Solar Gets Hot

How did kWh move into insuring renewables?

I’ve been in the renewable energy space for about 14 years and more specifically renewable energy finance. We started kWh on a premise of data and analytics. Then we moved into insurance about six years ago. When we looked at the best way to apply our insights, we landed on insurance as the best risk transfer mechanism for what we were finding in our data. One of the key learnings that we have is that if an asset is uninsurable it’s unfinanceable. At the same time, renewable energy is rapidly growing. It’s one of the biggest opportunities of our generation because it’s the cheapest form of power. When you look at what’s being built in the United States and globally, renewable energy is really taking the lead. The third piece of it is that data and specialization are really the levers that help bring insurance capital into the renewable energy space. Clients in this space really have a need for insurance, and the insurance carriers were not providing innovative products to address their needs and didn’t have the specialization to provide adequate capacity.

What do you see as the main hurdles facing solar?

Financing and insurability. Renewable energy needs to attract a lot of financing, and that’s the capital that keeps the engine going. Like any infrastructure asset, the banks require insurance within their loans. What we’re seeing is that you have a rapidly growing renewable energy asset class that is honestly being underserved by the current [insurance] market just due to how new it is and how unique the risk is. At the end of the day, that is one of the biggest challenges not only within insurance but within renewable energy more broadly. Some of the changes in the insurance market are positive from a carrier perspective, such as stricter nat cat underwriting, sublimits, deductibles and quota share, but they’re sending ripple effects to clients in the market because they’re used to just getting infinite amounts of very cheap insurance and that’s no longer available.

What is the insurance market like for solar projects now?

On the whole, I’d say prices are still hardening in our space. The underwriting community is getting smarter about the resiliency and the approaches that clients are taking. On the one hand, the solar industry has relentlessly for the past decade squeezed costs out of the system. On the other hand, you need to build resiliency into assets, and that costs money. Risk allocation is rapidly changing and being shifted back to the owners, so they’re changing their behavior. It could be simple things, like are you letting weeds grow underneath your panels in a very dry climate? That could lead to increased risk. It sounds simple, but mowing the weeds costs money. Where the market is really evolving, and where kWh as a firm specializes, is in understanding the specific actions and elements of resiliency, improved operations, et cetera, that really make a preferred asset. Obviously, things like the location, the technology deployed, how you operate the facility, and the decisions you make also matter a lot, and that’s still a relatively nascent idea for our space.

How does kWh approach these challenges?

There are two angles that set us apart. The first is we come from the industry, so we really understand the needs of our clients and we really understand the risks that they’re managing. I say that in part because the first product we introduced was Solar Revenue Put, insuring the electrical output of solar plants. This is a product that our clients are utilizing within their financing structure to secure better financing terms from their banks. We understand deeply how the financing comes together. Second, we utilize a database that we call HelioStats, which represents about a third of the U.S. market. From that, we have the operating history of facilities and the loss history of facilities, and we’re able to use that to very directly support our underwriting.

What are the main risks?

One of the things that makes the property business challenging is that it’s primarily secondary perils. Hail in Texas certainly gets a lot of attention because there have been quite a few significant losses. It makes sense—you’re putting pieces of glass out in the middle of the hail zone, and that’s one of those areas of innovation that I was talking about earlier. You can actually tilt the panels out of the way. People are beginning to look into hail detection algorithms to get a warning that the hail is coming to move their panels out of the way. Fires in California have been important, and it’s not the typical wildfire but more of a localized brush fire. We’re not building solar in the middle of a big forest, but fires can still melt and damage the equipment. The other perils that we think about include hurricane and flood as the other two big ones that go directly into the underwriting that we do on the property side. The attritional side is a little bit more stable. The big risks there are the inverters, which are the pieces of equipment that convert the power from direct current to alternating current, and other risks like rodents and animals in the boxes. When designed appropriately, solar is actually a very resilient asset class, but you need to know the right way to look at it, you need to manage your aggregations for the carriers, and you need to identify what’s going to be an appropriate risk that you want to write.

You talked a bit about risk mitigation strategies, how can buyers become better risks?

The first and most obvious answer is location matters. Second, how you match that asset up with other assets is also very important. Some owners of large portfolios of projects are able to get a good spread of risk. It makes it more attractive. The third is what are the decisions that they’re making on the construction of the facility and on the operations of the facility that can inform the loss profile. We touched on a couple other ways—like managing your hail risk, managing your fire risk and cutting back brush, using stronger attachment mechanisms when you’re in hurricane zones—all are very important. It really is peril by peril, so depending on the location, the decisions you make might be different. If you’re in a flood zone, you can build the solar panels a little bit higher off the ground. There are important decisions that go into the design and operation of solar projects that can make them a preferred asset for an underwriter.

If you have a gas plant, unless it’s down for servicing, it runs all the time, but there’s more variability in solar production. How does that impact finance?

The revenue streams associated with solar assets are very, very important. Because banks are very conservative, the amount of capital they’re lending to solar projects is on a percentage basis lower than they would lend to other asset classes. It’s lower probably than natural gas due to the inherent variability in the revenue streams. One of the ways you can mitigate that—and one of the insurance solutions that kWh Analytics helped innovate—is you can move some of that variability into the insurance markets. That’s the Solar Revenue Put, which insures the production that comes from these solar facilities. There’s volatility around that. Some years might be higher, some years might be lower, some years you might have equipment issues and it’s really low. The Solar Revenue Put basically puts a floor on that production for a multiyear period. When you’re able to firm up the revenue stream and narrow the volatility, the banks can actually lend more capital.

Where’s the renewables insurance market going?

Let me lay out three facts. Number one is there’s a tremendous premium opportunity in renewable energy. Swiss Re forecasts $237 billion of anticipated premium associated with renewable energy between now and 2035. The second is for the self-interest of the insurance industry. Natural catastrophes have driven a lot of losses globally, and it’s in the self-interest of the industry to support assets that support a decarbonization of our economy. The third is it’s a very specialty asset class with massive growth. The International Energy Agency says that the world will add as much renewable power in the next five years as it did in the past 20. You have property books that are shifting exposure from more traditional forms of energy into the renewable energy market, and solar is a specialty asset class that has its own unique risks. That really requires specialty underwriting, and my belief is that you’ll have specialty MGAs that crop up—like kWh—that really come from the industry and help carriers take advantage of the growth potential. Then, given that the market has been so dynamic in the last three to four years, the role of the broker has become more important to be able to place insurance, to prepare a good submission for the carrier, to navigate and really understand the resiliency that can differentiate one solar project from another. So it’s no longer just go get your preferred carrier and they’re going to write all of it. Having to think through those risks has become increasingly important in our space.