Renewable energy is a growing sector for reinsurers. And yet despite clear demand, the market is patchy, with some reinsurers not participating – costing both insurance providers and buyers. What’s going wrong, and what can we do to fix things to everyone’s benefit?

Climate change has rightly given enterprise a new focus on renewables. But the renewables industry itself is comparatively new, certainly when compared to traditional energy sources like oil and gas. The first offshore wind farm, Vindeby off the Danish island of Lolland, was only constructed in 1991, with a capacity of just under 5MW. And the sector has evolved rapidly: the largest operational offshore wind farm today is the UK’s Hornsea 2, with a capacity of 1,386 MW – almost 300 times as large.

For reinsurers, this presents several challenges. Truly destructive disasters do happen, but not particularly often. Just as importantly, the rate at which the wind turbine industry has matured – with economies of scale, international co-operation and manufacturing, improvements in design, capability, repairability and lifespan – also means that the parameters by which treaties might be constructed in the 1990s and early 2000s are simply invalid today. These points mean both a relative paucity of claim/loss data with which to derive assumptions and scenarios; and less of a statistically reliable base from which to understand risk. 

Assessing risk is also further challenged by the fact that those thirty years of wind power have also coincided with a dramatic increase in adverse weather events which insurers have had to contend with. The data for these weather events is of course very widely available and appreciated, but it adds a new dimension of complexity to risk.

Allphins works with over half of the energy treaty market and many of those firms tell us that, as well as poor loss information, they also suffer a lack of high-quality exposure data from insurers with which to assess the wind power sector for treaty. There is no standardised set of scenarios in wind and no consistent set of parameters which would yield meaningful insight once shared. Industry leaders agree – speaking about the even more embryonic floating pile business, Gallagher Re recently wrote:

“Sharing knowledge gained from early development could allow the insurance industry to be more pointed in its scope and premiums, and ensure its products are fit for purpose.”

The approach of reinsurers to date has therefore been to take a best-guess from the closest adjacent market segment for which there is excellent data: the offshore energy class. This has been successful – indeed without it, the wind energy industry would be crippled.

But whilst it may be a best-guess, it’s not a good guess. Yes, both offshore wind and oil/gas face some of the most treacherous weather challenges in the world; but that’s where the similarities end. Offshore oil and gas platforms connect with pipelines, which in the event of a disaster cause huge pollution problems and rapidly increasing costs; wind farms do not. Additionally, subsea cables used in offshore wind farms are not as robust as pipelines, leading to a significant number of failures. According to DNV, 80 percent of insurance claims in offshore wind are related to subsea cable failures, highlighting a critical risk management challenge for the industry. The number of oil/gas platform mishaps which can cause total destruction and write-off (particularly fire) is fairly high and platforms are unitary: one problem can destroy the whole unit. Wind turbines, conversely, are discrete: they can often be repaired and an individual pile is easily replaced even if it collapses. And with today’s modern fleets of turbines, this will barely even register a flicker in lost supply. Insurance Business reports, “While catastrophic collapses are rare, more frequent are minor failures that demand maintenance or component replacement, leading to operational disruptions and financial losses.”

On the other hand, those operational disruptions matter: oil and gas are not valued in real time, whereas if a key wind-sourced power cable from sea to shore is damaged, the attritional loss is immediate, because wind power cannot be stored. When wind is lost, it's lost from the grid immediately and forever. It's also important to note that there is very limited oil storage on a platform and zero gas storage, except for leaving them in the well. And that’s before we consider losses due to defects, which may be subrogated back to the manufacturer – a process which Gallagher Re has recently said is full of pitfalls. Clearly, the PML profile for wind is dramatically different to that of traditional offshore energy.

As renewables become increasingly important to the world’s energy system and more prevalent in the world’s seas, there is increasing demand in the market for insurance, and with that, a hunger for competition. Reinsurers owe it to the industry and to their own balance sheets to better understand the risks; and to uncouple the analysis from traditional energy.

At Allphins, we consistently find that granularity of data is key to achieving clearer risk profiles. We would seek consensus over the granularity of data to be shared: at wind farm level vs groups of turbines, the definition of a worst case scenario (does this include just turbines or attachment architecture, cables etc), and what a PML might look like (and the assumptions to get to that definition). Only then can the market begin to use insight to attach meaningful damage ratios to scenarios which are particular to wind energy catastrophes.

This becomes even more important as wind farms grow in size (an inescapable industry trend). For the reinsurance market, the growing size of wind farms presents an increased exposure risk. While offshore wind farms face unique challenges distinct from traditional energy platforms, their aggregation in specific areas introduces new complexities. This is particularly relevant when considering potential concurrent onshore events, such as earthquakes or typhoons, which could exacerbate the overall risk profile. 

As the dataset grows year on year and therefore becomes more insightful, reinsurers can increasingly provide cover that matches risk while reducing their exposure. COO of Allphins, Antonin de Benoist, says, “More data and more consistency means more understanding and more appetite, which is a win-win. Today, the market is under-powered because we have reinsurers who won’t underwrite wind farms. With enough insight provided in a consistent way, and with appropriate premiums, they will enter and build the market. And buy-side, that will translate into more options for coverage or better terms.” 

To find out how Allphins can help you make sense of all your data, get in touch at contact@allphins.com