Renewable energies – Opportunities and risks for the insurance industry
The desired rapid expansion of renewable energy will require tremendous efforts. Banks and insurers will play a key part in this. What opportunities are there, what are the risks?
In a Directive promoting the generation of electricity from renewable sources, the EU has committed all member states – including the acceding countries – to contribute to doubling by 2010 the share of electricity generated from renewable sources in 1997. In Germany, the share is to be raised from 4.5% to 12.5% in this period.
The importance of the credit and insurance industry is considerably greater than the public at large realises. Munich Re is actively involved in these processes: on the one hand, through its business interest as a reinsurer in this market of the future and, on the other, because it recognises the paramount importance of renewables for protecting the climate.
The tables that follow show, for each type of energy production, what opportunities and risks are inherent in normal, trouble-free operation, and what dangers threaten in the event of loss or damage. Of course, this simplified representation can only provide a rough impression. As the availability of figures on the individual criteria varies considerably, we confine ourselves to pointing out trends and problem areas and finally showing what is insurable and what is not.
Individual examination required
Many of the risks require insurers to examination each case individually before deciding whether or not to grant cover. These insurance solutions often contain special conditions agreed specifically for a particular risk. For instance, there may be agreements on technical measures that have to be taken to make the claims exposure manageable, or there may be certain conditions which clarify the scope of cover.
The decision as to whether a risk can be insured and at what terms and conditions is essentially taken on the basis of previous claims experience and the exposure. The risks associated with renewable energies are assessed and evaluated by Munich Re’s experts on the basis of a sound analysis and translated into individual insurance solutions. Besides conducting traditional facultative reinsurance business in this area, we also provide our primary insurance clients with comprehensive service. Furthermore, we are happy to support them in their negotiations with manufacturers and operators.
Munich Re also considers on a case-by-case basis the possibility of covering special-purpose companies in which projects like hydroelectric or solar power plants, wind farms, or thermal plants are financed through the assumption of payment risks in a sector very far removed from the risk. Thanks to these structured insurance solutions, the financing special-purpose companies either need to deposit less equity capital or regulatory capital or can borrow debt capital or hybrid capital on the capital market at more favourable conditions. These constructions are characterised by a high degree of complexity as regards the assessability of the technical, balance-sheet, regulatory, fiscal, credit-, finance- and energy-market mechanisms. In such cases, the experts responsible for writing these new kinds of risks in Munich Re’s Special and Financial Risks department take advantage of the proverbial technical and specialist know-how available in other sections of the company and can thus offer the solution that is best for the clients.