Solar panel manufacturer bundles products with catastrophe insurance in Japan

Ever since the devastating earthquake and tsunami struck Japan in March 2011 the country has received a lot of attention regarding the high level of exposure to a variety of natural disasters and catastrophes. Chinese solar panel and module manufacturer Phono Solar is addressing the broad catastrophe risks in Japan by introducing a natural disaster insurance program under which all products sold into the Japanese market will be covered.

Earthquakes, tsunamis, typhoons, rainfall induced flooding and even tornadoes have all struck Japan in the last two years and insurance plays a vital role protecting against the economic impacts of these perils. By introducing their Insurance Compensation Scheme for Natural Disasters for all solar products sold to the Japanese markets Phono Solar wants to provide investors in solar energy schemes with a guarantee not just for damage incurred but also loss of earnings.

It’s the first insurance scheme of its kind in Japan and will payout should a Phono Solar installation be damaged or destroyed by natural disasters in the country. The insurance will not just cover damage to property, it will also compensate for loss of income from government subsidies.

Eric Yuan, Marketing Manager at Phono Solar, commented; “Phono Solar takes specific steps to adapt its services to markets around the world and our new Interest Compensation Insurance is an example of this. In a country that is affected significantly by events characterised in legal and insurance terms as ‘acts of God’, project investors might otherwise be wary of committing to industrial-scale farms. This new scheme secures their ROI, and ensures that PV technology has a place in Japan’s renewable energy future.”

PV Magazine, which is focused on solar and photovoltaics, contains a little more insight in an article on the launch of this insurance product. The policies cover ‘direct loss’, so when a natural disaster event impacts the insured installations directly. In this way it doesn’t name specific perils such as tsunamis, rather they are covered as part of the flood coverage it provides.

The natural disaster insurance will payout based on the size of the installations. A solar installation of 10kW up to 1MW would receive payouts if damaged or destroyed by a natural disaster of JPY2 million ($24,000) for the first 10kW plus an additional JPY100,000 for each extra kilowatt. For an installation above 1MW in size the payout would be negotiated according to the article in PV Magazine.

The use of insurance to support the rollout of solar power is vital and not just for compensating losses from natural disasters. It’s also vital to protect loss of earnings from fluctuations in generation caused by weather patterns and a lack of sun. Solar installation owners can hedge those types of risks with weather derivatives or weather-index insurance. Now, at least in Japan, they can have specialised natural disaster insurance for their installations too.

As the solar industry grows the reinsurance sector is going to be called on to provide cover for these types of insurance schemes. That’s where the capital markets may have a role to play in the future as these are likely to be relatively high-risk insurance portfolios which may be best suited to being underwritten in the convergence sector and in some cases instruments like catastrophe bonds could have a role to play.

There is a big push to adopt renewable energy in Japan after the ongoing Fukushima nuclear power plant issues. Renewables are highly sensitive to weather and catastrophe events meaning that insurance and reinsurance are vital. It also makes the sector a good fit for the convergence reinsurance markets.

If Phono Solar, through this insurance scheme, assumes hundreds of millions of dollars of risk in Japanese solar installations they may become a prime candidate for catastrophe bonds to hedge the earthquake, tsunami and typhoon exposures. They may also be tempted to look to parametric reinsurance covers or parametric cat bonds to protect high-value solar installations which are in high-risk zones. Large engineering projects such as renewable energy are an area where the reinsurance and cat bond market has a real opportunity for growth.