On July 27th, China and the EU bilaterally made an initial commitment on the price of PV modules sold to the EU market, and this suggests that China and the EU committee may have found a win-win solution to the disputes over anti-dumping inspections on China’s PV industry by the EU Committee. Under this crisis, the financial service system supporting China’s PV industry is also a key focus, among which the application of insurance is essential for the export of China’s PV modules to overseas markets.
Analysis on the long-term insurance product:
The development of the global solar PV industry could be divided into 3 phases. Years 2008 to 2010 make up Phase One, where the one-year warranty policy for PV modules plays a major role. During that period, China’s PV module makers mostly used this solution to satisfy overseas buyers’ demand. Since the overseas demand on PV modules is much higher than supply, overseas buyers did not take it seriously. However, the merit of this solution is quite clear—if the module maker goes bankrupt, the policy is void since no one will pay a premium to make the policy effective as usual. Thus, it does not protect buyers’ rights.
Years 2010 to 2012 are Phase Two. Munich Re and PowerGuard (a US Agency) developed their own products regarding the 25-year PV module’s performance warranty, and China’s manufacturers like LDK Solar ( NYSE:LDK), Astronergy, and Yingli Green Energy (NYSE:YGE) secured insurance from them. Our research shows that both insurers have strict terms and conditions. However, China’s domestic PV module makers are required to buy the insurance in order to promote their overseas market sales and satisfy the demand of clients. Module makers have no choice if they want to get orders from overseas markets.
Phase Three will be the new insurance era for solar warranty insurance represented by China’s local insurers. Since the two insurance products above have restrictions on insurance terms and claims, a local insurer could improve on the terms of the overseas policies, so that the 25-year warranty insurance shall not be solely a marketing tool. Instead, the 25-year warranty policy shall be fair, reasonable for both the insured and the insurer, and it shall protect the rights of policyholders.
In terms of the branding, Munich Re is the most famous; PowerGuard has fame in the US, but in terms of policy design and insurance terms, both of them have restrictions.
Major restrictions are as follows:
1) Regulation and legal problems
From a regulatory perspective, based on Insurance Law of P.R.C. and other relevant regulations, for all the insurance business in Mainland China, the insurance applicant shall apply to an insurer licensed by CIRC (China Insurance Regulatory Commission). All foreign insurers shall obtain approval from CIRC and set up subsidies or branches before conducting any business in Mainland China. Purchasing insurance in overseas markets has less regulation. For example, some local module makers purchased a PowerGuard product and applied insurance from Hanover International, and they will face two legal issues: Firstly, PowerGuard does not have any legal license in China. All its marketing activity in China is illegal. Secondly, Hanover International has never applied for legal license to CIRC; thus, it is illegal for them to take risks regarding the 25-year warranty insurance for China-produced PV modules.
The above two issues may lead insurance applicants to the following results: Firstly, if there is any dispute between an insured and an insurer, the insured has no legal protection under Mainland China’s laws. Secondly, if any obligee under their policy takes legal action against module makers, or module makers take legal action against insurers, the legal expense, defense cost and the unfamiliarity with local legal jurisdiction will cause great trouble for any PV module makers.
2) High barrier for insurance application
For Munich Re coverage, the high premium rate and other requirements are quite challenging for solar module makers. Meanwhile, due to the high deductible of the Munich Re policy (the amount under which the insurer takes no liability), the insured can only get indemnity in the case of a big loss. For claim amounts less than the deductible, the insured could get nothing. Generally, Munich Re sets deductibles at about 2% to 8% of the turnover of applicants. For example, for China’s tier one solar makers whose turnover is about USD 1B, the deductible shall be at least USD 20M per claim. Obviously, a single loss of over USD 20M is almost impossible.
3) Insurance terms are very unfriendly, and infringe upon the rights of insureds and obligees.
These unfriendly terms of overseas policies do not comply with the global practice of the insurance industry. For example, under the PowerGuard policy, the insurance terms of Hanover International defines that “the insured shall not make any legal action against the insurer.” Based on China’s Contract Law, if party one has unfair terms under any business contract, it could ask the people’s court or arbitration institutions to amend or cancel the relevant terms. However, under the PowerGuard policy, the insured’s acceptance of the PowerGuard policy means it has given up its right to take legal action. If there is any dispute, the insured or its obligees (buyer, financiers, and etc.) have no right to take legal action. Similar unfriendly terms are in abundance under this policy.
4) Transparency of policies
The PowerGuard policy has quite a few terms that are unfriendly to solar makers, overseas buyers and financiers, but it forces the insurance applicant to sign a Non-disclosure Agreement (NDA) to block the channel of information release, and it forbids the insured to release full contract information. For obligees, since they are unable to read the original content and terms of policy, their rights are unprotected.
Financial Analysis:
The major partner of PowerGuard is Hanover International. Its 2012 annual report shows that its after-tax profit is only about £8.7 million and its net assets about £120 million. An insurer like Hanover International is small-sized, and obviously not suitable to take on the long-term risks of China’s PV module warranty with so many insureds in China. Although this insurer is a subsidy of Hanover Reinsurance group, Hanover International, headquartered in the UK, is an independent legal party, and Hanover Reinsurance Group does not take unlimited liability of Hanover International.
At present, PowerGuard has covered more than 15 China-based solar module makers with a total accumulated annual policy limit of over USD 40M. Based on this development trend, Hanover International’s accumulated limit within the next three years will even be more than its net assets. If several solar module makers have serial losses, this insurer will likely become insolvent.
To our disappointment, many financing banks have not noticed the severity of this problem and do not have a clear understanding of the contradiction between the unsatisfied financial strength of the insurer, the quality issue of PV modules distressing the solar industry, and large future claims. Not only will the PV module makers suffer; the financiers will suffer far worse!
Summary：
The overseas 25-year insurance solution for China’s PV solar module makers has served as a reference for China’s local insurance industry, and it helps China’s insurers develop their own long-term insurance for the solar PV industry. Since overseas policies have lots of restrictions, China’s solar PV industry requires better solutions, especially China’s domestic solutions, to help the industry grow solidly.
About Author
Professor Yan Haifeng is the director of School of Finance, Nanjing University of Finance and Economics, P.R.C.
