To Insure or Not to Insure: PV’s New Fangled Warranty Insurance Option
It is no secret that the last couple years have been rough for PV manufacturers globally. Panel makers have had to contend with compressed profit margins and an oversaturated market, both of which have driven many firms to shutter operations and enter into bankruptcy protection. Facing the difficult task of betting on which companies will be around in the future to honor product warranties, PV project developers, owners, and financiers approached the insurance industry to see if it could devise a solution for their concerns. The response came in the form of OEM (original equipment manufacturer) warranty insurance.
NREL recently completed a round of discussions with professionals from the insurance, finance, and PV industries on these new OEM warranty policies (as well as other topics in PV risk management). This blog provides an advance overview of our findings, which will be published in a forthcoming report on solar PV risks and mitigation solutions.
OEM warranty insurance is a new and still niche product, but there are indications that demand is growing. According to our research, in 2011 only a few panel makers had publicly announced that they had purchased manufacturer coverage. As of this writing, NREL has identified more than 20 manufacturers with an OEM warranty policy, at least five of which could be considered "Tier 1" suppliers. At least three insurance carriers offer warranty coverage, with Munich Re providing perhaps the most capacity (in terms of dollars) in the market right now. Several brokers and broker-type entities are also active in this space. These entities generally craft policy terms and arrange for the sale between the carrier and policyholder.
No two OEM warranty policies are alike, even amongst those carried by the same insurance provider. While terms, limits, deductibles, and other factors can differ widely, the policy generally functions like this: a manufacturer will purchase coverage on a portion of its inventory, and in turn for payment of this premium the insurance carrier will take on some of the warranty responsibilities associated with the insured product. This type of policy is sometimes referred to as a "wrap," because it wraps some of the warranty policy's terms and passes the pooled risk onto the insurance carrier. So, for example, say a project owner makes a warranty claim against a set of modules because of issues with delamination of the antireflective coating. If the manufacturer of these modules has warranty insurance, if delamination is covered under the policy terms, and if the cost to address the claim is higher than the deductible, then the insurance carrier may need to pay for the cost of repair or replacement, up to the policy limit.
OEM warranty insurance can provide several benefits to the manufacturer including:
- Manufacturers may not have to pay out-of-pocket for a certain portion of losses related to customer warranty claims, which can relieve their balance sheet of potential pressures.
- Manufacturers may be able to reduce the amount of funds set aside in their warranty reserve account, which would allow them to allocate capital to other areas of their business.
- If the insurance policy provides for "third party rights," payments may be redirected to project owners in the case of a manufacturer insolvency (though this process may be complicated by legal barriers and is not available from all carriers).
This last benefit of the policy entitles project developers, owners, and financiers to reimbursements from warranty claims should the manufacturer go out of business, which may prove a valuable term given the current shakeout in the manufacturing market. Some carriers do not stipulate third party rights as part of their OEM policy, and may offer additional insurance coverage to address manufacturer insolvency.
One additional benefit that warranty insurance can confer on manufacturers is the vaunted stamp of "bankability." There has been an investor flight to quality in the PV market, as manufacturers continue to declare bankruptcy and developers, project owners, and financiers are looking for the most reputable firms with the most demonstrably robust balance sheets to supply their panels. Panel makers that cannot break into the vaunted top tier of suppliers, may choose to purchase OEM warranty insurance to signal to investors that their products meet the quality standards of, and are backed by, AAA-rated insurers.
Another warranty insurance option for developers and project owners is a system-level policy, which can cover the warranties for a PV system's design and components (including modules, racking hardware, inverters, etc.). This type of insurance functions like a performance guarantee, compensating project owners for cash flows that have been jeopardized because of equipment malfunctions.
The jury is still out on the cost vs. the benefit of warranty insurance. These policies are typically expensive, and are usually payable in one lump-sum up front. However, some manufacturers told us their policies produced tangible marketing benefits. One company said its earnings in 2011 were seven times the policy costs. Conversely, some members of the financial community told us a warranty policy could be construed as an admission that the manufacturer's products were flawed and that the company did not expect to survive through the long-term. Moreover, OEM warranty insurance may complicate the pathway to filing a warranty claim by inserting a third party between the manufacturer and the claimant; additionally, that third-party (i.e. the insurer) may be more resistant to paying out claims than the manufacturer, which could complicate matters further.
Generally, however, it appears that the acceptability of OEM warranty insurance is growing. Project owners and financiers are growing uncomfortable with long-dated warranties (the PV industry standard is 25 years) from manufacturers that may not survive the current shakeout or may not have adequate reserves to pay off claims. And manufacturers are looking to send signals to the market that their products meet rigorous quality standards and are backed by reputable and creditworthy insurers.
As PV continues to capture larger portions of the energy mix, managing its market, technical, and financial risks will become key to maximizing its deployment. For now, warranty insurance offers a tentative solution to just such an end.