Day was already breaking when the pungent smell entered the homes of the 50 inhabitants of Elsa, a village in Upper Franconia: a quarter of a million litres of liquid manure had leaked into the village on a winter evening in 2006 and was gradually spreading through the streets. A silo had ruptured in the nearby biogas plant. “It was one of the worst biogas-related accidents we’ve seen around here,” recalls Thorsten Land, GDV spokesman for property and engineering insurance, loss prevention and statistics. The fire brigade used earthmovers to make barriers out of snow and halt the advance of the liquid manure. The farmers and fire brigade finally drained it all away. The damage was massive. Renewable energies are a consistently growing business area for insurers. For 20 years, they have been covering the risk of solar panels burning, wind turbines falling or biogas tanks leaking. None of these projects could happen without insurance cover. At the same time, insurers have invested about EUR 6 billion in German green electricity plants alone. Sustainable projects are an ideal fit for the insurance investment strategy. Already 56 percent of their capital investment volume is actively managed according to sustainability criteria, trending upwards.
It started in 2000, when the red-green coalition government passed the Renewable Energy Sources Act (EEG). Since then, the government has been promoting electricity production from renewable sources, including sun, wind and biomass. This did more than fundamentally change energy production. “An entirely new engineering insurance market arose, especially for technology-related property, for example large power stations or photovoltaic plants,” says Land. All of a sudden, insurers were no longer just looking at large central power stations, but also had thousands of smaller systems to contend with, all the way down to solar panels on family homes.
Solar energy set to double by 2030 - Provided it is properly insured
The energy revolution has been proceeding steadily since then. There is still a lot of business potential out there for the sector. In fact, the Federal Cabinet approved an amendment to the EEG in the autumn. The objective: to make Germany CO2 neutral by 2050. As an interim step, 65 percent of electricity is to be produced from renewable sources by 2030. The amendment therefore stipulates extending energy production facilities. Photovoltaic power alone is set to almost double over the next ten years across Germany from its current level of 52 to 100 gigawatts. In this new energy world, there is more than enough business to go round for insurers: the German Environment Agency reported over 740 accidents at biogas plants in 2017 alone. The risk posed by photovoltaic installations on the roofs of private homes is also often underestimated: although they rarely start fires, they can aggravate them. Then there is storm damage to large offshore wind turbines, which can run into the millions.
Green electricity was uncharted territory for insurers. They learned some costly lessons
Two decades ago, renewable energies came at the right time for engineering insurers. The market was saturated, leading to cut-throat competition among the market players. The only way to grow in most lines of the German insurance sector was for companies to take business off each other. Nevertheless, when the new market emerged as an opportunity, insurers quickly realised that it also brought new risks. Naturally, they were largely inexperienced in that segment. Renewable energies were new territory without any reliable loss statistics. Risks and default rates were unknown, recalls GDV expert Land. “The business didn't start well for many.” During the initial phase, providers often had to insure prototypes being used for the first time. According to reports from the sector, default rates were immense back then. During the initial years, engineering insurers had claims ratios for renewable energies of up to 300 percent. Or, to put it another way – claims costs were more than three times premium income for said claims.
Now, claims ratios are mostly at normal levels. “Insurers have learned from their mistakes,” says Land. This is also due to the green electricity sector using fewer new innovations. Many technologies have matured, and the equipment is mass-produced. This has brought down the default rate. “All in all, engineering insurers have profited from the renewable energy market,” says Land. About 16 percent of their EUR 2.3 billion premium income comes from green electricity plants. That amounts to EUR 360 million, trending upwards. That does not include photovoltaic or solar thermal installations on private houses – they are included in building or household contents insurance. Versicherungskammer Bayern (VKB) sees enormous growth potential, particularly for private building insurance with on-roof solar panels. That business line already accounts for about 30 percent of their entire premium volume with policies for about 130,000 photovoltaic installations. “The German photovoltaic market in particular still isn't saturated,” believes Sebastian Brandl from the Versicherungskammer. The new Buildings Energy Act (GEG) will probably increase demand as it obliges builders to use at least one renewable energy source for new builds, for example a solar roof installation. It remains to be seen what that means in terms of insurance.
Mixed outlook for wind power – the expansion is stalling
The situation with wind energy is not so straightforward. Having peaked in 2017, wind turbine development has since collapsed. This is mainly due to residents’ complaints, delayed approval procedures and unfavourable rules governing the tendering process for wind farms. A rule came into force this year whereby the Bundesländer (federal states) can stipulate minimum distances of up to 1,000 metres from residential property. On the one hand, that may allay public concerns, although it could also mean that many potentially suitable wind turbine sites suddenly become ineligible. That aside, the wind farm sector is working to achieve greater public acceptance, says Sven Müller, Head of Engineering Insurance at the Haftpflichtverband der Deutschen Industrie (liability association of German industry) (HDI). It remains to be seen whether investors will renew their interest in wind energy, thus presenting new business opportunities to insurers. Versicherungskammer Bayern, for example, no longer covers wind turbines.
The new growth market: hydrogen infrastructure insurance
Hydrogen, on the other hand, has potential. It could play a big part in the energy revolution as it can be used to store green energy. The federal government has recently put the issue on the agenda with its hydrogen strategy. “Hydrogen may well be of interest to German insurers over the next five years,” forecasts GDV expert Land. The HDI is fielding initial enquiries. “We have been following developments concerning this energy carrier with great interest for months now,” says Müller (HDI). Meanwhile, electromobility business is booming and the HDI is already involved in that by insuring the charging stations. Demand is growing in that area, but at the same time, the business line is not without its challenges – for example, cover for freely accessible charging stations is excluded. “They keep getting vandalised,” says Müller. The sector has now learned that renewable energies present both opportunities and risks.
Mariam Misakian and Marilena Pieske