Hurricanes are impressive, nobody will deny that. I confess, they make me feel meaningful, too. When I talk about hurricanes with people outside the re/insurance industry, and speak of the dazzling wind speeds, the resulting damages, the incurred costs (in the tens of billions!), my audience's attention is held captive and I feel that our jobs really add value as our company helps absorb a significant portion of the economic loss.
This being said, our industry can also help societies become more resilient by insuring for the exact opposite -- the absence of wind – an issue common in developing countries. Picture a wind farm with 100 turbines. It's expected to generate USD 60 million of income in an average year. Surprisingly, the wind doesn't blow the same way every year. Deviations of 15% are quite common from one year to another. So, for the coming year, the power generated by the wind farm could very well be 10% below expectations, or even lower. After the consideration of operating costs, a 10% reduction in revenue is likely to result in a loss.
With the help of index-triggered products, we can offer an insurance solution for the revenue shortfall due to the lack of wind. This is how it works: Based on the turbine specifications, we calculate the power generated for a given wind speed. We then use NASA data, for example, to get the wind speed for every hour of the day and every day of the year. This provides the total power generated for the year by the wind farm, on a purely parametric basis, with negligible basis risk. If the power is below the expected threshold, the index product pays for the difference (up to a deductible). These products can also apply to solar farms (lack of sun) or hydro-electric stations (lack of rain).
I was recently invited to present these index-triggered products at a USAID forum on the risks related to climate change. The reaction of the 100 attendees from government agencies, NGOs and financial institutions across the world was overwhelmingly positive. As a result, USAID will help us by carrying out research on the specific needs in three countries in Central America (El Salvador, Guatemala and Honduras). That's a great start!
We have the opportunity to make a difference in the Renewable Energies sector with index-triggered products. Let us know your thoughts or any specific opportunity you see!
Category: Climate/natural disasters: Climate change, Resilience, Sustainable energy: Wind