Insurance Jottings

Keeping pace with the development of onshore renewable energy technology. Dennis Culligan discusses this. Dennis Culligan of risk, insurance and claims management company Longdown|EIC Risk Consulting Ltd believes a full understanding of the onshore energy sector and its risks will be vital if insurers are to make the most of the opportunities in this market

There is little double that the focus on the growth of renewable energy is only going to intensify in the years to come. Efforts to combat global warming and with it changes in the world’s climate will necessitate the need for cleaner and more sustainable fuels alongside the finite nature of fossil fuels.

For the onshore renewable market, the focus is now on the solar and wind energy sectors and much has been done to see how the world can derive even greater levels of energy from these two sources

For the offshore renewable market, insurance cover has not deviated much from traditional offshore energy package and construction all risks products. Coverages for onshore risks are a slightly different story and one not wholly driven by underwriters and the operators.

Commercial renewable energy remains a relatively new industry and given the efforts by global governments to encourage the development of onshore renewables, it is attracting a great deal of project finance as investors look to participate in what they believe will be a significant future industry.

New Risk

In many ways it has created a new risk for the market. At present, the demand for cover is being driven and shaped by the investors in the sector. The predominance of project financing for new wind and solar ventures means the structure of insurance policies is determined to a significant extent by lenders who want to de-risk their investment via the widest available cover. This will include a full suite of lender clauses to prioritise their interests ahead of those of the developer.

In some cases this can lead to the curious position of an insurance programme being best suited to the requirements of the third parties rather than the insured who is paying for the cover.

Technological advancements in the sector require an on-going investment in technical and risk management education on the part of both insureds and insurers to ensure insurance coverages will respond to key insurable risks arising from wind and solar operations. Compared with other more established industry sectors, the level of understanding of renewables risks in the insurance community is low, but developing quickly. Risk management experts remain under-represented, however.

Away from the issues around the influence of the project financers, the onshore renewable insurance market is still selling products heavily based on the traditional commercial property and machinery breakdown covers, rather than insurance predicated on the risks which are specific to the sector.

Underwriting for the sector remains engineering-driven, with a focus on the technology employed and the downstream connectivity risk.

The market is relatively small but the potential for the future is significant. At present there are probably no more than 20 insurers worldwide who will underwrite onshore renewables

business as a specific area of expertise. The expectation, however, that as the market

grows, so will the number of underwriters who will be willing to accept the technical

challenge of these risks.

High Loss Ratios

Competition is still stiff and as such the premium rates are at best competitive. Loss ratios

for insurers remain stubbornly high, which is often a result of extended business interruption losses from electrical or mechanical breakdown. But therein lies the issue. While firms will look to offer cover, there is still a significant knowledge gap about the risks involved with the sector and the claims history which has led to many being reluctant to engage with the market to create truly bespoke products.

This reluctance, coupled with firms struggling to find professional risk managers who understand the sector and with it the specific risk profiles, means the market is finding it difficult to come up with products designed specifically for the sector.

New technology is part and parcel of the renewables industry and insurers have always been reluctant to cover what it cannot fully model and understand. Therefore the sector is still seeing restrictive limits put on covers as underwriters look to hedge their bets on the reliability and efficiency of technology, which in some cases remains cutting edge or in its infancy.

Risk transfer in the renewables space has been characterised by a reliance upon manufacturers’ warranties with insured having to look to claim from the manufacturers if machinery or parts do not perform as expected. Insurers argue that they should not be expected to underwrite the efficacy risk of an unproven technology or design. The preference for underwriters to require LEG 1 or LEG 2 clauses (clauses produced by the London Engineering Group) and an insistence upon restrictive series loss clauses within policies reflects this view.

There is no doubt, however, renewable energy sector will see growth increase significantly as the demand for clean energy increases.

Keeping Pace

Whether the insurance market will be able to keep pace with that momentum is still open for debate. Longdown|EIC is seeing increasing demand from the onshore renewables market for advice and risk management expertise so they can shape insurance covers to be more fit for purpose and ensure they mitigate effectively the risks which are specific to the sector.

We are optimistic for the future of the sector. Some leading underwriters have already moved away from the traditional energy market coverage distinctions between development and operating phase policies to offer seamless insurance.

Similarly, innovative products are being developed for the industry for operators, insurers and brokers working closely together, and in some cases with manufacturers, operation and maintenance contractors and lenders, to expand insurance available beyond the standard property damage, machinery breakdown and legal liability model.

