Captives part of solution in big energy projects with climate exposures: Panel

BURLINGTON, Vt. — The growth in large-scale facilities like data centers and renewable-energy projects in areas prone to natural disasters underscores the need for better risk management, and captives are part of the solution, experts said Tuesday.

Global insured losses from natural catastrophes reached $145 billion last year, with 80% of that in North America, said Daniel Raizman, Boston-based global head of client engagement in Aon’s climate risk advisory division.

That trend has continued this year, with over $100 billion in natural catastrophe insured losses so far, outpacing the 21st-century average, Mr. Raizman said during a panel session at the 40th annual Vermont Captive Insurance Association conference.

This year’s record pace has been fueled by California wildfire losses and severe convective storm activity across North America, he said.

“It’s easy to say the higher losses are driven by climate change,” but it’s also important to recognize that more people are in harm’s way, he said. “In Florida, for example, there’s been a doubling of the population since 1990.”

AES is seeing significant growth in power demand, fueled by artificial intelligence and data centers, said Andrew Baillie, Haymarket, Virginia-based director of global insurance for the global energy company.

The scale of renewable-energy projects, especially solar, is growing significantly to respond to that demand, which is creating a coverage gap, Mr. Baillie said.

Ten years ago, “if you built solar power, $50 million was a really big investment. Now, we’re developing solar projects exceeding $1 billion,” he said.

“That’s a lot of solar panels, a lot of glass. If you put it in a place where you’ve got the potential for a hailstorm or for a severe convective storm, it gets expensive really quickly,” he said.

If a $1.3 billion project were built with however many solar panels on 8,000 acres in Arizona, “the likelihood is I’m not going to get full-value coverage for all my natural catastrophe perils,” he said.

If only $250 million in coverage can be purchased in the commercial market, the gap between $250 million and $1.3 billion presents a balance sheet risk to the company, Mr. Baillie said.

“It’s not the captive’s job to take that risk. It’s our job as an insurance group to identify the exposures. Then the senior management has to make a decision on how to deal with that,” he said.

AES uses a mix of tools to manage climate exposures. “Sometimes risk transfer is the right answer, sometimes balance sheet risk is the right answer,” Mr. Baillie said.

It’s difficult to buy sufficient natural catastrophe limits for Gulf Coast assets, said Kevin Kachur, Toledo, Ohio-based insurance operations director at Marathon Petroleum.

“We’ve got sublimits in place and that’s where our captive can be part of the solution,” Mr. Kachur said.

Educating the management team about how the captive works is key, he said. “For some executives it’s a bit of an enigma. They don’t truly understand it and appreciate that it’s just another form of self-insurance,” he said.

Captives allow the company to have a strong partnership with insurers, “because they can partner with a company that’s taking a big first bite of the apple. It’s assuming risk and it’s just as incentivized to make sure that they’re avoiding significant losses,” Mr. Kachur said.