insurance as business enabler in financing of new...

Konferencja Aktuarialna Warszawa 2011

INSURANCE AS BUSINESS ENABLER IN FINANCING OF NEW TECHNOLOGIES

Jan Napiorkowski

Green Tech Solutions, Munich RE Hong Kong

INTRODUCTION

PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE

MARKET CHANGES – NEW RISKS IN PROJECT FINANCING

ADDRESSING THOSE RISKS – OPTION COVER

SUMMARY

INTRODUCTION

Survey among corporate risk managers worldwide – result:

“in average only 7% of all indentified risks are transferrable to the insurance industry”

Special Enterprise Risks unit to address them

Best way to start – first test case – Solar Industry

INTRODUCTION

Solar Industry

– high correlation between FiTs (Feed in Tariffs) and given long term performance warranties

FiTs Length of performance warranties

2-5 years

70Ec/Wp

INTRODUCTION

Solar Industry

– high correlation between FiTs (Feed in Tariffs) and given long term performance warranties

FiTs Length of performance warranties

25 years

25Ec/Wp

Investors see module long term performance as their main risk when

financing solar projects / correlation between FiTs / BEP and warranties

Provisions

INTRODUCTION

Reserving policy of PV module manufacturers unregulated

1 2 3 4 5 … 25

1 100 100 100 100 100 … 100

2 120 120 120 120 … 120

3 144 144 144 … 144

4 173 173 … 173

5 207 … 207

… … …

25 507

TOTAL

LIABILITY ∑ 100 220 364 537 744 … …

LIABILITY IN RESPECTIVE YEAR

YE

AR

OF

RE

VE

NU

E

RE

CO

GN

ITIO

N

All figures EUR

million

Author:

Estimating a 7% perpetual

growth

Not in place with many warranty conditions – constant exposure over time

Depreciation

UNREGULATED No clear reserve releasing policy, both time and value

Exhaustive and there is no reinstatement of protection (2% from one year of revenue for 25 years of liability)

INTRODUCTION




SUMMARY


Stakeholders

Policy

Structure

rating agencies

auditors

end - clients

banks’ / investors’

distributors

OUR

CONCERNS

manufacturers

…..

Providing significant risk transfer to the industry by securing insurer’s

concerns in a new industry at the same time


Policy Structure

ANNUAL LIMIT

years

TURNOVER

20%

2% DEDUCTIBLE

QUOTA SHARE

80% / 20%

25 2 2011


Pricing features – annual and serial degradation

1.1%

annual degradation

0.2%

210 Wp

200 Wp

Example:

Modules with nominal power of 200 Wp, positive binning (-0/+5%)

Expected annual degradation: 0.55%

(depreciation neglected for illustrative reasons)

2021 2035 2011

90%

80%


Pricing features

annual degradation

0.2%

210 Wp

200 Wp

Claim:

Insurance covers least performing modules

Due diligence has to be based on worst case and not overall production!

80%

90%

v

initial value distribution

initial degradation /

underlying function yearly degradation /

underlying function

Technology Mono- and polycrystalline modules with extensive in-field performance experience Thin-film technologies well understood in the lab – crucial is replicability of properties Next generation technologies (CPV, GaAs, …)

Manufacturing

process

Stability of electrical and physical performance measurements In-line statistical process control as well as in-line testing Clear process definition iro “value-added” manufacturing steps

Module binning Probably too little attention paid to so far Clear preference for binning in positive tolerances only Considerable tool of customer relationship management

Performance warranty

conditions

Guaranteed performance levels (linear vs. step-function); depreciation on module price No coverage of business interruption (impossible risk to mitigate for technology

providers over 25 years; pure operator risk)

MISC Module testing and factory audit in regular intervals by credible third parties Accessible project performance data monitored and provided by third parties Munich RE also analyzes the manufacturing process

OVERALL Munich RE does not and will not have a “white list” – manufacturing excellence is

regarded as a continuous job Excellence needs to be proven again over time

12


Pricing features – qualitative


Summary

Insurance as a

business enabler

2

3

4

1 Insuring

Insurance provides

significantly higher security

(also counterparty-wise) than

reserving

Insurance structure as

outlined can free-up reserves

Marketing

Customers prefer modules

from insured manufacturers

Edge for differentiation in a

competitive market

Reserving

Current reserving practice:

1.0% to 2.5% of turnover

Is there a clear accounting

rule stating when to use

reserves for claim payment?

