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Arbol: enabling climate risk transfer in renewables and reinsurance

InsTech’s Henry Gale recently spoke to Sid Jha, Founder and CEO, Arbol, to discuss the climate risk challenges faced by the renewable energy and insurance sectors and how Arbol is helping address them in 2024.

Turbine troubles

The renewables sector is growing fast. In 2023, the total amount of new renewable energy generation capacity added to the grid worldwide increased by 50% in 2022, according to the International Energy Agency.

As renewable energy projects scale, they continue to face fundamental challenges from the weather and climate.

Because wind speeds and sunshine are volatile, it is difficult to predict how much energy will be produced by a wind or solar farm. This makes it hard for firms to forecast their revenue and raise capital.

Sid Jha, Founder & CEO at Arbol

Government policy is another issue. While some renewable energy subsidies and support are starting to be withdrawn, there are also new incentives such as Production Tax Credits (PTCs) and Renewable Energy Credits (RECs) in the US. PTCs provide a tax credit to energy producers based on the energy they generate from renewable sources, while a REC is a certificate proving that 1 megawatt-hour of energy has been generated from renewable sources.

Since the US passed the ‘Inflation Reduction Act’ in 2022, renewable energy producers can sell the PTCs and RECs they earn. But any income from these assets is also volatile: wind farms will earn fewer credits if there is insufficient wind.

Meanwhile, extreme weather conditions can cause physical damage. A large quantity of the physical losses faced by the solar sector is caused by hail, with single events causing tens of millions in losses.

Transferring weather risk

These challenges are increasing demand from the renewables sector for parametric risk transfer from providers such as Arbol. Founded in 2018, Arbol exists to turn climate risk into an asset class. It offers insurance and derivative products to help companies across industries manage their climate risks and connects them with capital from insurance and alternative markets. In 2023, the company secured Lloyd’s coverholder status, supported by Beazley.

This year, Arbol expects to grow its presence in the renewables sector. There are increasing numbers of solar farms seeking parametric insurance for hail damages, while Sid described some of the organisations that are working with Arbol already to cover production risk.

“There are many organisations that own a portfolio of, for example, wind farms across the southern US. The performance of such a portfolio will vary by wind speed at the different locations. It can be useful to put a floor on the production quantity: if the portfolio produces less energy than a certain threshold, an insurance or derivative product pays the difference.

“Another example is a trader or utility operator that needs to balance supply and demand in real time. If one section of the grid sees a sudden spike or drop in energy production, this affects the price, so these organisations may choose to hedge their exposure to regional winds or sunshine.”

Reinsuring frequent climate risks

Another area of recent growth for Arbol and a focus for 2024 is reinsurance. Sid explained that insurers underwriting property coverage are struggling with climate risks and the reinsurance market is not fully meeting their needs.

“For a reinsurer, the ideal risk is a more remote one. A 1-in-20, 1-in-50 or 1-in-100-year event, whether a hurricane, wildfire, tornado, hail event or something else, is easier to find reinsurance for. It is harder for companies to find reinsurance for 1-in-3 or 1-in-5-year events.

One of the reasons why more insurers in the US have been going bankrupt recently is that losses from these more frequent, less remote events are eating into their surpluses [a surplus is the capital an insurer sets aside as a buffer to pay claims in unforeseen circumstances]. With climate change increasing losses and tight monetary policies making it harder to raise capital to replace lost surplus funds, insurers are worried.

Sid Jha, Founder & CEO at Arbol

Sid explained that Arbol structures parametric policies designed to help insurers transfer extreme weather and catastrophic risks that are not as remote as those covered by traditional reinsurers. Taking into account the location and value of each property an insurer covers, Arbol can create a model of the portfolio.

The reinsurance policy pays out based on how the physical characteristics of an event affect the modelled portfolio. For example, a proportion of the value of all the insured homes within a certain distance of a hurricane’s track. The structure of the policy can be customised to cover the lower layers of risk to an insurer’s portfolio.

In April, Arbol announced the launch of Lilypad Insurance, a carrier dedicated to serving the insurance needs of homeowners and property investors in coastal areas – in which 40% of the U.S. population currently reside.

The power of parametric

The market for parametric risk transfer is growing fast, enabled by companies like Arbol developing new products to fill gaps in coverage for renewable energy firms, property insurers and others. 

As the market scales, Arbol follows. In May, Arbol closed a $60 million USD Series B funding round led by Giant Ventures and Opera Tech Ventures. 

Arbol is interested in speaking to energy brokers, property insurers and reinsurance brokers to understand more about the climate risks they and their clients are facing and see how Arbol can help.

“We often talk to brokers who are aware of parametric insurance but have only seen one or two parametric deals before, sometimes a long time ago. Now the market is changing rapidly: we encourage people to come with an open mind and see what we can do for their clients.”

You can get in touch with Arbol by visiting arbol.io.

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