Parametrics gain traction in renewables market, increasingly appealing to buyers: WTW

Parametric risk transfer and insurance solutions are gaining traction in the renewable energy marketplace, according to broker and risk advisor WTW.

They are still seen as a route to address challenging coverage gaps, to extend cover, or to buy-down deductibles in the main.

But, with catastrophe and severe weather related losses rising, there’s also an expectation that uptake of parametric insurance solutions will continue to expand in the renewables space.

We’re hearing of increasing interest in providing risk capital to support renewables projects in 2024 and this has expanded beyond the most typical solar and wind project weather risk transfer, that is typically parametric, to now shift focus to emerging technologies such as battery energy storage systems and also energy supply-chain risks.

For years now, some insurance-linked securities (ILS) markets have provided capital to support weather risk arrangements embedded into project financing for renewables projects, with Nephila Capital being a leader there.

More sophisticated uses of data and analytics are enhancing the ability to tie weather hedges into financing arrangements, so we anticipate that expanding further in time, with performance related benefits of hedging likely to attract renewable energy project operators, as well as the financiers behind construction and ongoing operations.

WTW noted today that, “With the volatility in the natural catastrophe markets, parametric solution remains in sharp focus.

“However, the market continues to struggle blending traditional and non-traditional solutions efficiently for client risks in exposed locations.”

Severe convective storms are seen as a challenging area for solar installations in particular and this is another area for parametric risk transfer focus, as coverage is often inadequate and parametric insurance can act as a supplement.

Oliver Warren, Renewable Energy Account Director, Natural Resources at WTW explained, “One way for solar energy producers to address SCS coverage challenges are parametric solutions. Rather than using the damage trigger of a traditional indemnity- based insurance policy, parametric coverage can pay out based on, for example, the size of hail which hits a site, regardless of the amount of damage sustained.

“However, there are some obstacles to overcome in the widespread use of parametric alternatives. All parties will need to thoroughly understand the parameters of the coverage and in the short term, it’s unlikely lenders will be comfortable with replacing traditional coverage.

“That said, we expect parametric coverage to become increasingly appealing as a supplement to traditional insurance structures, to offset the cost of a deductible, as well as offer further coverage at a more competitive price.”

Steven Munday, natural resources global renewable energy leader at WTW, commented on the broader renewables space, “Recent challenges have tested the insurance markets, but resilience has improved. While surplus capacity exists for proven technologies, caution remains.

“The ongoing competition and potential for an La Niña year keep rates steady, with parametric solutions gaining traction despite integration challenges.

“To capitalise on emerging opportunities, renewable energy risk and insurance buyers should continue to engage with advisors and markets, employing smarter solutions to navigate the complexities of the evolving landscape.”