business interruption insurance for power plants€¦ · business interruption insurance for power...
TRANSCRIPT
23.09.2020
Stefan Feldhütter, BI Consultant, Claims 1.6.2C2 - Confidential
Business Interruption Insurance forPower Plantsthe elephant in the room….
Agenda
1. BI Coverage Overview Objective of Insurance Insured Perils Insured Loss
2. Fundamental Definitions BI Sum Insured Calculation of Indemnification BI PML Assessment
3. Specific Aspects of BI Insurance for Power Plants Power Purchase Agreements Power Generation with Renewable Energies
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BI Coverage OverviewOverview matters – not only for ostrichs 1
any BI insurance indemnifies for a Loss of Gross Profit, that is caused by a reduction in turnover caused by
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Coverage overviewPurpose of a BI policy
an interruption of an operational business (operational BI)
a delay of a project leading to delayed commencement of generation of turnover (Delay in Start Up (DSU), ‘Project BI’)
any BI cover should ensure the ‘money generation capability’ of an investment protect the liquidity of the business
the BI indemnification substitutes the Gross Profit lost due to the BI, the PD section protects the assets
Insured perils: usually like under the PD sectionBusiness Interruption Insurance for Power Plants
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(Variable Costs)
Net Profit Standing Charges Specified Working Expenses
Gross Profit
(Fixed Costs)
fixed taxes, property taxinsurance cost
fixed charges for electricity, heating or gasdebt service (bank requirements)
wages and salaries……..
sales taxeselectricity, gas, phoneprocess licensesfreight and packing…….
Turnover
greyzone
Coverage overviewDetermination of the Insured Interest
Business Interruption Insurance for Power Plants
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Fundamental Definitionsdeserve our highest attention 2
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(Variable Costs)
Net Profit Standing Charges Specified Working Expenses
Gross Profit
(Fixed Costs)
Turnover
Basically two options for calculating the Gross Profit:• deduct variable costs from turnover• add net profit and standing chargesshould lead to same result
Fundamental DefinitionsDetermination of the Sum Insured under BI
Business Interruption Insurance for Power Plants
Turnoverless
Variable Costs
Net Profitplus
Standing Charges
Gross Profit
Difference Method:forgotten var. costs lead to exaggerated SIbut: ‘safe side’
Addition Method:forgotten standing charges lead to insufficient SI=> potentially underinsurance
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Fundamental DefinitionsDetermination of the Sum Insured under BI
Business Interruption Insurance for Power Plants
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identical fixed costs
strong seasonal effects in turnover and thus net profit
increased likelihood of PD loss in periods of high capacity utilisation
higher BI exposure compared with power plant
even stronger impact forcampaign businesses (foodindustry: sugar, vegetables, ...)
Two businesses – both with the same Gross Profit!
Fundamental DefinitionsDetermination of the BI Sum Insured: seasonality
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Net Profit Standing Charges Specified Working Expenses
Gross Profit
Turnover
Fundamental DefinitionsDifferent Options for Scope of BI coverage
cap repayment and interests on debts
Not neccessarily the full Gross Profit is insured under BI but only parts of it as to the Insureds‘ need and money for premium available
Insurance of Specified Standing Charges only
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Turnover
Gross Profit
Specified Working Expenses
(Variable Costs)
Net Profit Specified Working Expenses
Gross Profit
Nonet profit!
