New green tech world: Part 1 & 2

Part 1

Mark Maroon:

Hey everyone. Welcome back to Climate Check. This is Mark Maroon, Vice President for Portfolio Management and Reinsurance at American Modern, a US-based subsidiary and specialty insurance provider and part of the Munich Re group. Today I'm joined by Michael Schrempp, Head of Green Tech Solutions at Munich Re. Michael, thank you so much for joining me today.

Michael Schrempp:

Hello, Mark. Thank you for having me here.

Mark Maroon:

So could you maybe first start out by telling us about yourself and your role, and then maybe about some of the history of Green Tech solutions within Munich Re?

Michael Schrempp:

Sure. By background, I'm a mathematician and I joined Munich Re 12 years ago. I'm heading the team since seven years now, and Green Tech Solutions was actually established in 2011 officially, though we have been underwriting special risks for green technologies already since 2009 when we signed the worldwide first photovoltaic performance warranty cover. We have been building up that book since then and continuously added new risks and new technologies from the green tech industry. We do have a global scope. We have offices in the US, in China, in Japan, and of course in our headquarter in Munich. The team is quite diverse. We have all sorts of professions in the team, mainly scientists coming from the technical industries we actually insure.

Mark Maroon:

Thank you for the overview. So I guess I would be curious to maybe get a few examples of what green tech solutions would encompass. I feel like that's an overarching bucket that we could put a lot of things into, but maybe can you share some specifics around what that means?

Michael Schrempp:

Sure. We have insured, for example, photovoltaic manufacturers backing up the warranty they provide to their customers. Actually, that's how we started off in green tech solutions. And we are not only insuring the warranty of the manufacturer, we are also covering in case the manufacturer disappears, so it becomes insolvent. We insure large projects against major performance losses due to underperformance of the modules. This is our core product we offer in green tech solutions, but we have added other technologies such as wind turbine energy, [inaudible 00:02:23] losses, or warranties for the EPC in engineering, procurement, and construction companies. We also insure battery performance or performance of lithium-ion or redox flow battery manufacturers up to 10, 15, 20 years. We insure bioenergy or circular economy projects for output, throughput, or lack of availability, so basically all technical risks. And typically, we insure a multi-year, meaning up to 20, 25 or 30 years, even in photovoltaic, non-cancelable for the insurer.

Mark Maroon:

Wow. That's quite the commitment. When I think of different insurance products, I usually think the traditional year-over-year type of product, but when we're talking about 20 to 30 years, that's quite the time horizon. How do you guys go through and underwrite products like that?

Michael Schrempp:

That's a very tough question. So first of all, it has to be un-cancelable for 20 or 25 years because if you want to match the warranty promise of a manufacturer, it's no help for the investor or for the lender, even if the insurance can pull out after bad year, or if there is a bad development. So we need to have a multi-year insurance coverage, basically back to back, on the warranty issued by the manufacturer. Otherwise, the finance will struggle. In order to do that, we do have a very technical approach, so mandatory for each underwriting process is the site visit, meaning our risk experts, our physicists, our chemists, go to the manufacturer and audit the production facilities. We also have a deep dive questionnaire Q&A session with the manufacturer, talk to the CTO, but also talk to the management and try to understand their economic situation in order to provide them a full-fledged warranty insurance to cover their exposure and ultimately the exposure of their customers.

Mark Maroon:

That makes sense, and it does sound like, yeah, there are quite a few challenges that go along with that, but I think that's an important point to make is that we want to make sure that we are a partner to some of these industries as well, and like you said, not necessarily pulling out after an adverse year. So Munich Re has made a series of climate commitments that could fall under the label of disabling strategies. So these are things like pledges from divesting from fossil fuel technologies or declining to offer new insurance policies to coal plants or oil sands operators, things along those lines. Green tech solutions, however, is what is considered an enabling solution. So, how can insurance be a powerful tool to not only discourage technologies that contribute to climate change, but encourage investment in positive actions?

