Climbing insurance premiums December 08, 2020 by Jason Kaminsky with kWh Analytics in San Francisco, and Sam Jensen with Stance Renewable Risk Partners in San Anselmo, California Property and casualty insurance premiums have increased as much as 400% over the last two years in the solar market, and some types of coverage may not be available at any price. Deteriorating terms The market for property and casualty insurance for solar projects has been hardening over the past 18 months, which is causing concern for both asset owners and financiers of solar projects. The insurance market goes through cycles of "soft markets," which typically entail easier underwriting, increased capacity, and more preferential terms, followed by "hard markets" with stricter underwriting, reduced capacity and generally worse terms. The current hardening of the insurance market, coupled with other industry changes, has caused disruption in the project finance markets. The global insurance markets are hardening across the board, with most types of insurance lines experiencing rate increases as insurers absorb and react to losses that have been increasing in both frequency and severity. As it relates to renewables, this trend has been especially pronounced given both the rapid growth of the renewable energy sector and the increasing frequency of extreme weather events leading to outsized losses. The solar property and casualty market was disrupted after a $70 to $80 million hail claim on a Texas-based solar project in late 2019. Additionally, two plants in Rosamond, California and a project in Bakersfield, California had significant wildfire claims during the 2020 wildfire season. Against this backdrop, renewable energy projects are seeing even steeper cost increases, with underwriters and reinsurers struggling to secure adequate coverage for renewables projects. Some types of coverage may not be available at any price. Five challenges As a result of this accumulation of losses, solar asset owners are experiencing a number of challenges from the market. First, buyers are seeing increased premiums for coverage, with asset owners reporting increases of up to 400% over the past two years. Second, policies have higher deductibles. During soft market conditions, deductibles under all-risk insurance policies were as low as $10,000 or capped at 2% to 5% of the total claim value for catastrophic perils. Deductibles have now shifted to much higher dollar amounts, and deductibles are now typically 5% of the total asset value for catastrophic perils. Third, insurers introduced natural catastrophe sublimits for certain losses, namely from severe convective storms, such as hail, tornados and straight-line wind. Large solar projects and portfolios are having difficulty securing capacity above $20 million for key risks amidst increased solar development in areas such as ERCOT, which face severe convective storm exposure. Fourth, insurers have introduced more nuanced policy restrictions, such as microcracking exclusions. The vast majority of underwriters insuring solar now implement microcracking restrictions regardless of geographic location. These typically appear as policy amendments that place costs associated with testing for microcracks in solar panels with the insured, as opposed to the insurer. The insured must also demonstrate that more than a certain percentage or amount of individual solar modules have suffered microcracks before the policy will respond. Fifth, the market is seeing inconsistency among insurers regarding policy terms, including terms associated with microcracking, sublimits, contingent coverages, and deductibles. These changes in the market are introducing risk into the structuring of solar projects, particularly for projects exposed to hail. Consistent themes The authors participated in a series of roundtables on this subject with lenders and tax equity investors, and a few consistent themes emerged. Most tax equity investors and lenders have been asked to waive insurance requirements embedded within their financing documents due to the lack of market availability, as many financing agreements were negotiated during soft market conditions. Investors are beginning to focus on insurance availability as a key underwriting risk prior to the issuance of term sheets. In some instances, lenders require asset owners to provide a guarantee for uninsurable losses. The market is adapting to these changes in real time. The market conditions have led to a focus on solar risk management, with emerging technologies and certifications that can help mitigate losses from these natural events. Larger developers with more sophisticated risk management programs are more easily able to secure insurance coverage. Insurers have signaled to asset owners and financiers that insurance may no longer be the main basis for transferring risk, and that traditional risk management, site selection and technology selection must be considered by developers, purchasers and financiers amidst increasingly severe weather patterns. In 2020, the demand for insurance for asset owners and financiers has exceeded the insurance market supply. In 2021, with a large pipeline of solar assets being developed in natural catastrophic prone areas, it will remain to be seen if balance can be achieved. Property and casualty insurance, and solar risk management, will be an increased area of focus leading into 2021, especially against the backdrop of a tightening in the tax equity market and a flight toward lower-risk transactions.