Local insurers miss out on green energy bonanza

Foreign insurance firms are reaping the rewards of SA’s renewable energy projects at the expense of domestic players, whose participation in debtfunded projects is limited by the country’s sovereign rating.

One of SA’s leading insurance brokers, Crawford Dougall, which advises clients across Africa on the local insurance and international reinsurance markets, said the domestic sector was set to lose about R1bn in premiums this year on the construction of renewable energy projects and this was likely to rise to more than R6bn over the next five years.

Sophie Maggs, head of renewable energy and infrastructure at Crawford Dougall, said this was because lenders focused on having insurance companies in countries with a higher sovereign rating to insure the projects they invested in.

She said this was because the sovereign rating acted as a cap on SA insurance companies’ ratings, effectively disqualifying them from underwriting these projects — despite many of SA’s top insurers being rated AA or higher, better than SA’s sovereign rating.

“Most of the utility-scale renewable energy projects being developed in SA raise debt funding from SA lenders such as commercial banks and the Industrial Development Corporation,” Maggs said.

“And as lenders have an interest in the ongoing viability of a project, they therefore make certain stipulations around how the insurance programme should be placed to protect against damage that impairs the project’s ability to repay the loan extended to it by lenders.

“One of these requirements is that a minimum of 85% of the insurance programme is placed with A-rated insurance markets. By definition, SA insurers cannot fully participate in these insurance programmes, though they have the appetite, strong balance sheets and excellent solvency ratios — as well as the capacity to insure the entire programme.”

The country’s sovereign credit rating is BB/B, according to S&P and Moody’s. Fitch Ratings restored SA’s local currency credit rating back to investment grade in December 2020.

SA’s banks and asset managers have been investing billions of rand in renewable energy projects as the country pivots towards cleaner forms of energy. This trend is expected to pick up further in the years ahead.

Africa’s largest bank by assets, Standard Bank, has for example identified financing sustainable energy infrastructure as the fastest-growing part of the group’s corporate and investment banking business.

The “Big Blue”, as the bank is referred in high-finance circles due to the sheer size of its balance sheet, plans to have achieved at least R250bn in sustainable finance origination by 2026. Absa made a commitment in 2020 to mobilise R100bn of sustainable finance by end2025.

The enlarged International Partners Group (IPG) last year increased total concessional financing commitments from $8.5bn to $9.3bn to support SA’s Just Energy Transition Investment Plan (JET-IP).

Maggs said for as long as SA’s sovereign rating was subinvestment, domestic insurance companies would continue to miss out on the boom in renewable energy projects and other debtfunded infrastructure projects.

THE SOVEREIGN RATING ACTED AS A CAP ON SA INSURANCE COMPANIES’ RATINGS, EFFECTIVELY DISQUALIFYING THEM

She said the current criteria for an acceptable insurance programme were A- for S&P or A3 for Moody’s.

“The market size for renewable energy projects in SA is 16.8GW in 2024. If 1MW of power generally equates to R20m construction costs, it implies the insurance market is R336bn of contract value. An insurance rate of 0.3% means the insurance premium in the market would have been R1bn this year. Of this, the SA market now earns at most only 15% (R150m), given they are capped at 15% capacity on all programmes that need lender funding,” Maggs said.

“This means lost revenue, lost taxes and lost jobs for SA as insurance premiums flow overseas, either directly through the participation of international markets on the programme or through reinsurance.

“And at this stage there is little insurance companies can do to change this trend. SA’s shaky fiscal positions means it is unlikely to regain its investment-grade rating soon. Over the next five years we expect the industry to miss out on more than R6bn of premium income.”