Michael Schrempp:

Sure. On the one hand side, insurance is absolutely crucial for the construction and operation of infrastructure, specifically of energy production facilities, whether this is renewable or fossil energy. Here, insurance can play a motor role to influence the market development, disabling by not providing insurance, or enabling by assuming proactively more risks than they would naturally. If the insurance industry is focusing on renewables and less focusing on fossil fuels, I think this influences the investors' risk appetite and also the lenders' risk appetite, and their insurance can play an influencing role in disabling fossil fuels and enabling renewable energies. But just assuming more of these kind of, for the insurance industry, also new risks. We have to face it. There is no real track record on renewable energy plants compared to fossil fuels where we have decades of experience. So this is a challenge for the insurance industry, and when you look at new technologies, new risks, this is certainly an even higher risk for the insurance industry.

So if you look at the 20 years, 25 years of performance warranties issued by the manufacturers, I would say in 10, 15 years, the technologies manufactured then will not have anything to do with the state-of-the-art technologies we see today and we insure today, though even the state-of-the-art technologies today don't have any major track record. We need to insure them today because we can't wait 15 years when they will be old technologies.

I'm fully convinced that the energy transition will happen only a lot faster with adequate risk grants for solution, and that's what we are up for. So I'm talking on the one hand side about traditional risks such as construction or operation policies covering against known perils, which is by far the biggest part of the worldwide applied risk budget for renewables. But I'm also talking about innovative new risks like we offer in green tech solutions. Here, the insurance industry needs to develop solutions in order to boost the energy transition, and that's what we are up for. Assuming risks of technologies no one has insured before and most of us struggle to insure, and quite frankly, we also struggle. We sometimes need 10, 12, 14 months in order to understand the technology, have a lot of exchange with industry experts, with research entities, with third-party engineers in order to really understand and fully digest the risk in order then to underwrite it for multi-years.

Mark Maroon:

Let's pause there because I'd like you to talk about where you see green solutions heading in the second part of our conversation. So folks, join us next time for our continuing discussion with Michael Schrempp, and head on over to munichre.com/climate for more information. We'll see you next time.

Part 2

Mark Maroon:

Hi, everyone. This is Mark Maroon, Vice President at American Modern, a Munich Re company, continuing my interview with Michael Schrempp, Head of Green Tech Solutions at Munich Re, discussing green technology.

Michael, in Part 1, you walked us through the influence the insurance industry can have in disabling fossil energy technologies and enabling renewable ones. So what are you really optimistic about in terms of sustainable energy and transportation, and where do you see some serious challenges still remaining?

Michael Schrempp:

So looking at the energy world map, I think the path is quite clear. We all agreed on Paris, and we have to fulfill on that. The question's only the speed, how soon we can change the energy consumption and the energy production, and this needs to go hand in hand. From my point of view, it doesn't make sense to have electric cars all over the place if there is not enough renewable energy supply, meaning not enough wind, solar, and other renewable energy sources. This of course is a little chicken and egg or Catch-22, and we need to make sure that we are supporting these industries in parallel. Meaning, there needs to be sufficient renewable energy supply for the green cars, for electric vehicles or electric transportation, but also for grid stability for storage and other renewables.

Mark Maroon:

I think that's an interesting point with the chicken and the egg, because it really does come down to having the infrastructure being able to support all of the energy needs that we'll need in the future. So how do you think that Munich Re and the industry can help some of the green tech companies with some of those challenges today?

Michael Schrempp:

So I think Munich Re is a very active already on the traditional insurance side, and we are one of the few insurance companies who have actually established a unit like Green Tech Solutions, looking at innovative and special-risk situations where we try to enable these technologies. And providing a performance warranty insurance helps actually the lenders or the equity investors to adapt these risks and feel comfortable with these kinds of risks. It also enables the manufacturers to offer more comprehensive warranties without stressing their balance sheet too much.

