As the world looks toward upcoming Net Zero targets, ESG considerations are increasingly prevalent across industries, particularly the energy sector. In this time of transition toward cleaner sources of energy, captive insurance is emerging as a significant facilitator of the industry’s growth and a solution to this new risk base.
The energy industry has a complex risk landscape, with considerations ranging from property damage to major weather events and environmental liabilities. As commercial insurance carriers struggle to address the unique risks of renewables, captive insurance solutions have emerged as a preferred alternative.
In this post, we’ll explore the growing importance of captive insurance in the renewable energy sector, trends to look out for, and how to use captives to your advantage.
What is captive insurance?
Captive insurance dates back to the early 1960s, when regulated self-insurance emerged as a way to reduce reliance on commercial insurance, which was both expensive and reluctant to cover certain types of risk.
A captive is an alternative risk transfer (ART) solution in the form of self-insurance, where a company creates its own insurance entity to manage its risks. This approach allows for greater control, customised coverage, and often significant cost savings over traditional insurance solutions.
While captive insurance is not new, conventional insurance products are often reluctant to cover the complex risks of emerging industries with limited risk histories—such as renewables—which has made captives a particularly beneficial partner in renewable growth.
The shift toward captive insurance for renewables
Renewable energy businesses and contractors grapple with significant risks, many of which are excluded from commercial insurance coverage. If coverage does exist, it’s often prohibitively expensive, leaving fewer resources for critical activities like research and development.
Increasingly, renewable energy businesses are using captives to insure themselves against sector-specific exposures such as seepage, contamination, or regulatory changes.
Several factors have driven the move toward captive insurance as a preferred option:
- Market trends: The commercial insurance market is signalling a reduced capacity for the energy sector. There is also a growing demand for insurance solutions willing to tackle green energy projects, so captives are stepping in to fill the gap
- Regulatory changes: Regulation has made captive insurance more attractive to companies in search of alternative risk transfer solutions
- Risk management: Captives offer proactive risk management, allowing companies to tailor coverage to their needs and retain more control over their risk portfolio
The benefits of captive insurance for renewable energy
As commercial insurance products raise premiums and limit coverage for the energy sector, there is a corresponding market push to mitigate risk for large renewable energy projects, many of which lack a significant history of risk data. Renewables face many unique challenges, including technological uncertainties, regulatory changes, and environmental risks.
Captives may be the solution to this and other challenges within a relatively young industry, helping to smooth out volatility and address challenges through:
- Customised coverage: Providing tailored coverage for specific risks associated with renewable energy, like equipment failure or project delays
- Risk management: Captives encourage proactive risk management, helping firms to identify (and mitigate) risks before they materialise
- Cost efficiency: Captives can offer cost savings by reducing reliance on commercial insurance and allowing for the accumulation of underwriting profits. They can also be rated based on a company’s specific loss history, offering more predictable pricing
- Direct access: Captives provide direct access to reinsurance markets, allowing renewables to bypass conventional markets and avoid mark-up costs
- Amplify profits: Captives can invest their reserves, generating additional income for reinvestment into the business
- Greater control: Insureds have more control over claims handling and underwriting criteria
- Flexibility: Captives are flexible enough to address emerging risks before traditional markets have developed relevant products
Conclusion
Captive insurance provides a compelling solution for managing the complex risks associated with renewable energy products. By leveraging captives, firms can achieve tailored coverage, greater control, and potentially lower costs. Contact us today to find out more.
