The winds of change

Agency partners with wind farm owners, turbine manufacturers, and insurers

By Elisabeth Boone, CPCU

Oil prices may be down now, but hardly anyone expects them to remain at low levels for long. Achieving U.S. energy independence is a goal for the new Obama administration, and the president has often asserted his commitment to fostering the development of clean, “green,” home-grown approaches to meeting America’s energy needs in the 21st century and beyond.

At the forefront of clean energy solutions is wind power. In some parts of the country, notably the upper Midwest and the Southwest, rows of slender silver wind turbines are becoming a familiar sight; and estimates are that by 2030, wind power will generate some 20% of U.S. energy. The federal government and many states offer tax credits and other subsidies to encourage the development of wind power generation, a trend that is expected to accelerate in the Obama administration.

In fact, some states mandate the development of renewable energy sources by means of the Renewable Portfolio Standard (RPS). Specific RPS requirements vary by state; Minnesota, for example, requires all energy providers to obtain 20% of their energy from renewable sources.

Like other emerging technologies, wind energy offers both promise and challenges. Chief among these challenges is the need to develop solutions to address the risk management and insurance needs of wind farm owners. A leader in that endeavor is Holmes Murphy & Associates, a national independent insurance brokerage based in Des Moines, Iowa. Licensed in all states, the firm has offices in Cedar Rapids and Davenport, Iowa; Dallas; Kansas City; Madison, Wisconsin; Oklahoma City; Omaha; Peoria, Illinois; Scottsdale, Arizona; Sioux Falls, South Dakota; and St. Louis.

In 2003, Holmes Murphy formed its Renewable Energy Division, which is based in the Sioux Falls office and is dedicated to protecting the providers of emission-free electricity. The division was established by Doug Muth, vice president at Sioux Falls, and TJ Rolfing, account executive; also serving in the energy unit is account executive Fred Hilsendager, who joined Holmes Murphy last August.

Muth, who joined Holmes Murphy in 1992, holds a degree in electrical maintenance and construction and has broad experience in commercial risk management. Rolfing’s primary responsibility is with the Renewable Energy Division; he also heads another specialized unit within Holmes Murphy. Hilsendager’s background encompasses risk management and insurance experience on both the carrier and wholesale sides, including responsibility for a number of Fortune 500 accounts.

Evolving market

Many of the loss exposures that confront wind farm operators are similar to those in mainstream commercial and industrial enterprises: property, general liability, equipment breakdown, business interruption, auto, and workers compensation. Early in this decade, however, many insurers showed little enthusiasm for wind farms, regarding them as an arcane and complex risk.

“In 2003, I invested in a wind farm, and while researching the process I discovered that there weren’t many markets for wind farm coverage,” Muth explains. “At that time I was put in touch with Fred, and together we developed some paper at Lloyd’s of London and started arranging property, liability, and other insurance coverage for wind farms.

“When we first got involved, there wasn’t much competition among insurers for wind farms,” Muth continues. “Since then, the coverage has become more of a commodity, and more companies are writing it. The coverage was extremely expensive to begin with; over the last couple of years, however, we’ve seen prices on the property side fall as more carriers get back into the market,” he comments.

“A lot of companies’ energy units were involved in the market 20 to 25 years ago when wind farms began to go up in California, and a lot of the carriers took heavy losses and got out of the business,” Rolfing says. “Now we’re starting to see some of those energy units coming back, and that has helped the landowners. However,” he remarks, “some of the owners with just one or two farms haven’t benefited as much because there’s not enough mass for the insurers with energy units to become interested.”

Over time, Hilsendager notes, the market has evolved to the point where wind farm operators can even purchase coverage for lack of wind. “That coverage is becoming more and more available, and several players are coming into the market for lack of wind insurance,” he says. Some carriers offer the coverage on an admitted basis; in other cases it must be placed in the nonadmitted market, Hilsendager says.

Lack of wind is just one of the risks faced by wind farm operators. Those slender silver turbines, like other industrial equipment, are vulnerable to a range of perils.

“We’ve had all kinds of scenarios,” Muth says. “We’ve had blades fall off. In one case, the turbine’s software malfunctioned. The brake went on in the turbine, but the software didn’t tell the ailerons on the blades to stop moving, and the whole turbine burned up.”

Weather-related exposures also come into play, Muth says; possible causes of loss include lightning and tornadoes.

Depending on the location of a wind farm, the liability exposure of a wind farm operator can be significant, Muth points out.

“When a wind farm is located along a busy highway, there’s always a concern when a turbine starts up and the ice flies off,” he explains.