I mean, if you assume an photovoltaic 25-year performance warranty as a manufacturer, and if something goes wrong, you're really exposed. And you're exposed not only for 1 year of production or 2 years of production, you are exposed for 25 years of production, and that's a huge stress on the balance sheet. And applying here the adequate risk transfer solutions for the insurance industry to become a risk-taker for the energy transition I think this is core, and this is what Munich Re with Green Tech Solutions offer. But also, other insurance companies need to follow and offer similar products, and we are very much here to help and to support, and to help the insurance industry to assume these kind of risks.

Mark Maroon:

I think that's a good point. And so maybe one thing I will ask you is that maybe look into the crystal ball a little bit, but what do you think are some of the most exciting advancements have been made with the aid of Green Tech Solutions to date, and then where do you see this going in the next 10 to 15 years?

Michael Schrempp:

This is a very good question.

So when we started 12 years ago with insuring photovoltaic manufacturers, it was also for us quite frankly it was an adventure, to convince our board of management to insure a semiconductor working at 80% 25 years with a non-cancelable policy. I can tell you this was a real challenge back then. Today, I would say they feel much more comfortable with our experience and with the knowledge we have gained since then. The world will become more comprehensive and more complex, energies will closely interact and systems will closely interact, so we need to make sure we are addressing not only specific standalone technologies, but the whole system at one point. Today, we are offering these performance warranties mainly to manufacturers, in order to enable them to sell more products at a more reasonable financing and more profitable project. Going forward, I think we need to move more downstream to the actually applications, to the end user, to the customers using these technologies in a more comprehensive way.

Mark Maroon:

Thank you.

Maybe if we can have a little bit of insight into how we work with the rest of the industry and how we take a look at the uncertainty here, because obviously this is quite a bit of a moving target, right? So how do you guys look at that?

Michael Schrempp:

So there are many uncertainties in the industry and there are several ones we cannot address from an insurance point of view. For example, political risk is challenging though possible under certain circumstances. But revoking subsidies for example, like it happened in the world, I think is a very difficult thing to insure market price risk is also possible to hedge, but only for a certain period of times. If the periods are becoming too long, the volatility might eat up the benefit. So therefore, hedging or insuring market price risk is also quite challenging.

And then we see of course the technological progress. This is also a huge challenge as it comes with a significant uncertainty, and investors and specifically lenders are reluctant to put their money on unproven or prototypical technology. And even if there is several years of experience, the amortization periods are stretched longer and longer, especially under the favorable interest rate environment, which brings additional stress to the manufacturer pushing for even longer warranties. And in 10 or 15 years, the technology we'll see and finance then, will not have much in common with today's technology. So in order to insure the technology today, we need all to have a very deep-dive technical expertise, like we have with our own scientists coming from the industry. We are running an test lab, a photovoltaic test lab, and for several years now, and we work closely with renowned third party expert and research industries. We have established these relationships over years in order to understand and make us capable of assuming these kind of risks long-term.

Mark Maroon:

One thing I did want to follow up on, we talked a little bit about the political risk associated with this. Is there an opportunity, do you think, for Green Tech Solutions to work more closely with government entities to try to move down the path of more enabling strategies?

Michael Schrempp:

Absolutely. I mean, it's in the core interest of our governments to fulfill the Paris Agreement and to facilitate the energy transition. And there we have a very strong alignment of interest, as this is also our core goal. We can help to support subsidies and to support funding into renewable energy projects, we can cover at least a major part of the downside. And by that, enable the investors to become maybe a little more adventurous by investing into new technologies. And by that, teaming up with governmental entities, I think can really help to boost the energy transition.

Mark Maroon:

Perfect.

With that, Michael, I think we will go ahead and get you out of here. Thank you so much for taking the time to speak with us today on this important topic.

Michael Schrempp:

Absolutely. I think it's a very important topic we addressed today, so thank you for the time and thank you for having me here. It was really a pleasure.

Mark Maroon:

The pleasure was all ours.

And folks, if you did like this episode, please subscribe to our podcast. And for more information, go to munichre.com/climate. We will see you next time.