Bankability stepping-stone

Munich RE as credible

counterparty taking on risk

PV manufacturers mostly

focused on the PV industry

only -> monoline business

model vulnerable to product

non-performance

Annual Limit

(10% - 20%

of turnover)

Policy Limit

Annual Deductible

(2,0% of turnover) Deductible

80%

Munich RE

20%

XYZ

13

INTRODUCTION




SUMMARY

15

Manufacturer

SOL Inc. Solar Farm Ltd.

20+ MW project

Munich

RE BANK



Non recourse financing


healthy situation

16

Manufacturer


20+ MW project

Munich

RE BANK

Non recourse financing


risky situation

17

Manufacturer


20+ MW project

Munich

RE BANK

underperformance

1. Module underperformance

2. Project’s cash in-flow reduced

3. Partial/total default on debt service

4. Financing banks have a credit event

non recourse financing


unhealthy situation

INTRODUCTION




SUMMARY

19

Manufacturer


20+ MW project

Munich

RE BANK

underperformance

1. Module underperformance

2. Project’s cash in-flow reduced

3. Partial/total default on debt service

4. Financing banks have a credit event

non recourse financing


Unhealthy situation

20

Manufacturer


20+ MW project

Munich

RE BANK

recourse financing

DSCR < defined trigger

=

Coverage payout triggered


Introduction – recovering from unhealthy situation

21

provides insurance to the mezzanine/senior debt only.

Equity = first loss.

1

Cash-Inflow is reduced due to a module performance drop so that debt

service is not satisfied.

2

insurance solution replaces non-performing modules so that project

performs rapidly again according to initial prediction.

3

Senior debt

Junior debt

10-20% equity insurance solution provides extra subordination in the illustrative project

finance structure.

4

Subordination

benefits (1) • Higher leverage in the financing structure possible. • Optimizing of financing cost.

Subordination

benefits (2)

• Insurance solution provides downside protection to all debt in the project. • Insurance solution can act as a business enabler to make project viable and attract

investors.

Subordination

benefits (3)

• Protection of senior debt only reduces the cost for insurance and delivers a similar security than providing protection to junior debt instead.

• Insurance solution the base for obtaining a project rating – essential for IPP model.


Introduction

Option Cover main features

22

1. No black out period

2. Limit for the option cover is:

•no stretch allowed

•the module value depreciates according to debt clearance rates

3. Deductible = Equity in the project

4. No Quota Share retention

5. Loss Trigger is:

•Modules’ underperformance

•AND Manufacturer’s insolvency

•AND is defined in details via the DSCR

6. The premium depends mainly on:

•the corporate rate

•project size

•DSCR

7. The premium is being paid by the equity in the project – allows to

incorporate it into the capex and have it financed

INTRODUCTION




SUMMARY

SUMMARY

Policy

Structure

rating agencies

auditors

end - clients

banks’ / investors’

distributors

OUR

CONCERNS

manufacturers

…..

First recourse financing possibility for Renewables

© 2010 Münchener Rückversicherungs-Gesellschaft

Risk Solutions

Imprint

Münchener Rückversicherungs-Gesellschaft

Aktiengesellschaft in München

Königinstraße 107

80802 München

Briefe: 80791 München

Tel.: +49 (89) 3891-0

Fax: +49 (89) 3990-56

[email protected]

www.munichre.com

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