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View Points | August 2017

Smart buyers analyse whether insurance can mitigate a particular risk

<span style="font-weight: bold;">Amit Agarwal, Director, Ideal Insurance Brokers Pvt. Ltd. </span><br /> <br /> <span style="font-weight: bold;">Solar power has seen a large boom, but with this comes the problems related to security and finance. How has the insurance market for this sector progressed over the last few years?</span><br /> In the last year, FY2016-17, the country's solar energy capacity expanded by a record 5,525.98 MW. According to reports released by MNRE, India added 3,010 MW in the previous year, thus translating to an almost doubling of growth in the past year. The growing demand for insurance in Indian markets comes as owners and developers of renewable energy projects seek to tap into new sources of financing, including from institutional investors such as pension funds. To make investments in renewable energy more attractive to these investors, projects must become less risky, all the way through from early stage construction to operation. <p></p> <p>New solar parks require enormous investments. Not only that, investors have to put their money into relatively new and sometimes less mature technologies. To reassure investors, sound risk management is key.</p> <p>Damage, delays, and down times are not uncommon and can significantly reduce the expected returns on investment (RoI). Risk transfer products are available to manage risks associated with the development and operation of renewable energy projects. Besides protecting against physical accidents or delays due to inclement weather, insurance can also help reduce revenue volatility. It can do this by compensating for the periods when the sun does not shine or when energy prices fluctuate in the market. </p> <p>Insurance is not a silver bullet. But, by mitigating the risk in the construction phase and improving the consistency and surety of revenues during operation, insurance can help improve the RoI for renewable energy projects. This, in turn, would allow the sector to attract the scale of investment necessary to put the India's energy mix on a more sustainable footing.</p> <p> As a relatively new concept, kindly explain the necessity of insurance for solar plants. Solar power projects face risks that are unique such as radiation variation, technology, solar panel quality, and counter-party payment. Since electricity generation is primarily dependent on solar radiation, the business is exposed to nature's vagaries. However, unlike wind, solar radiation varies relatively little year to year, and displays relatively less seasonality in a year. There are significant technology risks in solar power projects because, barring some exceptions, both technologies and manufacturers are new, rapidly evolving, and often owned by relatively new companies with moderate-to-weak credit quality.</p> <p>The severity and frequency of catastrophic events, both natural and man-made, have been increasing over the past 20 years. Between 1990 and 2015, cyclones and tropical storms accounted for a majority portion of total catastrophe losses, and the rate and intensity of these storms is predicted to increase with global climate change. A large portion of claims' payouts result from property damages and business interruption coverage losses. In addition to catastrophic events, insurers also consider man-made degradation of the environment. Increasing energy consumption and associated atmospheric pollution will directly impact the insurer's risk exposure. </p> <p>Extreme natural events, particularly those related to climate change, such as hailstorm, typhoons and floods, may cause serious damage in solar plants. Severe structural and economic losses may be incurred if specific components are damaged such as structural elements, electrical parts and components, control and inverter rooms, and connection lines. Flooding can affect different functions of the plant, both on the electrical generation side and on the balance of plant (BOP) side, including connection lines continuity, accessibility of different parts of the plant, erosion of roads and other infrastructures, fence functionality and interference with electrical systems, data monitoring and security systems. </p> <p>Security systems are essential for a suitable operation of a solar farm in order to avoid damages and possibly plant downtime from theft and vandalism. </p> <p> <span style="font-weight: bold;">What key factors must one consider before opting for insurance? </span><br /> Developers need to protect their investment and get coverage for the renewable energy installation itself and for home or business. Developers need early consultation in the process to get a clear idea of the potential insurance requirements and to understand how insurance will factor into the ongoing costs of the project. The insurance needs of a company installing solar depends on many factors. Every company should purchase a standard suite of property and liability coverage: workers' compensation, general liability, and property coverages. But the amount of coverage varies depending on the type of solar installation (rooftop versus utility scale farms), the legal environment of the state, and the terms of each project contract. We also recommend professional liability coverage if there is any design work done by, or on behalf of, the contractor.</p> <p>If developers are acting as the general contractor or working with large commercial or utility systems, they should purchase an erection all risk policy including the loss of income for the project owner and marine transit policy to cover the entire project. The policies usually include transit coverage (which covers the transportation of materials to the job) and temporary storage (if materials need to be temporarily stored off-site prior to installation).</p> <p> <span style="font-weight: bold;">There are no standardisations available, how are the parameters then decided?</span><br /> The insurance requirement of each company depends upon several factors and parameters like location of the project, financial aspects, technological features, etc</p> <p> As this is a new program, not all insurance companies offer the required coverages. Therefore, developers may have to shop around for the most economical and suitable insurance product which would be able to cater his insurance requirement. For example, developers may need coverage for the following scenarios: <br /> Loss or damage to solar panels or equipment on property due to theft, vandalism, fire, lightning, wind or other perils;<br /> Loss of income due to interruption of the generation and sale of energy caused by loss or damage to solar equipment and property;<br /> Liability for any potential loss or damage to a third party, such as a solar developer or renewable energy installer, or the local energy distribution company.</p> <p> <span style="font-weight: bold;">Kindly explain the different insurance options available for the solar segment.</span><br /> The solar insurance landscape is changing almost as fast as the industry. Whenever a development occurs that presents a new risk, an insurance company is bound to come up with a solution. Smart buyers analyse whether insurance is the best solution to mitigate a particular risk. </p> <p> The good news is the falling price of solar systems also reduces the cost of required property and liability insurance and frees up financial resources to protect against other project risks.</p> <p> <span style="font-weight: bold;">Here are some of potential solar insurance products:</span><br /> a) All-risk property protection/Industrial All Risk: For renewable electric power generation, all-risk insurance provides coverage for turbines, boilers, transformers, powerhouses, solar panels, conveyors, fuel, shops and offices.<br /> Machinery breakdown - Electrical arcing and steam explosion perils can be incorporated into a package policy.<br /> Business income - Business interruption coverage and extra expense insurance is available. There is evaluation of previous production levels and current marketplace value, among other factors, to determine the appropriate level of business income coverage required. <br /> b) Liability insurance: Provides protection for bodily injury, property damage, personal injury and advertising injury. It includes general liability insurance for existing renewable energy operations, as well as newly acquired or newly formed organisations.<br /> c) Contract Works/Erection All Risk policy: Protection against any loss arising from property damage caused during construction of the project. Cover starts while solar panels are in transit to the job site and ends once the job is completed or the owner accepts the work.<br /> d) Employers' Liability: Provides cover against risk of accident from usual workplace risks such as working at height and manual handling.<br /> e) Marine Cover: Covers include marine transit for any loss of goods and marine delay in start up to protect from any consequential loss in revenue.<br /> f) Professional Liability Insurance: Covers engineering and design of solar projects, as well as paperwork related to tax incentives and local rebates.<br /> <span style="font-weight: bold;"><br /> </span></p> <p><span style="font-weight: bold;">- JOCELYN FERNANDES</span></p>
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