Marketing

Renewable energy: Big risks, smart solutions

PER se, a unit of Ryan Specialty Group, brings skill and savvy to this challenging market

By Elisabeth Boone, CPCU

With oil and gas prices once more on the rise, the spotlight is on the use of techniques to extract oil and natural gas from shale deposits that previously were inaccessible. Hydraulic fracturing—or fracking, as it's colloquially known—has both avid supporters and fierce detractors; the former see the technique as the pathway to vast new supplies of cheap fuel, whereas the latter point to environmental damage and continued reliance on fossil fuels as the primary source of energy in the United States.

Amid this controversy, it's worth asking: What about renewable sources of energy? Solar, wind, hydro, geothermal, biofuels—each in its turn has generated excitement among scientists and consumers alike, and each has enjoyed a measure of success mixed with challenges and setbacks.

For Mike Bernay, renewable energy represents not just the future but the present for clean, affordable power. As managing director and chief executive officer of Per se^®, a managing general agency that specializes in arranging insurance for renewable energy power facilities worldwide, Bernay heads a team of underwriters who bring both depth and breadth of experience to this challenging market. Patrick Stumbras is managing director and president of Per se's New York office, and Jeffrey Smith is managing director and executive vice president of underwriting at the firm's headquarters in Newport Beach, California. Mark Hennessey is managing director and executive vice president of technical services.

Established in 2011, Per se is a unit of RSG Underwriting Managers, LLC, which is a subsidiary of Ryan Specialty Group, LLC. Per se (PER stands for Power Energy Risk) offers property and casualty coverages for wind, solar, biofuel, hydro, geothermal, and other renewable energy power facilities. Coverage is provided for all phases of the project exposure cycle: development, ocean marine transit, delay in startup, contingent delay in startup, construction all-risk, testing and commissioning, phased hand-overs, operating all-risk, business interruption and contingent business interruption, mechanical and electrical breakdown, critical catastrophe, and third-party liability. Policy forms are manuscripted to meet the specific requirements of project lenders as well as contractually required coverages for power production facilities.

Per se recently launched a new facility for renewable energy suppliers: cargo and stock throughput coverage that can be written on a stand-alone basis or integrated into a property program. Limits are available up to $150 million per conveyance and can include either a DSU (delay in startup) or contingent DSU component.

Another new offering is a policy that covers up to $40 million of the primary exposure on tax risks associated with investments in energy projects. Coverage applies to all non-excluded perils that give rise to an identifiable event if the event becomes a proximate cause of loss and was not within the control of the insured. The tax coverage can be written as a stand-alone policy or endorsed onto a property policy.

Global and growing

"Renewable energy is truly a global business, and we write risks worldwide," Bernay says. "Our primary lead capital providers are Ascot, a syndicate at Lloyd's, and AXIS Specialty Europe LLC, which is ultimately based in Bermuda. With these markets we have capacity in excess of $500 million per project, and that allows us to meet the needs of our clients virtually anywhere in the world. We've just formalized our third agreement, with Royal Sun Alliance on an international basis. In the two years since Per se was established, we have written accounts in Australia, Poland, Nicaragua, and throughout Europe," he says.

"That said," Bernay continues, "when we started Per se, we made it clear to our capital providers that the base of our business was going to be in the United States and Canada. We focus on North American-based risks because the projects tend to be bigger and the terms and conditions are more favorable; this allows us to be both more flexible and more profitable for our capital providers. We can cover risks throughout the world, but right now there's enough in our own back yard to keep us busy," Bernay asserts.

Of the renewable energy facilities for which Per se arranges coverage, wind represents 60% to 70% of the firm's book. "That's because wind is still the most efficient of all the renewables," Bernay explains. "It's also the best known and is the most popular source worldwide."

Over the last three to five years, Bernay says, "Solar has started to come on board, and every year it becomes more efficient and cost-effective. As a result, solar is attracting a lot of attention from venture capitalists, private equity, and other funding sources."

Because wind projects tend to be large operations with high values at risk, Bernay explains, they require so much capacity that relatively few players compete for these accounts. In solar the opposite is true; operations are smaller, so competition is brisk in this market.

An emerging source of renewable energy is geothermal. "It's becoming popular, but it's available only in areas that have an underground fuel source. There's a lot of opportunity there, and the technology and efficiency are improving significantly," Bernay comments.

