Post on 09-Jul-2020
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
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
ADDRESSING THOSE RISKS – OPTION COVER
SUMMARY
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
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
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
Policy Structure
ANNUAL LIMIT
years
TURNOVER
20%
2% DEDUCTIBLE
QUOTA SHARE
80% / 20%
25 2 2011
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
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%
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
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
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
Pricing features – qualitative
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
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
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
ADDRESSING THOSE RISKS – OPTION COVER
SUMMARY
15
Manufacturer
SOL Inc. Solar Farm Ltd.
20+ MW project
Munich
RE BANK
Performance warranty
Performance warranty
Non recourse financing
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
healthy situation
16
Manufacturer
SOL Inc. Solar Farm Ltd.
20+ MW project
Munich
RE BANK
Non recourse financing
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
risky situation
17
Manufacturer
SOL Inc. Solar Farm Ltd.
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
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
unhealthy situation
INTRODUCTION
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
ADDRESSING THOSE RISKS – OPTION COVER
SUMMARY
19
Manufacturer
SOL Inc. Solar Farm Ltd.
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
ADDRESSING THOSE RISKS – OPTION COVER
Unhealthy situation
20
Manufacturer
SOL Inc. Solar Farm Ltd.
20+ MW project
Munich
RE BANK
recourse financing
DSCR < defined trigger
=
Coverage payout triggered
ADDRESSING THOSE RISKS – OPTION COVER
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.
ADDRESSING THOSE RISKS – OPTION COVER
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
PHOTOVOLTAIC PERFORMANCE WARRANTY COVERAGE
MARKET CHANGES – NEW RISKS IN PROJECT FINANCING
ADDRESSING THOSE RISKS – OPTION COVER
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
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Aktiengesellschaft in München
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80802 München
Briefe: 80791 München
Tel.: +49 (89) 3891-0
Fax: +49 (89) 3990-56
corporate-insurance-partner@munichre.com
www.munichre.com