These could be on a specific project basis (e.g. supply chain insurance) or on a portfolio basis  involving the capital markets providing catastrophe bond-type weather derivative coverages for wind and solar companies.

It is clear that industry offers a real opportunity for growth, but a full understanding of the market and its risks will be vital if insurers are to make the most of those opportunities.

Talanx acquires Liberty Mutual’s Turkish unit

Talanx is acquiring 99.4 percent of the shares in Liberty Sigorta, the Turkish non-life subsidiary of Liberty Mutual Group.

Through the acquisition Talanx is strengthening its presence in Turkey, one of the group’s core markets. The transaction is subject to obtaining the relevant regulatory approvals, which is expected to occur in the first half of 2018.

Talanx subsidiary HDI Sigorta has been operating in Turkey’s non-life insurance market since 2006. The company provides insurance services through its nine regional offices. In 2016, HDI Sigorta achieved a premium volume of €261 million with a market share of 2.5 percent.

Talanx operates under a number of different brands, including HDI, which delivers insurance solutions to retail customers and industrial clients, Hannover Re, a major, the bancassurance specialists Neue Leben insurers, PB insurers and Targo insurers as well as Ampega, a funds provider and asset manager.

AIG to acquire Validus for US$5.56 billion

American International Group (AIG) has entered into a definitive agreement to acquire all outstanding common shares of Bermuda-based Validus Holdings.

Validus offers reinsurance, primary insurance, and asset management services.

The transaction enhances AIG’s general insurance business, adding a reinsurance platform, an insurance-linked securities (ILS) asset manager, a presence at Lloyd’s and complementary capabilities in the US crop and excess and surplus (E&S) markets.

The aggregate transaction value is US$5.56 billion, funded by cash on hand.

The transaction includes Validus Re, a treaty reinsurer with a focus on property catastrophe, marine and specialty, bringing deep relationships with brokers and clients.

AlphaCat manages US$3.2 billion on behalf of clients by investing in ILS products.

Talbot is a Lloyd’s syndicate focused on short-tail specialty lines. The addition will broaden AIG’s technical underwriting expertise and provide access to distribution in the largest specialty insurance market in the world, according to the company. Talbot’s brokers and clients will benefit from the complete suite of capabilities which has made AIG a global leader, along with access to solutions both within and outside of the Lloyd’s market.

Western World is a US specialty property/casualty underwriter focused on the small commercial E&S and admitted markets, will add technical expertise in binding authority. In addition, AIG gains Crop Risk Services, which provides access to the North American crop insurance market.

The transaction has been unanimously recommended by the boards of directors of AIG and Validus. The deal is expected to close mid-2018, subject to approval by Validus shareholders and other customary closing conditions, including regulatory approvals in relevant jurisdictions.

Thomas Miller acquires marine, energy consultancy

Insurance services provider Thomas Miller is acquiring marine consultancy Brookes Bell.

The value of the transaction has not been disclosed.

The transaction comes shortly after it emerged that Thomas Miller Specialty would acquire Navigators’ fixed-premium protection and indemnity business.

Brookes Bell is a marine technical and surveying consultancy with offices in Liverpool, London, Glasgow, Shanghai, Hong Kong and Singapore. It has served the marine and energy industries since 1903, providing specialist services in areas including emergency response, casualty investigation, salvage and wreck removal operations, scientific cargo expertise, forensic engineering and expert witness services.

EU Will Reap Benefits of London Staying Strong Financial Hub After Brexit

During the week of the week of the 8^th January, the UK government asked German business

leaders for help in securing a good deal with the European Union on financial services. The request deserves to be taken seriously. Europe’s businesses have much to gain from keeping London as a thriving financial centre.

The City is by far the most significant financial hub in Europe. In 2016, the UK accounted for more than three-quarters of the EU’s foreign-exchange turnover, 85 percent of its hedge-fund assets and nearly a third of its equity-market capitalisation, according to a recent report by the European Parliament.

Some in the EU-27 see Brexit as a chance to lure away parts of this business — and they are right. Yet it will not be easy to replicate the wealth of expertise which the City has built up. In addition, some of London’s financial infrastructure — its system for clearing derivatives, for instance — is complex and delicate. Relocation will be risky, especially if it has to be done abruptly. The City’s customers in the EU have an interest in minimising this disruption.

