Rosa Van Reyk, Underwriter, GCube Insurance Services discusses steps the industry must take to introduce a more robust damage cataloguing process and work openly with clients through the loss adjustment stage to mitigate risks in the claims process.
The renewable energy market has rapidly developed in recent years as increasing recognition of the negative effects of fossil fuels has generated growing social and political momentum towards greener energy sources. As a result of ongoing investment, renewable energy infrastructure has diversified both geographically into new markets, and technologically, with offshore wind – including floating projects –becoming a truly global proposition.
The resulting worldwide interest in renewable energy generation has created a surge in demand, with a growing variety of investors entering the space – alongside significant growth in regional supply chains.
That is not to say that the industry has not faced obstacles, however. The end of subsidies and FiT schemes in Europe in addition to more conservative government policies, in particular, is impacting new onshore wind development in markets like the UK and Germany. It is also driving the industry to consider its options for survival in a merchant risk environment, with projects exposed to fluctuations in market power pricing – and considerable innovation in risk management required to tackle this.
The insurance industry too has had to deal with a number of problems, with new markets bringing new risks – often resulting in large volumes of attritional losses, despite renewable energy claims remaining largely small and predictable, to the extent where some insurers have been forced to pull out of the renewable energy insurance segment altogether.
For example, GCube services over 400 claims annually and since 2016, global offshore wind claims seen by GCube have increased by 30%, with contractor error and defective design and materials making up over 60% of claims by cause of loss.
The effects of climate change are no longer ‘on the horizon’ either, with natural catastrophe (Nat Cat) hazards becoming ever more damaging, volatile and frequent, making up just 19% of GCube’s onshore wind claims between 2012 and 2018 but accounting for a large proportion of claims payments. As readers will be aware, hurricanes, earthquakes and other extreme weather events have made the last three years some of the costliest in insurance history. In 2017 alone it’s estimated that total global losses from natural disasters and catastrophes were an overwhelming $337 bn.
With the relatively recent emergence of such challenges and increasing frequency and severity with which they occur, insurers need to quickly innovate around the claims process to mitigate cost pressures on asset integrity and develop more long-term insurance pricing strategies to remain sustainable.
Innovating around the claims process
Clarity in Nat Cat definitions
As extreme weather behaviour continues to evolve, it is vital for insurers to redefine and categorise Nat Cat events to minimise grey areas in policy wording that could be subject to interpretation, as these can act as barriers to fair claims settlement.
Unseasonal, anomalous weather can be just as financially damaging as recognised Nat Cat events to renewable energy infrastructure, but without acknowledging this, insurers can unfairly leave insureds vulnerable – or vice-versa.
In truth, two categories of Nat Cat events are emerging – ‘Hard Cat’, made up of earthquakes, windstorms and other traditional definitions of extreme weather, and ‘Soft Cat’, which include an assortment of other potentially extreme and unseasonal weather events such as polar vortexes and wildfires.
Redefining policies wordings to distinguish between these two groups and remove any overlapping grey areas is essential and will require tangible and quantifiable differences in policy wordings, for example what wind speed, location or time of year constitutes a hurricane rather than an anomalous wind storm.
Both categories of incident are increasingly erratic, occurring outside of previously identified risk zones and for greater lengths of time, leaving renewables infrastructure at greater risk of damage from Nat Cat events. With location-based Cat modelling becoming rapidly outdated as a result, insurers must take into consideration trends in Nat Cat location and severity to ensure sustainable pricing strategies and provide insureds with more accurate risk assessments and project site recommendations.
Introduce a more robust damage cataloguing process
It’s easy to catalogue infrastructure or equipment damage… when you can see it.
Unfortunately, not all damage is visible to the naked eye and, without thorough examination, can easily go unnoticed. For example, external perils such as hailstorms and fire can cause internal structural damage to solar panels which are often not taken into account during damage inspections.
Solar ‘micro-cracking’ is another example of imperceptible damage. This can occur at any point during production or transportation, and poor handling or insufficient packaging by contractors will lead to reduced power output once operational. Often ineffective ‘repairs’ are made, leaving insureds with an unjustified repair bill and a reason to file further claims.
However, with organisations keen to protect their own reputation, identifying where, when and why the damage occurred can be difficult, and insurers should notify clients of the need for reputable supply chain partners who can deliver on the quality standard required to solve this problem and minimise imperceptible damage from contractor error.
On top of this, insurers should also emphasise the need for solar panels to be examined using x-rays, infra-red cameras, or photoluminescence tests both before operation and during the claims process, in order to establish when damage occurred and ensure a more accurate scope of damage estimation.
In addition, with a higher quality damage cataloguing process, insurers may be able to help insured limit financial losses and project downtime by recommending more effective repair or replacement strategies, and by identifying where equipment should be repaired rather than wholly replaced.
Work openly with clients through loss adjustment stage
We have all been confronted with highly complicated or contentious claims situations that have required further investigation to uncover whether the insured’s claim is covered under their insurance policy. But no matter how accurate our cause and scope of damage estimations are, without increasing transparency with insureds during the loss adjustment phase, we will continue to be caught in long, arduous and often reputationally damaging claims and legal procedures.
To avoid prolonging the claims process and costing both parties financially, insurers need to work openly with insureds either directly or through a loss adjuster to remove ambiguity on how evidence is collected or coverage decisions made and reduce the likelihood of insureds rejecting settlements that claim incomplete insurance coverage or hiring a loss assessor for a second opinion.
By explaining the loss adjustment process, sharing data and visiting the site of loss together during damage estimation, insurers can develop rapport and trust with clients and ensure a higher standard of damage cataloguing.
To maintain longevity, it is vital that insurers work with regulated loss adjusters and publicly direct them to ascertain fairly whether the insured is covered, and work with the client to develop a transparent means of working.
Innovation in these three key areas is needed to mitigate the impacts of a changing renewable energy claims landscape – which may otherwise spell the exits of further insurance businesses from the sector and ultimately reduce the insurability of renewables projects. Clarity in policy wording, thorough damage cataloguing and transparency throughout the claims process are all eminently achievable and will help the industry achieve long-term stability.