Expect The Unexpected: Solar Asset Insurance And Weather-Related Losses

Contributors
Written by Jatin Sharma
on October 18, 2016 No Comments
Categories : Featured, New & Noteworthy

While still something of a fledgling industry, the global solar market continues to go from strength to strength, with annual growth figures consistently exceeding 25% and a combined asset value of billions of dollars. All of this success has been achieved in the face of a range of challenges, from regulatory uncertainty to the fallout from climate change, the very phenomenon whose effects solar power aims to mitigate.

This rapid growth has largely been driven by falling technology costs, which, coupled with sufficient scale and innovation, have in turn driven expansion, both in established markets and overseas throughout South America, Africa and Asia. In the U.S., for instance, utility-scale solar projects are expected to help ensure the solar industry has another record-shattering year in 2016.

However, if this rate of growth is to be maintained, particularly as subsidies and feed-in tariffs begin to dry up, the global solar industry will need to be better protected against sudden and unforeseen risks. Despite lower technology costs, for example, the average severity of solar insurance claims has increased by 87% in the last five years, due predominantly to weather-related losses.

In the U.S., for instance, one solar farm suffered hailstorm damage to over 4,000 panels following a particularly violent storm, while a second saw a tornado tear through the site and damage 170,000 panels. Solar farms in desert locations have also been known to be susceptible to flash flooding, particularly in the absence of adequate drainage. Due to its preoccupation with growth, cost reduction and innovation, the solar industry has arguably developed something of a blind spot to these risks, to the detriment of investors and project stakeholders alike.

In short, then, the solar market will need to learn to expect the unexpected – and be prepared for it. Such foresight is all the more urgent as the market increasingly moves into areas prone to natural catastrophe and extreme weather conditions.

GCube’s recent “Cell, Interrupted” report identifies the challenges faced by utility-scale solar PV developers and owners around the world, the causes and costs of solar insurance claims, and how they can best be mitigated. It draws on detailed examples of incidents, key factors influencing their financial impact on project operators, and recommended failure prevention methods.

In particular, the report finds that weather-related losses are one of the most common causes of solar PV insurance claims worldwide, accounting for just under half of all utility-scale PV claims in North America and over a quarter throughout the rest of the world. These sources of loss include tornados, floods, and windstorm and hail damage.

Currently, two-thirds of global utility-scale PV assets are located in countries where natural catastrophe risks are considered above average or high. This proportion is set to increase in the coming years, following expected growth in parts of the U.S. and emerging markets, many in Southeast Asia.

Of course, natural catastrophe risks vary from site to site, and insurers therefore use a variety of underwriting tools to model, evaluate and score the likelihood and severity of a potential earthquake, windstorm or flood. These methods can also extend to more general adverse weather conditions, such as lightning and hail.

However, these modeling techniques are only accurate up to a point, and none of them can account for or factor in the increasing unpredictability in weather events brought about by climate change, which bring with them a unique set of challenges.

For example, natural catastrophe events are typically low-frequency, high-severity events. This means that when they hit, the damage caused will be concentrated on a much higher proportion of a site than those losses arising from other causes, such as electrical malfunction.

There are, however, a number of considerations that, once acted on, can help offset the effects of unforeseen and adverse weather conditions, or even natural catastrophe events. In the first instance, building strong relationships between risk managers, asset managers and loss adjusting teams early on is of paramount importance. Familiarity with these teams and how they work will ultimately increase the efficiency of the insurance claims process.

Equally, and ahead of any potential loss, being proactive can go a long way toward protecting solar assets from risk: Be sure to have a comprehensive business continuity plan in place, and have all necessary documentation in order. In addition, wherever possible, acquire access to a local weather data source and check that your site security meets your underwriter’s requirements.

If the worst should happen, and management of a catastrophic loss becomes necessary, there is no substitute for having personnel on the ground. Ensure that a member of the project team is available throughout the claims and loss adjusting process to confirm that activity is being tracked and reported appropriately.

Of course, it must be recognized that solar PV losses will continue to occur. However, by promoting greater awareness among the investment community of the resources required to prepare for the sudden and unforeseen, the industry will be better prepared to cope with these events.

Ultimately, and as the industry continues to mature, collaboration between stakeholders and the implementation of proven best practices will help minimize balance sheet losses, as well as insurance claims.

Jatin Sharma is head of business development at GCube Insurance Services, an underwriter of renewable energy projects.

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