Hard or Soft Cat?

Fraser McLachlan ProfileIn the insurance business, definitions are critical. Grey areas – and policy wording that is open to subjective interpretation – can pose an obstacle to claims settlement and a fair, equitable outcome for all parties involved in a loss.


But grey areas are also a fact of life, and, in a relatively young industry like renewable energy that is subject to constant evolution, insurers must look at a changing risk landscape and work with the industry to continually refine definitions.


Nat Cat is one area that is causing the insurance sector to think hard about the way it defines risks. We’ve spoken in the past about risk zones and how these artificial boundaries can lull project developers and owners into a false sense of security.


Now, as the trend towards extreme weather continues, a key focus for us is redefining Nat Cat itself.


If an unseasonal hailstorm causes a very large loss at a solar PV site, it has the same financial impact as a named Windstorm. Yet the insurance market fails to define such events, leaves them open to interpretation and then suffers the consequences. These grey areas, if we don’t address them, could leave Insureds vulnerable, through no fault of their own.


The reality is that two categories are starting to emerge – ‘Hard Cat’, which constitutes the traditional definitions of Nat Cat, such as Earthquake, Windstorm and Flood, and ‘Soft Cat’, including wider extreme or unseasonal weather events. These Soft Cat events can be just as damaging as Hard Cat when it comes down to it, and it’s important that they are defined properly.


Soft Cat is a major issue in renewables at the moment, driven by three main factors. As we have discussed previously, location-based Cat modelling has clear limitations, as some areas have poor geocoding and corresponding data. Furthermore, the global map for Cat is being redrawn by climate change, with incidents taking place outside of defined risk zones. Finally, sites under construction have proven particularly vulnerable to relatively minor adverse weather.


A substantial amount of renewable capacity is currently being rushed to completion to meet tax incentive and subsidy deadlines, and these projects could be greatly upset by this year’s windstorm season – whether or not their Cat exposure is ‘Hard’ or ‘Soft’.


In light of this, it is no longer acceptable for Brokers to cling to the old ‘soft market’, hope that ‘grey is good’ and seek to benefit from ambiguity. When a loss happens, a good Broker takes responsibility, points out to their client where there are shortcomings in their policy wording and explains how ‘grey’ in policy language has crept in as the soft market has carved out every last bit of profit in the insurance industry.


With a large proportion of the industry having never experienced a ‘hard market’ in their careers, Brokers need to quickly learn again how to deliver the ‘bad’ news and explain a double-digit rate increase to their client. Often, they will find that their client, the Insured, is expecting the obvious having seen year over year of double-digit reductions and widening of terms.


GCube continues to work with Insureds to help them through this process, to refine these definitions, explain why rates and deductibles need to increase and why issues like cyber are real and can no longer be ignored.


At our next Advisory Council in September, we will be inviting our US insureds to share their own views and experiences in an open forum, while our Broker Academy and Offshore Wind Risk Seminar will provide vital touchpoints with our colleagues in Europe and further afield.


In the meantime, today’s newsletter edition looks at our wider, ongoing drive to ‘reset the benchmark’ for renewable energy risks. Offshore wind provides a strong case study of how quickly things can change, and in our claims update, we highlight key risk trends to watch out for. In our market update, we look at the challenges faced by underwriters in renewables, and why it is time to adjust to a new normal loss expectation. Finally, with the next Broker Academy, Offshore Wind Risk Seminar and September Advisory Council on the horizon, we highlight upcoming opportunities to meet and engage with the team.


Enjoy the edition!


Fraser McLachlan

CEO, GCube Insurance