"The same is true for biofuels and biomass, both of which are emerging sources. Hydro is essentially status quo, and we don't write large hydro facilities. We look for smaller, run of the river projects that make up a portfolio; the largest group of hydro projects we write is perhaps $80 million to $100 million. There are a lot of hydro projects in the U.S. Northwest and throughout Canada, but the challenge is that most of these facilities were built 20 or 30 years ago. Few if any new projects are being built now because of permitting and regulatory issues, so a lot of facilities are being retrofitted while others continue to operate without upgrading."

There's plenty of buzz about the use of hydraulic fracturing to extract oil and natural gas, Bernay acknowledges, but he doesn't see it adversely affecting the ongoing development of renewable energy sources.

"I don't think it's going to be a game changer when it comes to renewables," he says. "What I hear from people on the renewable side is that it represents an opportunity to partner with the oil and gas operators, as opposed to competing with that industry. I think the owners of renewable facilities are realistic; they know that wind turbines only work when the wind blows, and solar plants only work when the sun shines. Down the road, I believe we're going to see more hybrid projects between renewable operators and traditional fossil fuel facilities," Bernay remarks. "For example, when there's not enough wind to power the turbines, we'll likely see a gas engine running some gas turbines. We're not there yet, but I think that's the future for energy production."

A win-win

Each unit of the Ryan Specialty Group is headed by a seasoned veteran who brings talent, experience, and enthusiasm to the venture. No one is better connected in the specialty market world than RSG's chairman and chief executive officer, Patrick Ryan, and few can rival him as a judge of character and ability. When Ryan approached Bernay about taking the top post at Per se, Bernay was enthusiastic and at the same time knew he had to ask himself some serious questions.

"Several of us from our previous organization made the move at the same time, once we were satisfied that there were good reasons to do so," Bernay says. "We had a lot of discussions with Pat about the kind of culture he seeks to establish in his MGAs: an entrepreneurial environment that focuses on building relationships and adding value. Those were exactly the qualities we valued and were seeking in a partnership with Ryan Specialty."

What's more, Bernay says, "Pat understood the MGA model and grasped the importance of its being practical and sustainable. We were building an underwriting business, not a brokerage business."

In that regard, Bernay and his colleagues liked the fact that Ryan Specialty Group is an independent entity. "The fact that RSG isn't part of a larger broker organization is really important to us, because we have the flexibility to make decisions that best serve our clients' interests," he says.

"Another advantage of partnering with Pat is that he attracted a lot of strong capital providers. We already had credibility in the market, but becoming part of RSG greatly enhanced our appeal to markets," Bernay comments.

Pat Ryan is often quoted as saying that a key objective for his organization and its specialty units is to bring "differentiating creativity and differentiating expertise" to the markets they serve.

"I think he identified us as being able to do that, and that had always been our model," Bernay says. "Renewable energy is a highly specialized niche market, and it's all we do. From the start, we've taken a strong interest in the activities of our insureds, and we've become their partners. We support their associations and their lobbying groups, and that gives us access to people we otherwise might not be able to reach."

Eye on risk management

In the renewable energy field, with its complex and expensive equipment, loss control and risk management are vital adjuncts to comprehensive coverage. "We use sophisticated techniques to help our clients prevent losses, and we act swiftly and decisively when a loss occurs," Bernay says. "We start by reviewing a client's contracts to identify exposures, and we provide guidance in drafting contracts to minimize those exposures."

In the renewable energy industry, Bernay observes, it's not a question of whether a facility will have a loss but when a loss will happen. "I tell our clients: 'If you're in renewables, you're going to have losses,'" he declares. "When a loss occurs, it has to be mitigated quickly and an array of resources must be marshaled to turn the situation around with a minimum of downtime."

At Per se, Bernay says, "We've built a reputation for doing just that, and we have some great stories to tell our prospects." Here's one:

"Recently we had a substantial fire loss on a large wind energy project that had just been completed; the damage was estimated at between $2.5 million and $3 million," Bernay says. "We do all our own adjusting, and we sent our adjuster to the site along with a fire expert and a metallurgist. We also invited the manufacturer to be part of the adjustment process. After all the cause of loss reports came back, we were able to show where the loss occurred and prove that it was a warranteed loss. By spending about $200,000 to retain the experts, we were able to save our capital providers over $2.5 million; in the end the claim was settled for about $100,000."

That sounds a lot like Patrick Ryan's mantra at work: differentiating creativity and differentiating expertise.

For more information:

Per se

Web site: www.powerenergyrisk.com