Ukraine’s huge renewables losses will ‘catch re/insurers by surprise’

Massive losses in Ukraine’s renewable energy sector as a result of Russia’s ongoing invasion are likely to catch the insurance industry by surprise, according to Tom Johansmeyer, head of PCS, a Verisk business.

The damage could surpass $1 billion, he said, which would make it “the largest renewable energy sector loss event in history”.

“Renewables could catch re/insurers by surprise because nobody I’ve spoken with seems to have realised that there was a large concentration of renewable assets in areas where the fighting is most intense, or that there was significant insurance in place,” Johansmeyer told Intelligentinsurer.com.

“In analysing the risks to the re/insurance industry from the Ukraine crisis, if you start with reported rates of insurance penetration, you’ll miss a lot of the risk,” he said.

He explained that such penetration statistics tend not to include the large global and regional programs that may include assets in Ukraine but are written and purchased outside the country. For example, large industrial assets are often insured in this way.

“The losses from the 2019 riots in Chile illustrate this dynamic. It was a multi-billion-dollar industry-wide insured loss, which would seem inconsistent with rates of insurance penetration.

“However, some of the larger losses came from large programs written and purchased outside the country—large retailers, for example.”

Evidence of insured losses is already surfacing, he said, adding that reinsurers were already receiving loss notices from their cedants for renewables in Ukraine.

A burgeoning sector

Ukraine’s burgeoning renewable energy sector is small, Johansmeyer said, but it shows plenty of potential. Under the country’s national energy strategy, the objective is to get a quarter of its energy mix from renewables by 2035. And Ukraine already has a fairly diverse energy mix, with 65 percent of its needs in 2018 met by internal production. Coal provided 30 percent, natural gas 28 percent and nuclear 24 percent, while renewable energy accounted for only 5 percent of the mix.

But, Johansmeyer emphasised, by the end of 2020 the proportion of renewables had grown to 12.4 percent. Solar power accounted for the majority of renewable energy providing 78 percent of the aggregate renewables total.

“Loss estimates for solar haven’t been communicated yet, to our knowledge. Keep in mind that the cadence of loss estimation and other loss-related communication is likely to be uneven because the conflict is ongoing. This is also the case for nuclear,” he said.

The country’s wind power, a small but growing sector that generated 1.7 gigawatts of energy for Ukraine in 2021, may be more exposed.

“The onset of armed conflict has quickly shown that the optimal areas for wind are in the southern part of the country, which is where the fighting is now centred,” Johansmeyer said. “Thirty-eight of Ukraine’s wind farms are located between Odessa and Luhansk, with the remaining four near the border with Poland. That means the vast majority of Ukraine’s wind assets have been exposed to serious risk, and repairs can become very expensive.”

Counterintuitively, this historic loss could also demonstrate the effectiveness of insurance as an economic security measure that supports communities in rebuilding, Johansmeyer added.

Could this mean greater access to capital for renewable and nuclear energy re/insurers in the future? It is not quite that straightforward, he said, because the link between the loss event and future growth requires a few intermediate steps.

“After the losses have been absorbed, we think that end insureds will see the value of having access to insurance in the event of a major political violence event and will contemplate adding that protection.

“Insurance purchasing is subject to budgetary considerations, just like any other company expense, so a case has to be made relative to a company’s other spending priorities.

“Insurers need to be able to underwrite the risk appropriately and to secure sufficient reinsurance capital to support any expansion in this class of business. There is certainly an opportunity here, but like any opportunity, it has to be developed,” he concluded.