Climate change is grabbing headlines once again. An unprecedented heatwave in Canada, forecasts of the third worst wildfire season in western US since 1960, Prince Charles launching his Sustainable Markets Initiative insurance task force, and 128 of the world’s largest investors – controlling US$43 trillion in assets – now committed to a net zero emissions target. The list goes on. Unsurprisingly, against this backdrop, focus on – and investment in – renewable energy continues to intensify. These developments are having an impact on industry and the insurance market.
Shifting market dynamics
The green energy transition has resulted in a clear move by the oil and gas majors into renewables. This has had a knock-on effect on the insurance market – underwriters now need to be able to underwrite across the energy portfolio: upstream, downstream, operational power and renewables. As traditional upstream energy activity declines, those insurers that may have previously focused on oil and gas business are now moving into renewables.
As renewable energy projects increase in size and complexity, we will see a greater need for packaged policies with large exposures (increasingly with Critical Cat) being placed on a verticalized basis. So, with the renewables market set to accelerate at the same time as it has been suffering with significant and complex claims – including weather-related losses which are estimated to have risen three-fold in the past decade – the arrival of new underwriters and capacity into the space is cautiously received.
Getting to grips with the issues
However, these new arrivals will need to embark on a learning process to understand past trends and get to grips with rapid developments in the market. The renewables sector is constantly evolving with technological advancements to reduce costs and improve efficiency. For example, for many years solar was attractive to renewables underwriters. But with increasing competition costs have fallen to such a degree that question marks are being raised over the design considerations, quality of components and the competency of contractors and operations & maintenance providers.
A number of large losses due to hail, wildfire and storm damage mean that the sector has been struggling to make an underwriting profit. Technical issues have emerged around the effectiveness of solar panels to stow in order to protect against adverse weather conditions.
In the offshore wind market, subsea cabling (a long-standing Achilles’ heel for insurers) has recently suffered from further defective design and workmanship issues that could lead to losses running into hundreds of millions of dollars. And in onshore wind farms, there have been a material number of catastrophic turbine failures due to hub locking pins located at the top of turbines not being fully disengaged. We have also seen concerning trends of blade failures and lightning strikes which in some cases continue to re-occur on the same units year after year.
Ensuring coverage is fit for purpose
In the face of emerging trends and shifting weather patterns – and therefore risks – due to climate change, insurance policies need to be unambiguous and respond effectively.
Sompo International is actively involved in several London Market Association and Joint Rig Committee working groups with a focus on the introduction of new clauses into insurance policies to clarify coverage intent and application in the context of emerging developments.
Key areas of work address a number of the issues above including: Wildfire Mitigation Minimum Standards – to address amongst other items vegetation management and fire suppression; Hub Locking Pin Guidance – to ensure all pins have been safely, verifiably and fully disengaged; Microcracking Endorsements – to address increasing frequency and quantum of losses attributable to microfractures/microcracking within solar photovoltaic (PV) technology; and Serial Loss Clauses – application enhancements and differentiated cover for serial losses.
The renewable energy sector continues to present a challenging risk profile and this is destined to become more complex as the industry evolves. Whilst the market has shown disciplined hardening over the last 24 months, further improvement is still necessary to ensure long term viability. It is crucial that underwriters, brokers and clients work together to protect the stability and sustainability of the insurance market so that it can effectively support the transition to renewables.