Protecting assets, operations and revenues with insurance794... · Protecting assets, operations...

General Public Release

Operations & Maintenance for offshore wind

Protecting assets, operations andrevenues with insurance

Deborah DussStuart Brown


• Reducing your total operational cost

• How optimized risk transfer protects your revenue

• The value of hedging – new approaches to managing wind energy risk

Agenda

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We have more in common than you think

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Cost position:Remembered whenit goes wrong

Cost savings

Revenue protection

Rapidly changingtechnology

We are more than arisk taker


What drives your insurance costs?

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Risk mitigation

•Warranty•O&M•Preventive risk

management andcontingency plan

Historical performance

•Loss frequency andamount

•Lessons learned andaction plan

Extent of coverage

•Property Damageonly or BusinessInterruption as well

•Self insuredretention, limits andextensions

Wind farmcharacteristics

•Site•Technology•Age


How to cope with uncertainty

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Are youprepared?

Redundancy

Technology risk,warranty andcertification

Contingency BI risk


Reduce financial volatility

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Remaining risk(corporate retention)

Warranty, design risk

Scheduled maintenance, inspection,online CMS

Force majeure and unscheduledmaintenance, risk mitigation, risktransfer of asset and operationalexposure (e.g. weather)


In a world without offshore wind subsidies andunstoppable growth

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•Specialist companies find nichesalong the value chain of O&M

•New types of company andbusiness model are on the rise

•Key worry remains businessinterruption, who owns theinsurable interest in the assetsand services?

•Rapidly growing sector moves fromsingle project to portfolios

•Merchant market increases volatilityof financial results

•Proper, tailor made risk transfer is amust to reduce volatility of financialresults and allow continuousinvestment

•Holistic covers combinemultiple risks and orinterdependent triggers andallow better alignment to thespecific risk transfer needs ofan insurance buyer


Wrap up - optimal risk strategy

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αTail riskγ

Cat risk

σStandardDeviation

μExpected

loss

Loss Distribution and FinancingLoss Distribution and Financing

LossProbability

LossSize0

99th

percentile

CashFlow

Technic.reserves

Profit EquityAbility for

refinance

Reduction of volatility translates into cost savings


Exposure Weather phenomenon Trigger

Delays in delivery of keycomponents

Wind, storm Storm occurrence

Set-up and moving of jack-upplatforms

Wind, wave height Wind velocity, wave height

Down time for cranes, hoists,lifters

Wind, wave height Wind velocity, wave height

Cable laying Wave height Wave height

These risks are typically priced into the contractors' bids and/or negotiated in the contracting process

Value could be added for a contractor by absorbing that cost and insuring it directly, enhancing a bid andgetting a valuable piece of business

Construction exposures can be hedged


Elements of an index productPeril index, payout formula

HDD: The number ofdegrees below 18°Celsius in average

temperature per day

HDD: The number ofdegrees below 18°Celsius in average

temperature per day

CDD: The number ofdegrees above 18°Celsius in average

temperature per day

CDD: The number ofdegrees above 18°Celsius in average

temperature per day

Customised Index: basedon cumulative weathervariables (temperature,

precipitation, irradiation,etc) with a fixed payout

per index unit.

Customised Index: basedon cumulative weathervariables (temperature,

precipitation, irradiation,etc) with a fixed payout

per index unit.

Weather Index

250

750

1250

1750

2250

2750

3250

500

1000

1500

2000

2500

3000

3500

Trigger point

Limit

Payout based on index levelsprovides recovery that hedges the

risk


• Identify the metrics of the hazard, such as windspeed, wave height, current,time between swells, etc.

• Choose the levels of hazard that define the trigger. These can be weighted,either/or, etc.