indemnification of the lost gross profit on the (as if) basis:'…had no loss / delay occured …'
no guarantee for Net Profit of the business under BI
… a change of economic situation: decrease of product price, production volume unchanged
(Fixed Costs)
Standing ChargesStanding Charges
Turnover
Fundamental DefinitionsIndemnification based on Actual Loss Sustained (‘ALS’)
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Standing Charges
Turnover
Gross Profit
Specified Working Expenses
(Variable Costs)
Standing Charges
… further drastical price decrease
(Fixed Costs)
Turnover
Specified Working Expenses
Net Loss Gross Profit
indemnification of the lost gross profit only as, far as it had beenearned by the turnover -> alignment of interest
again:indemnification of the lost gross profit on the 'as if' basis:'…had no loss / BI occured …'
Fundamental DefinitionsIndemnification based on Actual Loss Sustained (‘ALS’)
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Besides a forecast of the monetary values BI risk assessment and underwriting require and estimation ofthe worst case duration of a BI
PD-, BI Policy Period
Interruption
Removal of DebrisReview of Design *
Replan*Re-Supply
Re-Erection & Re-Testing
SafetyMargin
t
Maximum Indemnity Period
(Indemnity Period Limit)
* generallyexcluded
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Fundamental DefinitionsDetermination of the Indemnity Period Limit IPL
Such assessment isexecuted for the most severeBI scenarios
IPL/MIP restricts theInsurers‘ exposure under a BI policy timewise
Gross Earnings wordingsusually do not apply an IPL/MIP => no restriction in time, just in monetary amount
Business Interruption Insurance for Power Plants
Practical approach:
if • the IPL was assessed in a realistic manner and• there is a bottleneck equipment
simplified calculation:
PMLBI = Annual Sum InsuredBI *
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Fundamental DefinitionsPML assessment
IPL – Time Deductible
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*1*1
*1 in months
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Specific Aspects ofBI Insurance for Power Plantskeep one eye on the technolgy, the other one on thebusiness 3
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Generation of power / electricity comes with a very wide range of different technologies
These technologies have quite different basic characteristics Base load capability Seasonal fluctuation of primary energies (RE) Contribution of fuel costs to production costs ….
These differences lead to quite different business models, that need to beaddressed in BI insurance
Specific Aspects of BI Insurance for Power PlantsVariety of Power Generation Technologies
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(Variable Costs)
Net Profit Standing Charges Specified Working Expenses
Gross Profit
(Fixed Costs)
fixed taxes, property taxinsurance cost
fixed charges for electricity, heating or gasdebt service (bank requirements)
wages and salaries……..
sales taxeselectricity, gas, phoneprocess licensesfreight and packing…….
Turnover
greyzone
Specific Aspects of BI Insurance for Power PlantsCost and Turnover Components in Power Plants
Power Generation – a typical monoliner
electricity
heat *1
*1 cogeneration
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(Variable Costs)
Net Profit Standing Charges Specified Working Expenses
Gross Profit
(Fixed Costs)
fixed taxes, property taxinsurance cost
fixed charges for electricity, heating or gasdebt service (bank requirements)
wages and salariesdepreciation
……..
sales taxeselectricity, gas, phoneprocess licensesfreight and packinggrid utilization costs…….
Turnover
greyzone
Specific Aspects of BI Insurance for Power PlantsCost and Turnover Components in Power Plants
Typical Costs for Power Generation
electricity
heat *1
*1 cogeneration
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Mechanism and rationale of Take or Pay Cost Agreements
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Gas SupplierA
GT Power Plant Bgas
EUR
electricity
Gas Purchase Agreement
defining:• quantity of supply• quality of supply• price per Nm³ or MWh• min. reinbursement for not taking
off gas (Take-or-Pay Agreement)
+ certainty offutureincome, evenif PP fails totake off gas
+ certainty offuture supply and fuel costs
⇒during a BI fuel costs should not fully be considered variable costs, at least ToP costs are quasi standing charges and should be treated as such in calculating the BI Sum Insured to avoidunderinsurance
⇒surplus gas can be sold potentially -> potential earnings -> response of the policy-wording to that?
