Environmental exposures drive energy companies to captives

BURLINGTON – Concerns about climate change are prompting more companies to embrace green technology, but the move is changing the nature of the risks they must manage, sometimes increasing their exposure.

As commercial insurers face significant climate-related risks, they are using captives more, a panel of experts said.

Losses from natural catastrophes remain high, with global insured losses expected to exceed $100 billion for the fourth consecutive year in 2023, said Daniel Raizman, global head of client engagement at Aon PLC’s climate risk advisory division in Boston.

And the trend continued into 2024, with U.S. insured losses from severe convective storms reaching just $39 billion in the first half of the year, he said during a Wednesday session at the Vermont Captive Insurance Association’s annual conference.

Much of the increase in disaster exposure is attributed to demographic changes as more people move to coastal areas, but climate change is also likely contributing to the increase, Mr. Raizman said.

As threats from climate change increase, companies are looking to alternative energy sources, but the shift to green energy production can also increase risks, said Andrew Baillie, Haymarket, Va.-based global insurance program director for AES Corp., a global energy company.

For example, AES has a coal-fired power plant in Puerto Rico that Category 5 storms have hit three times without going offline, he said.

“The next time a Category 5 storm comes over a solar farm in Puerto Rico, it won’t be the same response,” Mr. Baillie said.

In addition, renewable energy sites can have very high values. For example, AES builds more than $1 billion worth of solar panel solar facilities in concentrated areas, and often the commercial insurance coverage available is a fraction of the value of the panels, he said.

“The protection gap is huge between value at risk and what you actually want to be able to protect,” Mr Baillie said.

AES is using more of its Vermont-domiciled captives to cover exposures, he said.

“Our money comes first, so we are committed to risk engineering and have three engineers on our staff,” Mr Baillie said.

Climate change also increases exposures for the Lancaster County Solid Waste Management Authority in Lancaster, Pennsylvania, which operates two waste-to-energy facilities and waste management facilities, said Chief Financial Officer Daniel Youngs.

Waste management organizations have experienced more catastrophic fires in recent years, increasing insurance rates, and the nature of the materials they process is changing as they grapple with the risks of renewable energy, such as old solar panels and used batteries for green energy storage, which are fuels, he said.

LCSWMA established a captive in 2021 in response to higher rates, reduced capacity and increased coverage exclusions, Mr. Youngs said.

“The captive generated a vehicle that allows us to be differentiated,” he said. “It also allowed us to take more risk and put more skin in the game.”