• Define the structure, such as critical day or workwindow, the size of payoff,attachment point, and limit. Test cost/structure tradeoffs

• Choose a data source and provider, and check model against any surfaceobservations to confirm match between product and exposure

• At end of risk period, calculate payoff and settle

Designing an index product for offshore construction

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• Most historical weather data come from ground observations

– National weather services' data are typically cleaned by data services usingaccepted methodology for removing anomalies and filling gaps

– Even with that, locational specificity limits data quality, so techniques havedeveloped for simulating location-specific measurements using reanalysis data,gridded data, etc

The data issue: why modelled data are used


• Protection needed is compensation for financial cost of vessels and spreadsnot operating in inclement weather

• The decision about whether to operate is made on forecast data

• Product can reference either forecast or outcome data

• One of two sources of basis risk, the other being undersensitivity of trigger;when master won't let the vessel/spread deploy but the "critical period" testis not met

Forecast or outcome?


• During risk period, data provider provides ongoing reports on Critical Day orother index count

• After risk period, the data provider provides the final report

How the product (claim) is settled


• Derivative

– Master agreement on standardformat from the International SwapDealers Association ("ISDA Master)

– Separate transaction confirmation foreach deal specifying product type,parameters, cost

– No IPT

– Transaction reporting to a reportingservice to comply with EMIRrequirements

• Insurance

– Master policy wording thatincorporates index settlementlanguage

– Acknowledgement by insured thatthe peril creates an economicexposure and that the "agreedvaluation" settlement is appropriate

– Attracts IPT

Documentation and legal


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Offshore weather applicationWorkwindow put to hedge cost overrun risk

Exposure: Adverse weather increases project cost

Sample costing: EUR 5mm limit / 250,000 tick / workwindow set as combination of windspeed, wave height and wavesurge distance. Attachment point (strike) set based on 10-year historical average

Construction Window (in hours) 12 18

Attachment point Mean - .5 std -1.0 std Mean - .5 std -1.0 stdAttachment point in Windows 141 135 129 87 83 80Premium in EUR 2,250,000 1,570,000 1,100,000 1,750,000 1,210,000 950,000

• Offshore construction requires continuous mildweather

• Weather slowdowns idle costly equipment• This exposure is shared between developer and

contractor, not always efficiently or transparently

Solution: A "workwindow" floor

• Workable weather conditions are defined based onweather parameters and time, eg: wave height lessthan 1m for 18 hours constitutes a "workwindow"

• Independent data source counts workwindows duringjob period

• Insurer pays client for shortfall of workwindows atagreed rate

Structure

Product Construction workwindow floor, or put

Risk period Set to match construction schedule

Reference location Lat/long coordinates matching job location

Data source Independent provider of gridded offshore data

Weather underlying Pre agreed as eg: wave height, windspeed

Construction hour Acceptable levels of Weather underlying

Construction window Number of consecutive Construction hours

Index Count of non-overlapping Constructionwindows during risk period

Strike Number of workwindows

Tick Pre-agreed

Limit Pre-agreed

Payout Min(Max(Strike – Index, 0) * Tick), Limit


Using weather hedging in contracting strategy

0.25

Contract cost Contract withoutweather

Weather riskimpact

Cost of protection Competitiveadvantage

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• Work with employer toprovide contract bidwith and withoutprotectable weatherrisks

• Assess cost ofmanaging weather riskinternally and hedging aportion


Contact us

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Deborah Duss | Hub WindpowerProducts & Global MarketsSwiss Re Corporate Solutions LtdDirect: +41 43 285 26 79E-mail: [email protected]

Stuart Brown| Head Origination Weather& Energy APEMEAEnvironmental & Commodity MarketsSwiss Re Capital Markets LimitedDirect: +44 20 7933 4730E-mail: [email protected]


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Legal notice

©2016 Swiss Re. All rights reserved. You are not permitted to create any modificationsor derivative works of this presentation or to use it for commercial or other public purposeswithout the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date ofthe presentation and are subject to change without notice. Although the information usedwas taken from reliable sources, Swiss Re does not accept any responsibility for the accuracyor comprehensiveness of the details given. All liability for the accuracy and completenessthereof or for any damage or loss resulting from the use of the information contained in thispresentation is expressly excluded. Under no circumstances shall Swiss Re or its Groupcompanies be liable for any financial or consequential loss relating to this presentation.

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