'A huge education piece is needed' - The role of insurance in financing and infrastructure resilience

As part of our Resilient Infrastructure series, we sat down with Andy Cox, Head of Energy Transition at insurance group Howden, to discuss the industry's role in building assets that last.

When talking about resilience, is there still a gap between what insurance can offer and what owners or investors think it can do for them?

It never ceases to amaze me. Whether you're an investor, a lender or a sponsor of a project, there is a lack of understanding and a huge education piece needed. Insurance is still seen as a necessary evil; but what people are failing to do is think about the power of insurance when it comes to being part of the financing, the capital stack, and the whole risk management framework around a project, and how the insurance can transfer so much of that risk.

People don't appreciate the size of the balance sheet that can carry that risk rather than let it sit in a project and see it drive up cost of capital. Overall, the power of insurance is on the financing side, where it can manage the regulatory and technological risks. That is less talked about.

Can you give us a couple examples: what does that look like in terms of the products available?

One that is becoming more popular to talk about is what we call technology performance risk. Banks hate lending to projects that are less than very mature technologies with long run times. Insurance markets look at it differently. We have developed a product that supports first-of-a-kind type projects, or pilot projects looking to scale.

People talk about the 'Valley of Death' – going from when you've had your early stage money going into a project and a pilot that works with your tech and you now want to really scale it. That's the challenge, getting capital through the banks to come in at that point. 

What we've done is develop a product with specialised markets in insurance that are out there. It does two things. Firstly, it wraps around the technology and underwrites the efficacy of that technology. If it doesn't work how it was meant to work, the insurance company will step in to the debt repayments and continue repaying the debt. But secondly, it puts some capital to work to try fix the problem. If it can't be fixed, it'll repay the entirety of the debt. Obviously, it's not a low premium on something like that, but it's priced in a way where it makes sense for the project economics to work anyway. 

Where have you deployed these tools, have they been deployed in renewables, batteries or nuclear, for example?

Wind and solar, but battery projects as well. That is starting to pick up. Part of the challenge is people are not aware of it. One of the areas is around carbon capture and storage. The capture element of that in particular where there are OEMs behind that technology which don't always have the strongest balance sheets. 

You're also Head of Energy Transition at Howden. How do you see the split in attention between de-risking new projects and keeping existing assets in an insurable state in the context of climate change?

Over the last couple of years, most of our time was spent on the pre-FID piece in the financing, that still takes up a lot of our time. But more and more you see extreme weather events and ageing infrastructure. Despite the rhetoric around ESG and the backlash around that term, we are seeing more scrutiny around existing assets; lenders are looking into them and pushing for more resilience measures and insurers thinking about that in terms of premiums. It's more like 50/50 in terms of our attention now and I think that's about right. The need for financing and de-risking of the financing is still so important, so that'll continue.

When you're looking at renewing cover on an existing ageing asset, what does that look like in terms of enhanced due diligence on your side and understanding the state of the asset?

The due diligence being undertaken by underwriters has increased significantly in that regard. I would say, as a broker ourselves, we've employed more risk engineers into the team. We have more specialists who understand the details behind these assets. We are using them even more, it's a part of our business growing considerably at the moment.

Do you think the market understands what you've learned in terms of what is and isn't effective when it comes to prevention or protection strategies and feeding that back into the underwriting process? 

People are starting to appreciate the amount of data and analysis that exists in the insurance world. These models are more and more sophisticated, right down to the asset level. AI means some of this can be done much quicker as well. As a broker, we are one step removed from that, we pick up some of the lifting but the real deep modelling is at the insurer level. AI is likely to disrupt some of that.

What part can insurance play in helping build resilience into the design and operation of assets in the longer term? 

Traditionally, it's thought of too late and not being built into the design process, but that is starting to change. More partnerships are needed between the developers and the insurance company. Rather than just a conversation at the end, think about all the data and information the insurers have which can feed into this. We're starting to see more of that, as opposed to just wanting a phone call for a policy to wrap around a risk at the last minute. 

Do you think the industry has a seat at the table in terms of regulated design standards?

It's not been used enough. But governments, investors and operators are starting to think about things like annual average loss and probable maximum loss. Those sorts of insurance-grade analytics are starting to be built when they're designing risk frameworks. 

Do you think insurability is a sufficiently prominent topic of conversation at board level for asset owners?  

I come from a world of sitting at that C-suite table, having strategic conversations about deploying capital, but I really noticed the lack of insurers in that world. Insurance has been seen as a procurement exercise with a junior risk manager and about lowering annual premium. It should be much more involved in the decisions around allocation of capital. What it means is insurance players are not used to those strategic conversations, but that is starting to change. 

What role do parametric type products have in building resilience in infrastructure assets? 

The term parametric has been used more and more. I think of it as a way of using an index to set a floor and act as a trigger on insurance and simplify the process and hasten the speed at which losses are covered. Hurricanes are becoming more common. If you bring it down into infrastructure, we've seen it used to set a floor on wind resource, so on the volatility of wind, if you're looking at a wind power project. How can you put a floor to that wind resource through a parametric trigger? By putting in that policy, we've seen the banks become more comfortable and be able to size the debt to a greater extent. We've seen it in other renewables too. 

Now that parametric is being understood, people are starting to explore more areas where it can be applied.

Is the index linking what provides the certainty for the payout?

The trigger gets agreed upfront before anything happens. It's a matter of fact, not something where you need a loss adjuster come in assessing a situation. It's a matter of fact that a trigger has been hit.

What should leaders be prioritising now to improve resilience in their assets, and how does insurance play into that?

Embedding insurability in the boardroom and changing the mindset of how people think about insurance. Looking at the risk analytics and scenario modelling, getting more sophisticated in those areas. There is the climate action planning, of course, which continues to be required, underwriters want more of that.

But mainly building partnerships with insurers, collaborating to find a solution for a problem, not just a third-party you go to in a moment of need.