Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Offshore wind a perfect match for alternative risk transfer


The offshore wind energy industry is growing rapidly. It’s an environmentally friendly and sustainable form of energy production which is getting more focus as governments begin to support companies wanting to build offshore wind farms both financially and by allowing them access to areas of coastline which are perfect sites. As this industry grows the insurance industry has to innovate to provide risk management solutions that are appropriate for this growing energy source.

Willis, the global insurance broker, rightly sees this as an opportunity to branch out and provide support both to new insurance product innovation and also capital markets risk transfer. They foresee a near 30-fold increase in the size of the market by 2020 and given that these are multi million dollar projects the opportunity for re/insurers to create products to meet the demands of this industry is growing.

Wind farms require complex risk management programs which must include methods to smooth the revenue of the companies building and operating them. This is where alternative risk transfer methods can be used such as wind futures and derivatives which can hedge against times of low generation when the wind doesn’t blow. However ART methods could also be used to help protect operators against losses caused when winds are too high as well and even catastrophe bond type structures could be utilised to protect against disasters that threaten areas chosen for wind farms. Perhaps we could even see a market for wind swaps between operators.

The wind energy generation industry seems a perfect candidate for our markets to step in and offer risk transfer products. With a perfect correlation between wind speeds and the resulting energy produced it’s an ideal place to trial new index linked products. Paris Re and Marsh have already been looking into this with the help of the United Nations (which we blogged about previously here). We expect to see a lot of innovation in this area in the coming years.

Read the press release from Willis here.

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