Global reinsurance firm Swiss Re has identified a number of opportunities in the renewable energy production arena where demand for risk transfer is likely to increase considerably and parametric or index triggers are eminently suitable, an opportunity the ILS market is also targeting.
Working directly with large corporate ceding companies is often considered the domain of the major global insurance and reinsurance players, like Swiss Re with its Corporate Solutions unit. But increasingly the larger ILS fund managers are looking to opportunities that allow them to work more directly with corporate cedants or sponsors, enabling the to access insurance risks more directly.
Swiss Re has identified an area of opportunity for its business that also aligns closely with the ambitions of the insurance-linked securities (ILS) fund market, renewable energy production, particularly weather or natural resource exposure that the renewables sector faces.
That’s good news for ILS, a weather or natural phenomena linked risk that can be understood and transferred using traditional insurance or reinsurance structures. Indeed some ILS funds are already on-board with this risk and in the case of Nephila Capital have been leading the charge into renewables for some years now.
Perhaps even better news is the fact that these risks come with data, enabling risk transfer contracts to be designed that meet the corporate clients hedging needs and are based on parameters to do with the risk being transferred, as parametric or index triggers. Concepts the ILS fund market is very happy to engage with.
Swiss Re is bullish about the prospects for this sector, with renewable energy production increasing across the globe and the supply of resources required to generate power “inherently volatile” as is the way with weather and natural phenomena, the reinsurer sees ample opportunity to help mitigate that volatility, by offering risk transfer products that help producers to offset those weather related risks.
Swiss Re’s Global Head of Engineering, Gregory Schiffer, explained the size of the opportunity; “According to recently published figures by the end of this decade, the substantial increase in renewable energy investment is likely to double insurance spending in six of the world’s leading renewable energy markets alone.”
With the renewable energy sector set to continue growing, but output so reliant on weather conditions and at the mercy of volatility in resource supply, Swiss Re expects that demand for insurance solutions to manage these risks will grow alongside the industry.
As a result Swiss Re has honed in on the use of parametric triggers and index triggers, linked to the very weather resources that renewable production relies on, as a way to offer insurance products that transfer the volatility associated with resources and smooths revenues for the producer as a result.
“Compared to traditional indemnity-based insurance, the index-triggered solutions offer faster pay outs, low transaction costs and increased transparency in the settlement process,” Schiffer explains.
These products, which Swiss Re has designed to target wind, solar and hyrdropower (so wind, sun and water resource hedging or volatility smoothing), offer a way to protect renewable energy stakeholders (investors, producers, plant construction projects etc.) a mechanism to protect against earnings volatility, offering greater certainty in the outcome of renewable energy production, which should in turn stimulate continued growth of the sector.
The wind power sector alone is thought to offer a massive opportunity to risk transfer markets, with weather risk seen as the largest single risk wind power has to deal with, as this piece of the renewables market develops. Other renewables with weather exposure are likely in the same boat.
The confidence that global player Swiss Re demonstrates when discussing opportunities such as this, where there are risks which are increasing in supply but the re/insurance industry has yet to wholesale move into, demonstrates a clear opportunity for efficient capital from ILS funds and their ability to structure parametric linked capital markets hedging instruments could capitalise on.
As we said, there are some ILS funds already working in this space, most notably Nephila Capital which has backed numerous innovative renewable energy linked transactions, from revenue swaps to weather hedges or guarantees.
The underlying weather risk fits well in an ILS fund portfolio of natural peril risks, while the opportunity to work more directly with corporate cedents offers a chance to secure enhanced margin, while also demonstrating expertise and an ability to truly listen to a clients needs.
As global reinsurance players increasingly target this space, the volume of weather linked risk flowing to the ILS market could grow, both as more ILS players try to deal directly, or alongside the traditional market, and also as retrocessional needs result in some of these risks flowing down the chain.
But most importantly, the attention that big players like Swiss Re, or Munich Re, and others show to the renewables space should be a reminder that there are opportunities outside of traditional property catastrophe risk to pick up natural hazard exposed risk assets, while also providing innovative solutions that help clients better manage their exposures.
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