To be sure, the UK government cannot expect business as usual for the City. As is stands at the moment, when the UK leaves the single European market  banks and insurers located in the UK will lose their automatic “passports” to operate anywhere in the EU. Many financial-services companies would like to stay in London, but will not be able to once those permissions are lost:

The remaining 27 members in the EU account for a large part of their revenues.

Still, a compromise ought to be possible. Britain and the EU-27 could agree on some form of regulatory “equivalence” — under which the EU would recognise that the UK’s rules are as good as its own. The idea is not new: Europe already applies the principle of equivalence in its financial-services dealings with other non-EU countries. To be of much use for London, equivalence would need to be extended to new areas of business — but there is no reason why that should not happen. This would give UK financial services firms partial access to the EU market, serving the interests of the UK and the EU alike.

The move would still be far from painless. Partial access to the European market is still just that — partial. Britain might have to accept some rules without having any say, and would not be able to let its financial rules diverge much from Europe’s in future.

For London, and for the City’s EU customers, all this would fall a long way short of simply remaining in the EU and its single market. But a deal along these lines would be vastly better than none, and not just for Britain. Europe, too, has in interest in coming to terms.

Cyber rises to second biggest global risk

Cyber threat continues its upward trend globally, ranking second in the Allianz Risk Barometer in 2018 compared with the 15th place five years ago.

Multiple threats such as data breaches, network liability, hacker attacks or cyber business interruption, ensure it is the top business risk in 11 surveyed countries and the Americas region and second in Europe and Asia Pacific, according to an Allianz press release on the 16^th January.

It also ranks as the most underestimated risk and the major long-term peril.

Recent events such as the WannaCry and Petya ransomware attacks brought significant financial losses to a large number of businesses. Others, such as the Mirai botnet, the largest-ever distributed denial of service (DDoS) attack on major internet platforms and services in Europe and North America, at the end of 2016, demonstrate the interconnectedness of risks and shared reliance on common internet infrastructure and service providers.

On an individual level, recently identified security flaws in computer chips in nearly every modern device reveal the cyber vulnerability of modern societies. The potential for so-called “cyber hurricane” events to occur, will continue to grow in 2018, according to Allianz.

The Allianz Risk Barometer results show that awareness of the cyber threat is soaring among small- and medium-sized businesses, with a significant jump from rank 6 to rank 2 for small companies and from position 3 to position 1 for medium-sized companies. With regard to sector exposure, cyber incidents rank top in the entertainment & media, financial services, technology and telecommunications industries.

Business interruption (BI) remains the most important risk for the sixth year in a row (# 1 with 42% of responses / # 1 in 2017), ranking top in 13 countries and the Europe, Asia Pacific, and Africa & Middle East regions.

No business is too small to be impacted. Companies face an increasing number of scenarios, ranging from traditional exposures, such as fire, natural disasters and supply chain disruption, to new triggers stemming from digitalisation and interconnectedness which typically come without physical damage, but with high financial loss.

Breakdown of core IT systems, terrorism or political violence events, product quality incidents or an unexpected regulatory change can bring businesses to a temporary or prolonged standstill with a devastating effect on revenues, the press release says.

For the first time, cyber incidents also rank as the most feared BI trigger, according to businesses and risk experts, with BI also considered the largest loss driver after a cyber incident.

Cyber risk modeller Cyence, which partners with AGCS and is now part of Guidewire Software, estimates that the average cost impact of a cloud outage lasting more than 12 hours for companies in the financial, healthcare and retail sectors could total US$850 million in North America and US$700 million in Europe.

BI also ranks as the second most underestimated risk in the Allianz Risk Barometer. “Businesses can be surprised about the actual cause, scope and financial impact of a disruption and underestimate the complexity of ‘getting back to business’. They should continuously fine tune their emergency and business continuity plans to reflect the new BI environment and adequately consider the rising cyber BI threat,” said Volker Muench, global property and BI expert, AGCS.

Chris Fischer Hirs, CEO of AGCS, added: “For the first time, business interruption and cyber risk are neck-and-neck in the Allianz Risk Barometer and these risks are increasingly interlinked.”

“Whether resulting from attacks such as WannaCry, or more frequently, system failures, cyber incidents are now a major cause of business interruption for today’s networked companies whose primary assets are often data, service platforms or their groups of customers and suppliers.

However, last year’s severe natural disasters remind us that the impact of perennial perils shouldn’t be underestimated either. Risk managers face a highly complex and volatile environment of both traditional business risks and new technology challenges in future.”