We normally associate emerging risks with very bad things happening that will likely impair insurers’ balance sheets. But emerging risks can also translate into emerging opportunities.
Climate change is one of the biggest emerging risks society faces. However, the way engineers and entrepreneurs are coming together to tackle it presents opportunities to far sighted investors – and reinsurers.
One of the problems with renewable, alternative energy projects is that its long-term performance potential is untested. And that makes investors uncomfortable. How long will photovoltaic modules remain productive? How vulnerable are offshore turbines to windstorms or salt water? How many times does a drilling rig on a geothermal project need to be repositioned before it strikes lucky?
Munich Re has spotted the possible disconnect and started a market for the sort of performance guarantee insurance needed to make start-up renewable projects work for investors as well as their sponsors.
The reinsurer’s home market will be at the forefront of developments because the German government has abandoned nuclear energy.
Munich Re has already underwritten insurance covering guarantees that a German builder of wind-power plants gives its customers. The company gives a technical guarantee of five years to buyers of its up to 2.5-Megawatt wind turbines.
With project developer Exorka, Munich Re and insurance broker Marsh jointly developed an insurance concept to cover the exploration risk of a geothermal energy project in Taufkirchen, near Munich, whereby the reinsurer assumes the significant risk of failure that thermal heat drilling entails.
But there are opportunities abroad as well. In Japan, Munich Re has provided the first solar panel warranty insurance to thin-film manufacturer Solar Frontier for installations worldwide.
Thomas Blunck, member of Munich Re’s board of management, told me that Munich Re has written performance guarantee business worth around Eu20m ($27m) in 2010. He expects the entire renewable energy segment, including weather related coverages, to be worth hundreds of millions of euros within the next five years.
The reinsurer is also making direct investments in the sector – Eu500m so far –which will eventually total Eu2.5bn.
Munich Re’s willingness to make direct investment in the sector, along with its ability to carry out high quality technical due diligence, including loss control analysis from its engineering subsidiary HSB, is a big comfort to investors looking for insured performance guarantees to wrap around their investment.
Blunck says that Munich Re intends to further widen its involvement in alternative energy coverage to include weather related products, such as lack of sun, or lack of wind, to complement the performance guarantees it writes for solar or wind farms.
He also foresees a big increase in demand for nat cat covers. Most of the projects planned in Europe will be exposed to storms and demand for property re/insurance to protect assets will require additional capacity that is not currently available, he says. Eu 100bn will be invested in offshore facilities in Europe up to 2020 and all of that will be exposed to winter storms.
Does all this mean Munich Re, like the German government, is turning green? Blunck says not. Munich Re will continue to provide risk transfer for conventional energy construction projects, including nuclear, and it will also back carbon-based energy projects.