Challenging Times: Where next for the renewable energy insurance market?

Fraser McLachlanAfter years of soft market conditions, the global renewable energy insurance market is undergoing a significant and long overdue ‘reset’. Where broad terms and low premiums were once the norm, policies and pricings are now being brought in line with the realities of operating in a market exposed to not only frequent, attritional losses, but also the rising threat of major claims from Nat Cat and Extreme Weather.

 

The renewable energy sector has always built projects to a fixed cost or a budgeted amount both on and offshore. In many cases, and especially in the offshore sector, cheaper and less experienced contractors and Original Equipment Manufacturers have been used to save on construction costs, and, in some instances, proper due diligence has been sacrificed in the name of frugality – and usually at the expense of insurers.

 

Currently, the offshore industry is trying to find a fix for the latest issue to hit the industry – that of inter-array cable damage – with a recent, highly-publicised example potentially amounting to the most expensive loss in offshore wind’s history.

 

If, as an industry, offshore wind is to avoid similar scenarios in future, the implementation of cable protection techniques and other processes must take precedence above the cost that such activity inherently entails. Otherwise, unless there is a major transformation in the industry, the ability of the insurance sector to sustainably provide cover on a cost-effective basis may be compromised.

 

Settling for substandard quality and relying on insurers to pick up the bill for the subsequent claims afterwards is not the dominant culture everywhere, but it is not limited to just one company either. Since Ørsted made their issue public, more renewable energy project owners have, more quietly, disclosed the discovery of similar cable damages on their own sites. As the situation develops, the renewables insurance market may yet see additional claims come in further down the line. This topic is discussed further in our latest ‘Interview with an Underwriter’ with Andries Veldstra.

 

It’s not just the offshore wind industry itself that is to blame, however. The renewable energy insurance market is coming out of a very soft market cycle, wherein insurance companies have been overly eager to participate in high profile offshore wind projects, in part to satisfy their ESG obligations. Recently, we have seen more entrants into the offshore wind arena from the traditional oil and gas insurance market, which have little or no experience in underwriting offshore wind.

 

Coupled with new entrants in the onshore renewable energy space such as AIG, Markel and Aviva – to name but a few –  this trend has continued to contribute to an emerging culture of underpriced risk and broad terms and conditions, which may prove unsustainable in the long run.

 

Like subsea cables, claims from natural perils are only increasing in frequency and severity. Driven by rising global temperatures, increasing numbers of Extreme Weather events, and the greater number of projects being developed in suboptimal locations, the risk profile of natural perils to owners and insurers of renewable energy projects has rapidly changed over the last decade. Indeed, this year is predicted to be the worst wildfire season in the United States, and it will not just be restricted to California.

 

According to GCube’s data, outlined in our ‘Hail or High Water’ report launched earlier this year, the average solar loss due to traditional Nat Cat or Extreme Weather was almost 2400% higher than the average non-weather-related solar loss in 2019. Indeed, across both wind and solar, the average Nat Cat or Extreme Weather-related loss in the latter half of the last 10 years was over 300% higher than before 2015.

 

By contrast, insurance premiums, whilst up, have come no way near the increase needed to cover such events. Restricting limits and increasing deductibles has become essential for insurers to help ensure that a more equitable balance of risk sharing can be achieved between project owners, developers, investors and insurers.

 

Having successfully weathered this difficult period along with the coronavirus pandemic, the more discerning insurers have continued to follow GCube’s example as a market leader, narrowing policy terms and increasing deductibles and premiums. But whereas the ‘race to the bottom’ driven by soft market conditions can last for several years, market hardening is normally a swift affair. This begs two questions; how long will the ‘hard market’ in renewables last, and how can we assess and respond to the ongoing fallout from years of soft market conditions?

 

There are lessons to be learned from the renewable energy insurance sector’s handling of attritional and Nat Cat losses, and these will need to be applied more broadly to tackle emerging market challenges. Cyber-attacks on the global energy sector are becoming increasingly sophisticated, as recently demonstrated by the Colonial pipeline ransomware attack, and COVID will likely continue to impact global industries over the next five years.

 

The insurance market has begun to make much-needed corrections to maintain its robustness following over a decade of decline, but further work is still required as we support renewable energy developers and operators in adapting to their evolving risk profile.

 

Fraser McLachlan

CEO, GCube