The insurance industry is losing out on benefiting from renewable energy projects because of South Africa’s sovereign rating, says Sophie Maggs, the head of renewable energy and infrastructure insurance at Crawford Dougall.
Brokerage Crawford Dougall specialises in advising local and international clients in the commercial, corporate, hospitality, and renewable energy sectors.
South Africa’s insurance market – otherwise capable of underwriting renewable energy projects – is disqualified from participating in the lion’s share of these projects because of South Africa’s credit rating, even though many of the country’s top insurers are rated AA or higher, Maggs said in an interview with Bruce Whitfield on “The Money Show”.
The insurance premium pool for the construction of renewable energy projects is about R1 billion, but only some 15% is held in the country, and most of that pool is being sent offshore and going through the reinsurance market to international insurers, and so the country is losing out on a lot of insurance premiums, taxes, and jobs, Maggs said.
The country’s insurance companies have strong balance sheets and solvency ratios, and the capacity and appetite to take on renewable energy projects, but the sovereign rating precludes them from participating in these projects, she said.
The sovereign credit rating is BB/B (below investment grade), according to S&P and Moody’s. Fitch Ratings restored South Africa’s local currency credit rating to investment grade in December 2020.
The criterion for an acceptable insurance programme is A- for S&P or A3 for Moody’s.
Maggs explained that most of utility-scale renewable energy projects raise debt funding from lenders such as commercial banks and the Industrial Development Corporation. Lenders have stipulations around how the insurance programme should be placed to protect against damage that impairs the project’s ability to repay the loan. One of these requirements is that a minimum of 85% of the insurance programme is placed with A-rated insurance markets. Therefore, South African insurers cannot fully participate in these programmes.
“The market size for renewable energy projects in South Africa is 16.8GW in 2024. If 1MW of power generally equates to R20-million 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 South African market now earns at most only 15% (R150m), given they are capped at 15% capacity on all programmes that need lender funding,” Maggs said.
She said South Africa’s shaky fiscal position 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.”
