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

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

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

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

Rob Bothwell, executive managing director of Beecher Carlson and head of the brokerage's national energy practice, says his firm has been getting a lot of new accounts from energy producers, noting that some of those projects were waiting for the go-ahead until the PTCs were extended.

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

“I believe that renewable energy is positioned to play a critical role in the global power mix of the future,” says Darren Small, vice president and underwriting manager of Ace Group's National Custom Casualty Energy Unit.

A recent report authored by Small notes total investment in renewable power and fuels rose 17 percent in 2011 to $257 billion, a six-fold increase over 2004 and nearly double the 2007 level. In the U.S., renwable-energy investments grew to $51 billion in 2011, a 57-percent leap over the prior year. Renewable sources supplied 20.3 of global electricity in 2011.

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

“As these technologies are less mature than those used to produce fossil fuel, it is reasonable to assume the greater risks involved will mean a greater demand to transfer those risks via insurance,” Way adds. “From our point of view, this is a market with real growth potential.”

A NEW SET OF RISKS

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

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

Another complicating factor is that many alternative-energy business models are unconventional; there are many counterparties involved, including lenders and investors as well as equipment manufacturers, construction contractors and power purchasers—and in many cases there are contracts binding the energy producer to a certain expected output or other deliverables.

Risk transfer therefore plays a major role as energy companies and investors look to reduce their exposures around project completion, performance, operations and credit. Warranty insurance is also essential.

“This is not typical insurance underwriting,” says John Carella, Energy practice leader at American International Group. “These policies need to be customized. The risk is so high. The technologies 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 and experience [with underwriting alternative energy accounts] varies from carrier to carrier,” says Small.

In terms of pricing and capacity, Mavraganis says the alternative-energy market is “very competitive” these days, with adequate capacity from a number of markets and managing general agents looking to form “clean-tech” or renewable insurance units.

While innovative products are in many cases still being developed, more standard, well-established products allow other insurance players into the game by offering Property, Auto, Workers' Compensation, Environmental, Employment Practices Liability, General Liability, Umbrella, Excess Casualty and D&O. There are also Marine Cargo and Supply Chain components.

ENERGY OVERALL: EXPOSURE, PRICING & CAPACITY PICTURE

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

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

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

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

In the most general terms, Marsh, in a recent report (see page 17), 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 forecast reduction in capacity in 2013.”

But in such a broad industry, numerous hard and soft pockets exist, depending on the type of operations in question.

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

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

“It is difficult to take a broad view of an overall pricing trend, but generally prices are up. However, pricing depends on the coverage and retentions,” Gibbons says. Those clients with higher retentions saw lower rate increases at renewal at the end of 2012.

Stephen Coward, president of Energy and Engineering for Navigators Insurance Co., says that in mid-2011 he started seeing what 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 of events.”

Beecher Carlson's Bothwell says he's heard underwriters complain that the power-generation industry isn't a space in which insurers can make money.

“There's so much capital, they can't raise rates that much,” he offers. “Price increases are minimal to flat. The first offer will come in at plus-15 percent and it will end up being no higher than 5 percent” for the private-power-generation segment Beecher Carlson plays in.

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

OFFSHORE INNOVATIONS

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

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

Adding to the challenges: Rigs in deep water don't use a mooring system to stay put. Rather, they use a global positioning system—with thrusters built into the hull—to keep the rig stationary, explains Pete Connors, head of Offshore Energy for Allianz.

The insurance needs of these multi-billion-dollar operations are immense, with a mixture of Offshore Energy and Marine policies covering everything from physical damage and loss-of-production income to accidental pollution and the considerable cost of re-drill, should, for example, an initial attempt at drilling go wrong 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 the ceiling is,” Connors adds. “This is a fast- growing segment, but you need to keep a close eye on concentration and aggregates.”

Special Reports /

Energy Insurance: An Alternative Universe

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