As Hilsendager notes, however, “When it comes to causes of loss, there’s not a huge liability exposure. Owners need to carry the coverage, but it’s not terribly expensive.

“The majority of what we see is smaller breakdown issues,” Hilsendager continues. “A gear fails, or a computer board malfunctions, or the oil wasn’t changed. We still have a severity of exposures, but catastrophic losses are relatively rare. In terms of frequency, it’s the minor equipment breakdown incidents.”

Partnering with clients

The linchpin of Holmes Murphy’s dedicated wind farm unit, Hilsendager says, is its commitment to serving as a reliable business partner to its wind farm clients. “We all feel very strongly about this industry and about helping it succeed and prosper,” he says.

In line with that commitment, the agency has launched a new initiative to protect its wind farm clients and offer them the opportunity to stabilize their cash flows.

“We’ve evolved and taken the next step, which is to offer an insurance-backed extended warranty on equipment that takes effect after expiration of the manufacturer’s two-year or five-year original equipment warranty,” Muth explains.

The stand-alone warranty was developed in collaboration with AAER, Inc., a Canada-based manufacturer and distributor of high-capacity wind turbines in North America and Europe; the product is underwritten by an insurer domiciled in Canada.

The extended warranty is available for up to 10 years after the equipment is commissioned; it includes parts availability, direct and indirect labor costs, liquidated damages, and serial loss.

Wind turbine owners who want to purchase the extended warranty must demonstrate that they have adhered to the highest standards of equipment service and maintenance, and they also must keep meticulous records of service and repairs.

To determine a premium for the extended warranty, Hilsendager explains, the underwriter looks at how the particular piece of equipment has performed since being put into operation. “They look at the service log for the machine and make note of incidents where a part malfunctioned or downtime was involved, perhaps because of a major gearbox failure that affected the mobility of the machine,” he says.

“There are hundreds of variables that go into determining the premium,” Hilsendager continues. “How long has the oldest machine of this type been in operation? Six months? Five years? Those are huge factors in determining the reliability of a machine,” he says. “Who is the manufacturer of the blades, gearbox, or tower? Who is assembling the end product for you, or are you doing it yourself?” These and other factors also help the underwriter establish a deductible for the warranty.

Supporting manufacturers

In addition to protecting the owners of wind power equipment, Hilsendager says, the extended warranty also benefits manufacturers of the equipment—especially smaller and start-up operations.

“AAER is a perfect example,” he says. “It’s a small, second-tier company that had a huge need for a product like this; that’s true for a lot of second-tier manufacturers that struggle to sell their equipment because they don’t offer an extended warranty. We can step in and help them meet this need so they can sell their product. A company can manufacture a good product,” Hilsendager continues, “but if they can’t sell it, they’ll fail and the industry will never meet its produc-tion goals.”

To help larger wind turbine manufacturers, the Holmes Murphy wind farm team has developed an enterprise risk management mechanism that uses insurance to strengthen a company’s balance sheet.

“First-tier manufacturers like GE, Siemens, and other big players have to carry some liabilities on their balance sheet,” Rolfing explains. “In partnership with these companies we have put together a product that, depending on the manufacturer, could allow the company to pull tens or even hundreds of millions of dollars of liabilities off its balance sheet, plug an insurance product into that, and free up that cash to generate more profit.”

Notes Rolfing: “This approach cleans up the manufacturer’s balance sheet so that bond rating agencies will see it in a different light because removing the liabilities makes the balance sheet stronger and improves the company’s equity position. The balance sheet still carries some liabilities, but they are drastically reduced.”

The enterprise risk management technique is also beneficial to smaller, less established manufacturers, Muth comments. “We’re dealing with manufacturers that may have been in business for only three to five years,” Muth points out. “When a group of people wants to buy a turbine from one of these companies, whether they’re able to do so depends on their finance company.

“We are essentially renting our insurance company’s balance sheet to that manufacturer to make it stronger,” Muth continues. “When a finance company is considering whether to finance the purchase of a turbine, they know there will be a balance sheet to go after if the machine doesn’t perform as expected. That helps our manufacturer clients sell wind turbines.”

Because of the interdependence among wind farm owners, turbine manufacturers, and insurers, Hilsendager asserts, Holmes Murphy’s extended warranty is truly a mutually beneficial solution that exemplifies the firm’s partnership ethic.

“In every aspect of our operation, we do our best for each client,” Hilsendager declares, “and we expect them to reciprocate by being good partners to us. We want our clients to come to us with their concerns and needs and give us the opportunity to solve those issues.”

The winds of change are blowing—and the Renewable Energy Division of Holmes Murphy is spearheading solutions that offer stability and prosperity to all partners in this fledgling industry.