson, Energy practiceleader for North America at Marsh. “Demand is increasing. There'smore of an opportunity for new projects.”

In an industry with such hugely varied risk-transferrequirements, it's difficult to make blanket assessments of currentEnergy insurance pricing and capacity.

In the most general terms, Marsh, in a recent report (see page17), characterizes Energy capacity as abundant. And in its Q4 2012“Power Insurance” report, brokerage Aon also says capacity remains“strong, with no direct withdrawals during 2012…and no forecastreduction in capacity in 2013.”

But in such a broad industry, numerous hard and softpockets exist, depending on the type of operations inquestion.

Capacity for certain risks—pipelines, for example—has tightened,says Olsson. There has also been reduced capacity for ExcessCasualty cover, with a lot of non-core markets exiting.

In terms of pricing, an abundance of capacity tends to temperthe size of rate increases. But the high level of claims—many ofwhich have been severe—over the last three years has resulted ininsurers aggressively seeking rate increases.

“It is difficult to take a broad view of an overallpricing trend, but generally prices are up. However, pricingdepends on the coverage and retentions,” Gibbons says. Thoseclients with higher retentions saw lower rate increases at renewalat the end of 2012.

Stephen Coward, president of Energy and Engineering forNavigators Insurance Co., says that in mid-2011 he started seeingwhat have become continued quarter-on-quarter rate increases“driven by losses from the recent past”—especially on accounts that“may have gotten it wrong” or “had an unfortunate sequence ofevents.”

Beecher Carlson's Bothwell says he's heard underwriters complainthat the power-generation industry isn't a space in which insurerscan make money.

“There's so much capital, they can't raise rates that much,” heoffers. “Price increases are minimal to flat. The first offer willcome in at plus-15 percent and it will end up being no higher than5 percent” for the private-power-generation segment Beecher Carlsonplays in.

Indeed, a recent Aon report states that some insurers have saidrates would need to increase by as much as 30 percent to returntheir Energy books to profitability, but the brokerage says actualrate bumps have been more in the 5- to 10-percent range.

OFFSHORE INNOVATIONS

Innovations in offshore drilling are unlocking U.S. oil andnatural-gas resources once thought to be inaccessible.

Energy companies are drilling in deeper ocean waters and aretrying to tap resources in “adventurous environments” such asAlaska and northern Russia, says Coward at Navigators.

Adding to the challenges: Rigs in deep water don't use a mooringsystem to stay put. Rather, they use a global positioningsystem—with thrusters built into the hull—to keep the rigstationary, explains Pete Connors, head of Offshore Energy forAllianz.

The insurance needs of these multi-billion-dollar operations areimmense, with a mixture of Offshore Energy and Marine policiescovering everything from physical damage and loss-of-productionincome to accidental pollution and the considerable cost ofre-drill, should, for example, an initial attempt at drilling gowrong or fail to hit pay dirt.

Still, despite the various risks and their high-severity nature,this sector has attracted new capacity.

“Underwriters need to be vigilant in making certain what theceiling is,” Connors adds. “This is a fast- growing segment, butyou need to keep a close eye on concentration andaggregates.”