Latam Briefing: Renewable energy insurance in Brazil
Brazil is a renewable energy powerhouse and is making significant investments to increase the participation of green sources in electricity production.
The country’s clean energy transition creates opportunities for insurers, both local and international, as demand for coverage is on the rise in a market that has little exposure to natural catastrophic events.
The share of electricity generated by renewable energy plants reached 92% last year in Brazil, the highest ratio ever recorded in the country, according to Câmara de Comercialização de Energia Elétrica, CCEE, the electricity market operator.
The main generation source is hydroelectric, which was responsible for 72% of the total last year. But the participation of wind energy has grown fast in the past decade, moving from 1.2% of total generation in 2013 to 13.5% in 2022. Onshore wind farms already produce 24.1 gigawatts of electricity, and the market is now preparing to invest in the newly regulated sector of offshore wind energy, which is seen as very promising by market players. Applications from about 100 such projects are currently being reviewed by the government, according to sources.
A flood of investments in photovoltaic plants, which currently amount to a tad over 2% of total generation, is also under way. According to Clean Energy Latin America, a consultancy in São Paulo, investments in photovoltaic solar energy reached R$35.1bn, or $7.4bn, in 2022, a 79% increase over the previous year.
The local insurance market is aware of these developments, and a number of local and international underwriters are active in the provision of covers to wind and solar energy projects. The Brazilian subsidiary of Tokio Marine, one of the market leaders, works with estimates of annual double digit premium growth in the segment.
“The market is still heavily dominated by local players. However, we see a spike in interest from overseas and London-based markets looking to expand their book into Brazil,” says Severin Hegelbach, the Head of Knowhow and Advisory Service, Sustainable Energy, at Howden.
He notes that renewable projects can mostly find coverage in the local market. However, a growing number of projects are using international project finance structures to raise funding, and lenders, in such cases, tend to demand that sponsors buy insurance in global markets in order to improve their credit ratings. Very large risks or those with poor loss histories also need to look for extra capacity abroad, Hegelbach points out.
Sidney Cezarino de Oliveira Souza, the underwriting director at Tokio Marine in São Paulo, says that the main product purchased by renewable energy projects is engineering risks, which is demanded by lenders. But he stresses that the company has an industry-wide approach where it offers covers for all kinds of participants in renewable energy projects. Last year, the company launched a package aimed at the sector that includes, in a single policy, cover for engineering risks, liability and property.
“We provide cover for the whole chain of production. We analyse and understand the risk from beginning to end,” he says.
“The main insurable risks are property damage during transport, construction and then operation, machinery breakdown and electrical failure during operations, as well as loss of revenue and business interruption,” adds Andoni Hernandez, Regional General Counsel, Howden LatAm and Executive Chairman in Brazil. “The substation connecting the project to the grid represents a bottleneck in renewable energy projects, which underwriters assess very closely because of the business interruption risk, but it is manageable so far.”
Being a largely non-catastrophic market, at least in terms of perils that spook renewable energy insurers in other jurisdictions, such as a hail and earthquakes, capacity continues to be plentiful in the country, although prices and conditions have been somewhat affected by the global hard market. Brokers point out that underwriters are now making more comprehensive queries about the risk management practices of project sponsors and contractors.
“The market is difficult, it is hard to find capacity, and for that reason it is necessary to present insurers with a comprehensive risk analysis,” says Paulo Mantovani, the head of Energy and Mining at Marsh in Brazil. “The hard market is likely to persist for some years yet, and we will probably not go back to how it was during the soft market.”
“We have seen some upward corrections in the last three years both in terms of prices and worsening terms and conditions in the renewable energy market. So, to some extent, the Brazilian market has followed the hard market trend over the past years,” Hernandez adds. “We see higher premiums, slightly increased deductibles and some sub-limits for flooding for example.”
Souza says that Tokio Marine has started to ask higher deductibles than before, but policies have few exclusions. One example is the risk of microfractures in solar panels, which is a standard exclusion in other markets too. He also notes that the company strives to help potential clients to evaluate its risk exposures. Tokio Marine has set up a risk management consultancy that can be hired by buyers to help them with the task.
“When we quote a risk, we also offer to the buyer the possibility of hiring the risk management service at a discounted rate,” Souza says.
“The quality of risk management has improved over the years as project developers and sponsors have gained experience,” Hernandez stresses. “The development of risk management expertise has been supported by international lenders financing these projects and requiring high standards of due diligence.”
All things considered, though, buyers still enjoy of favourable conditions when structuring their insurance programmes in Brazil.
“When compared to other markets, Brazil, which has plenty of natural resources such as wind and sun-hours, but without the burden of a heavy natural catastrophe exposure, still benefits from favourable terms,” Hegelbach says. “At first, competition was fierce, which led to favourable terms and conditions for clients overall. These have now gradually adjusted upwards due to the local loss experience but also international capacity constraints for renewables. Nevertheless, reinsurance contracts have increased their offered capacity and many of the risks can now be placed in the local market, through co-insurance.”
The strength of the sector is leading underwriters to launch new products too. For example, Newe Seguros, a local insurer, has introduced a surety-like cover for renewable plants that guarantee a minimum return for investors in such projects, reducing their exposure to connectivity risks to Brazil’s complex electric grid.
“The goal is to ensure investors that final consumers of electricity will pay their bills. Today, the main problem we see in the market is that investors, especially those from abroad, have no certainty about whether their investments will deliver the expected returns,” says Átila Santos, the head of Financial Lines Newe Seguros.
Newe is also introducing a parametric cover for corporate buyers of photovoltaic electricity in the free market that ensures that they will be able to purchase the energy they need from other sources if sunlight is insufficient for their providers to deliver the goods.
New and tailor-made solutions tend to become more of a market feature as underwriters adapt themselves to changes promoted by regulators that grant them more freedom when elaborating policy wordings.
“There has been some flexibility from a regulatory point of view and insurance brokers and insurers were able to adapt some of the insurance wording towards a fit for purpose power and renewables wording,” Hernandez says. “We are not finished with the path, though, with many steps left to go. It is a continuous process, and we have seen some innovation around parametric covers and contingent business interruption.”