EUR
ElectricityConsumer C
Specific Aspects of BI Insurance for Power PlantsTake or Pay Costs
Business Interruption Insurance for Power Plants
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Key Elements and Mechanism of Power Purchase Agreements (PPAs)
Electricity GridOperatorPower Plant B electricity
EUR
Power Purchase Agreement
Defining supply:• max. power (MW)• expected quantity (MWh)• Power quality• price for MW and MWh
+ price for max. supplycovers investmentcosts (capex)
+ price forconsumption coversgeneration/fuel costs(opex)
+ certainty of futuresupply and costs
electricity
EUR
ElectricityConsumer
+ certainty of futuresupply and price
+ increased reliabilityand quality ofelectricity supplied toend consumer
Additional price components(penalties) e.g. for capacity availability grid services
+ increasedrelaibility and qualityof electricity supply
- increased downwardpotential in case of BI
⇒DSU and BI should consider all relevant price components -> ‚back to back‘ coverage to PPA
Retail PPA
Specific Aspects of BI Insurance for Power Plants Power Purchase Agreements
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Insurance of Specified Standing Charges only
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Example: Insured owns a multitude of power
plants with sufficient spare capacity of older PP, that run at part load only
Insured can still produce every MW demanded with slightly higher production costs/MWh (lower efficiency of older PPs)
Lenders nevertheless stipulated Insurance for their interests (cap repayment, interest payment) for not yet paid off PP
cap repaymentX X
Specific Aspects of BI Insurance for Power PlantsCoverage forms
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seasonal business, e.g. Windfarm in RSA
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identical fixed costs
strong seasonal effects in production, turnover and thus Gross Profit
increased likelihood of PD loss in periods of high capacity load?
higher BI exposure compared to coal fired power plant
concept of preagreed GP values for individual months or weeks to ease claims handling
Specific Aspects of BI Insurance for Power PlantsCoverage forms
Windfarm, GP 100mio ZAR p.a.
Coal fire base load PP, GP 100mio ZAR p.a.
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Gross Revenues coverage
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Specific Aspects of BI Insurance for Power PlantsCoverage forms
Coverage often demanded by industries / businesses with little variable costs-> Gross Profit is close to Turnover / Gross Revenues-> Indemnification based on the lost Turnover / Gross Revenues (or a high percentage thereof) easesclaims handling
application in:
Renewable Energy generation (no costsfor fuel -> low variable operational costs)
but: inherent tendency to over indemnification seasonality in most RE projects
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Gross Revenues coverage - pitfall
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Specific Aspects of BI Insurance for Power PlantsCoverage forms
Net Profit Fixed costs Variable costs -> fuel
Gross Profit
Gross Revenues
gap
Net Profit Fixed costs Var.costs
Gross Profit
Gross Revenues
gap
A typical RE project: no fuel costs => low variable
costs Gross Profit ~ 90% of Revenues
An older fossil power plant: Investment fully written off
=> low fixed costs high fuel costs => high variable
costs Gross Profit ~ 50% of Revenues significant over indemnification
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Wind Energy Yield Cover (WEYC)
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Specific Aspects of BI Insurance for Power PlantsCoverage forms
Perspective of a typical Investor in a Wind Farm Project
?windfarm
Key interest of the investor is the monetaryperformance/output of the project
WEYC allows for externalization of
wind risks availability and technical
performance/efficiency of the windpark
WYC does not cover electricity price risks!
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For BI insurance of Power Plants
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analyse and understand the underlying technology, business modeland PPA
be aware, how the Gross Profit / potential daily BI loss develops over time-> the Sum Insured under BI only provides an overall limit-> the Sum Insured under BI might be exhausted faster than expexted
=> such risks require higher BI rates for decreasing Turnovers it should be checked, whether Gross Profits still
would have be earned by the Turnover (Actual Loss Sustained) probably address seasonal effects in the wording to ease BI claims handling
(i.e. define monthly preagreed GP values) for PML estimation consider seasonal fluctuations for IPL > 12 months
(e.g. 18 months IPL might cover 2 full seasons and ASIs)
Specific Aspects of BI Insurance for Power PlantsWrap Up
Business Interruption Insurance for Power Plants
Thank you for your attention!…and now: friendly discussion with a Rhino
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