The use of parametric insurance for renewable energy projects has gained more traction as climate change continues to introduce volatility to the rapidly evolving space and as capacity remains constrained in traditional markets, according to WeeBeng Seow, head of Southeast Asia for Descartes Underwriting SAS.
"What we have seen in the last two to three years is that capacity has shrunk quite a bit, especially in the traditional markets. Even if there is capacity available, there are a lot of gaps [in coverage]," Seow said during a presentation at the Pan-Asia Risk and Insurance Management Association's Manila Masterclass event on May 21.
The adoption of parametric insurance has been very useful for renewable energy projects across the globe, Seow added. These solutions address risks not effectively covered by traditional insurance policies, such as revenue protection and nondamage business interruption.
Parametric renewable energy insurance offers coverage for losses or damages to renewable energy projects or assets based on predefined parameters, according to a December 2021 report published by Descartes. Instead of the traditional proof of physical damage, this relies on specific triggers like weather conditions, production levels or other quantifiable factors that directly affect energy generation.
Renewable energy projects are made even more challenging in the face of climate change, with regard to asset vulnerability and resource volatility. As the climate gets more erratic, it gets more difficult to forecast what will happen in the next few years, Seow said.
Natural disaster events driven by climate change threaten infrastructure and have significant production impacts on the renewable energy industry. Natural catastrophe exposures and climate change also pose nonnegligible threats that hinder investment and the continued development of the sector worldwide, according to the report from Descartes.
Renewable power generation is also dependent on natural resources that could limit its use or efficiency because of dynamic variables like wind fluctuations or solar radiation shortfalls, leading to revenue variability. Investors consider renewable projects to be somewhat risky because of this, which could lead to difficulties in obtaining financing.
Parametric insurance makes renewable energy projects "bankable" and more attractive to financial institutions, who then provide loans to project owners, Seow added.
Meteorological risks, such as windstorms and inclement weather, could also result in disruptions, delays and nondamage business interruption exposures for these projects. Parametric covers could be structured to pay out when weather conditions reach certain thresholds, acting as a financial hedge.
"As a whole, the insurance market and energy players have a part to play [in fast-tracking the energy transition phase]," Seow said.
Political risk and supply chain disruption
Seow said Descartes could design a parametric insurance solution in the future to address political risk and its effect on supply chain disruption, citing the war in the Middle East and the resulting situation in the Strait of Hormuz.
"Unfortunately, it's not something that we can provide right now," Seow said during the panel.
Descartes is currently focused on natural catastrophes and extreme weather-related events in relation to supply chain exposures, Seow said.
