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Can Green Be Its Own Reward?

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Those interested in both green investments and insurance might want to consider keeping an eye on a recently issued performance insurance policy that combines both.

The policy, a collaboration between XL Group’s Complex Accounts unit, Munich Re’s Green Tech Solutions team and consultants New Energy Risk (NER), was issued for a portfolio of fuel cell servers installed in the U.S. that enables a grid-independent energy supply for several companies. The fuel cells’ performance is insured for a period of 15 years if the manufacturer is unable to meet warranty obligations. The project was financed by a $99 million bond that was granted an investment-grade rating, thanks to the insurance coverage for performance—something the collaborating companies say was critical to support the project.

XL Group started the ball rolling on this kind of performance insurance coverage in 2013 with New Energy Risk. XL Group, together with Munich Re, provided the insurance coverage, and the companies say it’s the first time an insurance coverage has contributed to a financing bond receiving investment-grade rating.

“Each of these companies brought valuable expertise that, combined, led to a unique insurance solution for a new technology. This collaborative approach could pave the way for further business in this and other energy-related fields,” said Tom Hutton, CEO of New Energy Risk, in a statement.

The underwriters faced a number of challenges in coming up with the product, and in an email interview, representatives for all three companies weighed in on different aspects of the project’s complexity.

Joachim Walch, head of underwriting in XL Group’s Complex Accounts unit, listed some of the challenges. “To start with, we needed to understand the real need of the client and the investors and to translate it into an operational risk transfer policy so that we could offer the expected added value for the insured. An important goal was to enable the client to secure capital on a better basis than he would have had without the insurance coverage.”

Part of the complexity, Walch said, was the involvement of several different insured parties and loss payees. “The named insured is a Special Purpose Vehicle (SPV) established to own and maintain the equipment, build the facility and contract with the off-taker.”

Walch added, “One of the biggest challenges—and the reason why the majority of insurers shy away from this type of complex project—is that the historical loss information that we as insurers usually rely on to price a risk was not available, and neither were pricing tools. So it was critical to foresee what could be the probable maximum loss (PML) and run appropriate risk calculation models to be able to price the risk. We relied on heuristic pricing models, a structured insurance approach and on our strong insurance wording expertise to develop the solution.”

Michael Schrempp, head of section for Munich Re Green Tech Solutions, said his team did an “intensive industry-technology study, utilized the expertise of our own scientists (chemists) and closely collaborated with NER and XL Group.”

New Energy Risk’s CEO Tom Hutton said that by using information “from the lab to pilot facilities to field installations, and through extensive interviews with engineers and technicians who work for our client, Bloom Energy, together with XL Group and Munich Re, [we] were able to develop a model to evaluate uncertainty around projected performance. We then had to translate this into a performance insurance policy that satisfied the lenders and investors, and in this case the rating agencies.”

So is this just the beginning for such complex products? Schrempp said, “There is huge market potential in the field of fuel cells, but also other renewable energy and energy-efficiency technologies.” Schrempp said biomass and energy storage in particular present an “untapped market.” He said, “As demonstrated in this fuel cell transaction, the value proposition of the insurance facilitated the bond financing. We are seeking similar opportunities to create value for our customers, and in some cases, for previously uninsurable risks.”


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