Performance Insurance

A key challenge facing Private Equity houses and funds seeking to invest in new and cutting-edge technologies is in establishing the necessary confidence in the manufacturing process and substantiating the anticipated revenue streams to the benefit of the stakeholders involved in the project.

In this article we look at how a newly developed specialist financial insurance product providing performance cover can help them meet that challenge.

---

Private Equity houses seeking to invest in new and cutting-edge technologies face the challenge of establishing the necessary confidence in the manufacturing process and substantiating the anticipated revenue streams to the benefit of the stakeholders involved in the project. This is of particular relevance in the rapidly expanding renewable energy sector but applies equally to other technology-based ventures.

From the entrepreneur’s perspective, the requirement is to effect an insurance cover for new technology risks associated with the manufacturing process so as to secure initial financing.

Matrix can provide investors with a solution to both these problems in the form of a newly developed specialist financial insurance that provides performance cover.

Performance insurance protects long-term investment with a guarantee of project output and the quality of the end-product. It can also be extended to cover the plant commissioning risks inherent in the new venture.

Scope of Cover

Performance insurance provides cover for the manufacturing process. It is not intended to provide cover for the supply chain, lack of feedstock or lack of off-take.

The policy cover basis can be either revenue or loan (or debt) repayment, for the life of the funding structure (currently cover of up to ten years duration can be provided) or a shorter period.

For the performance cover we will develop an insurance structure with an attachment point or “trigger” (required output) and policy limits (on both an annual and aggregate basis) to guarantee a minimum level of production adequate to generate sufficient cashflow to support the project’s financing over the policy term.

In addition, start-up repair cover can be included for the plant commissioning risk. This will provide cover for related repair costs necessary to meet the start-up performance test requirements for up to a specified period from the mechanical completion of the project. For this type of insurance we will identify an appropriate deductible level and policy limit.

It’s important to note that whilst insurers will offer start-up repair cover, they will only do so as an add-on to performance insurance, not as a stand-alone cover.

The Quotation Process

For these insurances the two main rating factors are revenue and CAPEX. Detailed underwriting information will be required, including (but not limited to):

• Project financing structure

• Project plan and financials

• Contract agreements for the main parties involved in the venture including details of any key project contractors for O&M, EPC and Project Management services and applicable warranties or guarantees, liquidated damages and equipment manufacturing warranties. This includes relevant off-take contracts

• An independent engineers report on the manufacturing process and verification of equipment capability to provide confidence in the technologies

• Fire and security protections

• Utilities arrangements

• Commissioning protocols and process outcomes required to pass the start-up performance tests.

Initially, the insurer will develop a Letter of Intent or Term Sheet including a non-binding indication for the terms and conditions for the prospective cover. Following provision of the initial required information, this process will normally take three to four weeks.

Once the Letter of Intent is agreed and executed, a small commitment fee will be required for the insurer to provide a draft policy with binding premium price, terms and conditions. This should take approximately 45 days which will normally include a demonstration site visit and a meeting with management and related technical staff to finalise the commercial terms of the insurance cover.

Matrix Global Services

Through our extensive market contacts and experience, Matrix can facilitate the process of the design, negotiation and implementation of the performance insurance programme, developing a full enterprise risk management solution for the project.

In addition, Matrix is ideally placed to identify and manage the appropriate insurance broker and team to organise all of the other commercial insurance for the project including both construction and ongoing operational risks.

If you would like further information please get in touch.