Interview with an Underwriter: Overcoming supply chain and operating risks in offshore wind

 

Once seen as an interesting technology but with few serious prospects, offshore wind is now set to explode onto the global energy scene in the next few years. Driven by rapidly falling costs, numerous insurers have rushed into the market to capitalise on the opportunity, but often without taking the steps necessary to effectively assess its financial risks. We spoke to GCube Senior Underwriter Andries Veldstra for his take on some of the main messages for GCube’s insureds in the offshore wind space.

 

What are the most notable challenges which the offshore wind insurance sector has faced in recent years?

 

A key focus for developers in the offshore wind sector has been to increase the technology’s cost competitiveness with other energy sources, which has often led to cost cutting across the design, construction and operational stages of projects being prioritised. This has put additional pressure on Original Equipment Manufacturers and contractors to reduce costs.

 

In some cases, this ‘race to the bottom’ has led to a dip in quality standards, with 60% of claims since 2016 caused by contractor error or defective design and materials. We have seen recent examples of prominent offshore wind farm owners choosing manufacturers known for producing malfunctioning cables and only testing 25% in quality checks, demonstrating how the industry’s short-term focus is leading to risk being transferred directly to insurers. As a result, since 2016 global offshore wind claims have risen 30% year on year.

 

The subsequent increasing frequency and severity of offshore wind claims has caught new entrants to the market off-guard. Many oil & gas insurers followed BP and other oil and gas majors into the offshore wind sector, offering low premiums and deductibles along with broad terms and conditions. But as losses due to extreme weather, component defects, contractor error and more recently fires have mounted, a number of these insurers are now questioning their decision to enter the sector.

 

In addition, the scale of offshore wind projects often requires multiple insurers to cover the project on a syndicated basis in order to spread risk. However, the lack of collaboration between these insurers in regard to the policy definitions, sub-limits, deductibles and premiums charged to the owner – known as a verticalised placements – make it extremely complex and time-consuming to ascertain which insurer is liable when a claim occurs. This is becoming a bigger and bigger problem as claims are filed more frequently.

 

In light of the $490m Ørsted cable issues announced in May 2021, are cable claims becoming a bigger problem in the offshore wind industry?

 

Cable claims have existed in one form or another since the birth of the sector, accounting for approximately 70% of all offshore wind losses. A lack of both cross-industry collaboration and standardisation in regard to the testing and certification of cables have prevented the market from fully resolving the issues, leading to unnecessary claims continuing to impact the market.

 

The $490m Ørsted cost to rectify the issue is simply the latest in this long line of cable problems, though it will become the largest cable loss in history should the full amount become an insured loss – purely because it affects so many wind farms with the same design. It is believed that the damage has been caused by tidal movements dragging the inter-array cables which connect individual turbines to the offshore substation across the sea floor. Originally, rocks were placed over the cables to keep them static, but for some unknown reason the industry stopped placing them, seemingly in a bid to reduce costs, resulting in the cable protection system and the cable itself being damaged.

 

Numerous other offshore wind developers also followed suit, and RWE and other firms have recently announced that they have found damage to cable protection systems at their sites. It is not yet known exactly how many European offshore wind projects currently in operation are facing the same issue, but as the practice of placing rocks was widely abandoned a number of years ago it is possible that we could see billions in claims cumulatively over the next couple of years.

 

What can offshore wind insurers do to reduce their exposure as claims increase in frequency?

 

For as long as the offshore wind market continues to prioritise cost over quality and rely on contractors and component suppliers towards the cheaper end of the market, then raising premiums, increasing deductibles and narrowing terms and conditions will be critical to reducing insurers’ exposure to offshore wind claims.

 

Soft market conditions have historically meant that the offshore wind insurance market has taken the brunt of financial losses. In previous years, broad policy terms enabled contractors, suppliers and developers to be covered under the developers’ insurance policy, leading to unsustainable losses in the insurance sector. Insurers need to ensure that responsibility for offshore wind’s financial risks are shared equitably across the supply chain in order to reduce claims. The appropriate transfer of risk to insurers needs to be continually recalibrated to address this and maintain quality standards.

 

Insurers who are keen to take advantage of the significant opportunity offered by offshore wind should learn from the mistakes made by onshore wind insurers, and ultimately follow industry leaders in refining terms and conditions and implementing precautionary measures to reduce their exposure.

 

With floating offshore wind projects set to be developed off the US west coast, what challenges do developers of floating offshore wind projects need to overcome for the technology to be commercialised?

 

Floating offshore wind projects are still very prototypical from an insurer’s perspective, with the technology currently in use originally designed for fixed-bottom projects. The increased movement of floating structures could accelerate metal fatigue as a result, leading to greater uncertainty around the expected lifetime of individual components.

 

The unpredictability around the technology’s behaviour also adds considerable financial risk to the development of utility-scale projects, with development and repair costs still extremely high in comparison to more mature technologies such as fixed-bottom foundations. In addition, dynamic mooring lines, Nat Cat perils and undeveloped domestic supply chains all present substantial unknowns to insurers, and will likely require higher premium rates and deductibles, along with greater limitations on the coverage that insurers can sustainably offer.

 

GCube was one of the first insurers to be involved in the development of US offshore wind projects, with multiple projects insured to date. We have worked closely with our clients to ensure that claims are paid in an expedient manner and base our pricing on our unparalleled appreciation of market-specific risks. Through our local US-based team of offshore wind underwriting specialists GCube has been able to fully support clients in the offshore wind space for over 25 years.