Time to shoulder more risk

The insurance industry's cautious-if not downright negative-attitude to wind energy today is partly the fault of the wind industry itself. In the early days of wind power, underwriters, with little or no understanding of the wind energy business, were insuring much technology that was poor, according to Fraser McLachlan of Miller Insurance Group. They were writing the wind industry's research and development risk and the wind industry was happy to transfer such risk, and who can blame them, he told last month's British Wind Energy Association conference.

"Simply, underwriters lost their shirts by providing insurance for risk such as performance of wind turbine generators, efficacy, lack of wind and similar such esoteric types of insurance," said McLachlan. By taking advantage of the insurance cover on offer, the wind industry had been taking a short term view, he maintains. "The history of the bad losses that ensued from this industry has done us no favours at all. The net result; wind power became a dirty word to an insurance underwriter."

McLachlan's recent experience shows that this distrust of wind energy still persists. In trying to renew the WindPro insurance program, 30 of 47 different insurers approached would not even entertain discussion about insurance of wind power. "They had long memories from losses paid over a decade ago and were looking to return to basic underwriting principles, insuring what they viewed as "standard" risks," he said.

He views two recent underwriting developments with alarm. The first is the German insurance market's insistence that developers of German projects replace turbine parts every five years (main story). "What impact will this have on the financing of such projects?" he asks. "I always thought insurers were in the business of risk, not engineering." McLachlan's second cause for concern is that underwriters are treating wind projects as they would large power generation projects. This means that they are not offering insurance terms that actually reflect the true exposure and risk they are writing.

McLachlan said that the very "hard" insurance market will impact on the wind industry and the way it has been doing business until now. The move away from a "soft"-or under priced-insurance market has been brought on by severe losses from paying out for too many claims and from the terrorist attack on the World Trade Center, as well as by long term unsatisfactory performance. In addition, over capacity in the market-"simply, too many insurers chasing the same business,"-has led to consolidation in the industry.

He advised that wind farm operators should consider insurance companies in the same vein as the rest of their financial partners. "After all, it is their capital that is underwriting your, and indeed your lender's, bottom line." But most importantly, operators should choose their insurers carefully, he warned. "Those insurance companies offering the cheapest deal today may be absorbed by another in a few months' time; perhaps into a company with a completely different attitude to wind energy business and risk," he said.

McLachlan is working hard to change this seemingly negative attitude. Once insurers understand the wind business, the wind industry needs to work with them so that diligent operators are rewarded for best practice risk management techniques, he urged. Previously, rates were so low there was no scope for rate reductions for the well-run companies.

It is time, he continued, for the industry to recognise that the market of the last decade is no longer there. The wind industry will need to bear more risk in the form of deductibles (the sum it agrees to shoulder before it can make a claim) or self-insured retentions.

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