Tailwind for plan engineering
Munich Re’s new coverage concepts are designed to take a good deal of the burden off the energy industry’s balance sheets. Underwriter Michael Schrempp played a key role in drafting a cover for serial losses involving wind power plants. The scope of cover offered by this solution is unique.
The manufacture and construction of wind power plants is a lucrative business – as long as the turbines generate electricity. Whenever there is an outage or disruption, however, the costs for the manufacturers can be substantial. The reason for this lies in the generous guarantees given by the industry to the operators of such plants. Five years or more are not uncommon. In some cases, the manufacturers even warrant up to 97% availability per year and assume the costs of a business interruption. After all, extensive guarantees and services are implications of good quality – an important criterion on which wind park operators base their choice of manufacturer. From the point of view of the latter, however, guarantees are a balance sheet risk for which provisions must be established. It is not so much the material damage and minor defects that are critical, since they can be financed via machinery breakdown covers or out of the available cash flow. Serial losses, however, are another matter entirely.
If a serial component breaks as a result of a design flaw, this could result in the outage of up to 100 wind power plants. On land, the repair costs could amount to a mid double digit million € sum for each plant. If the wind farm is out on the open sea, however, repair costs could attain a multiple of that figure. This is a risk that is capable of jeopardising a manufacturer’s very existence and until now has not been covered by any insurance.
Engineers and underwriters in search of the risk
Munich Re identified this gap in cover. Two years ago, its engineers and underwriters started giving careful consideration to the coverage of serial losses in the energy sector and gathering facts and figures on this rapidly expanding industry. Working in close liaison with the manufacturers, they analysed the latters’ production techniques, quality management and the guarantees and services offered by this branch of industry. Munich Re’s experts also took a closer look at the suppliers. After all, their guarantee obligations, quality management and default probability have a significant impact on the manufacturer’s guarantee risk.
Standard pricing tools are of no help when it comes to special risks
The underwriters then went to work on modelling the risk on the basis of the facts and figures they had gathered. “Our work starts with an empty sheet of paper”, says Michael Schrempp, Special Enterprise Risks Underwriter at Munich Re, describing the development of a coverage concept. Schrempp mind-maps the links between the individual risk components. “This method often brings to light connections and associations no one had thought of before”, explains the risk expert. In addition to the engineering risks themselves, he also takes into account weather, marine and installation risks as well as other factors of influence, such as business interruption, supplier guarantees and the probability of default on the part of a supplier. The outcome: A highly complex structure that accurately maps out the various risk factors and their interaction. “There are no standard pricing tools for special risks of this kind. Since we do not have a statistically representative amount of loss data at our disposal, we use the experience we have gained with comparable risks to arrive at risk-based pricing with the help of a mathematical model”, says Schrempp.
“Business interruption constitutes an especially large risk with offshore wind farms. The cost of repairs on the open sea is considerably higher and very much depends on the weather. It often takes weeks for assembly ships to get the job done. That is also why covers for offshore plants are currently limited. This is a factor that the manufacturer and insurer need to take into consideration in their guarantees.”
Modular structures allow for creativity in design
Based on their analyses, the findings from their meetings with the manufacturers and brokers and their many years of experience, Michael Schrempp and his colleagues developed a modular coverage concept for the energy industry and plant engineering. Besides serial losses, Munich Re also provides coverage for contract penalties, availability and performance. The various cover modules can be combined in different ways and according to the manufacturer’s wishes. With this particular solution, the risk carrier is one of Munich Re’s primary insurers. In addition, we offer reinsurance for captives. We do not limit ourselves to any particular sectors or regions. More information about the new solutions is available in our brochure.