Beazley eyes longer-duration risk transfer for energy transformation

Energy transformation could require insurers to look beyond the traditional annual policy cycle, as volatility and financing requirements create demand for longer-term and more tailored risk transfer solutions.

That is according to Beazley Bermuda leaders Stefan Wunderlich, head of parametric insurance, and Richard Gray, head of third-party capital and general manager, who see scope for insurance and alternative risk transfer to give investors and developers greater certainty around projects.

One of the challenges Wunderlich identified is a mismatch between the timeframe of the investment and that of the insurance protecting it.

“Duration is often a problem as we have an investment cycle that has a five to 10 years horizon, and the insurance cycle in many ways is still annual,” Wunderlich told Bermuda:Re+ILS ahead of ILS Bermuda Convergence, held October 12-14.

“How do you synchronise these different cycles? Insurers are still very apprehensive about providing 10-year durations or terms of an insurance product.”

Energy transformation projects are being developed against a backdrop of volatility, including movements in natural resource and electricity prices. For lenders assessing a project that might run for a decade, uncertainty over those variables can determine whether financing is available.

“Investors want a lot of certainty over 10 years, and if you have such a volatile market, it’s really hard to predict your outlook,” Wunderlich said.

“The financial expected return on the investment is hugely uncertain because of this pricing volatility.”

Wunderlich said carriers such as Beazley, including through its energy transition MGA KWH, can structure products that reduce the peaks of that volatility and provide stronger boundaries around potential outcomes.

“With that business case, it’s much more likely to get much more favourable financial investment, so that you can actually start working, building and developing your project,” he said.

The question for insurers is therefore not only what protection they can provide, but whether its duration can be more closely aligned with the financing behind the asset.

Wunderlich said Beazley is already moving beyond annual structures in some cases: “We have now several five-year transactions and we’ve started to scratch that limit. So there are some exceptional 10-year transactions we are starting to look at. An element of innovation to fuel this market could be to think about this alignment of the maturities.”

For Gray, energy transformation represents a significant growth area for Beazley, which has a dedicated team focused on the sector and has acquired an MGA specialising in the area.

But he stressed that growth needs to be commercially sustainable: “It’s about growth, but it’s about sensible, justifiable growth.”

It has to be an area where Beazley can provide a return to its capital providers, he said, while fulfilling insurance’s role in transferring risk to enable innovation and growth in critical areas. Developing those solutions also means starting with the problem faced by the client rather than creating insurance products in isolation.

“The best starting point is always to understand the problem of the client; looking for a problem for a solution that has already been developed is always the wrong sequence of going to market,” Wunderlich said.

He believes investors themselves could play a greater role in that process, arguing they are often outside conversations around optimising insurance.

Bringing together the investor, asset owner or developer, broker and insurer earlier could allow risk transfer to be tailored more closely to a project’s financing and risk requirements.

Alternative risk transfer adds capacity, not replacement

Alternative risk transfer can form part of that ecosystem, including for energy assets where recent loss experience has constrained the availability of traditional insurance capacity. Wunderlich pointed specifically to solar assets exposed to hail and severe convective storms, where insurers have paid more claims than expected.

Parametric structures cannot reduce the frequency of hail or the damage it causes, he stressed, but can provide a different way of assessing and transferring the risk.

“What it can do is again assess the risk more purely, or it identifies the frequency and the severity of the natural catastrophe quite precisely, so that the risk premium can be determined and these assets can receive additional insurance capacity, which they cannot get in the traditional insurance market,” Wunderlich said.

That does not mean alternative risk transfer is replacing conventional insurance: “The solution really is the combination. There are more offerings that address certain needs rather than replace one thing completely with another thing,” he said.

Wunderlich also pointed to the size of the protection gap, arguing there is little reason for alternative structures to displace existing insurance when significant risks remain uninsured.

Gray similarly sees parametrics as another part of the risk manager’s toolkit, particularly where organisations need certainty and rapid access to funds following an event. He pointed to structures in the Caribbean that can make funds available within days of a hurricane, allowing organisations to begin clean-up and rebuilding quickly.

For Wunderlich, Bermuda is well placed to support the development of risk transfer solutions for energy transformation because of its captive market, regulatory and financial framework, and proximity to captive boards and other decision-makers.

“Bermudan Insurance Law is a very trusted and tested framework,” he said.

The ability for captive board meetings to take place on the island, for insurers to participate in those discussions and for transactions to operate within an established regulatory framework can help simplify the process, he added.

Gray, meanwhile, emphasised the investment needed behind the capital itself.

“We’re investing in people, we’re investing in systems, we’re investing in modelling, we’re investing in pricing,” he said.

For both Gray and Wunderlich, however, developing the market is not simply a question of putting more capital behind energy transformation risks. It requires insurers to understand what developers and investors actually need, build structures around those requirements and reconsider how long they are prepared to commit their capacity.

For Wunderlich, aligning insurance more closely with the five-to-10-year horizons of energy investments could be an important part of that evolution. While longer-duration commitments remain unfamiliar territory for much of the market, he argued that this should not prevent insurers from exploring them.

“It’s not usual, but I don’t think it’s impossible. It must be possible,” he said.

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