Climate change ‘altering risk profile’ for insuring renewables

As the renewables market continues to grow, re/insurers are increasingly seeking growth by underwriting the risks associated with the sector. But it can present very different challenges to fossil fuels and the transition has not always been a smooth one, Fraser McLachlan, CEO at GCube Underwriting, told Intelligent Insurer.

“Insurance for renewables is a very different model to more conventional power. We have seen around 500 claims a year for renewables whereas with conventional power we see only two or three but of course these claims are much larger,” he said.

Historically, insurers for fossil fuel power were reluctant to get involved with renewables. They were focused on the large returns that fossil fuel businesses could provide. However, renewables have become more attractive as the sector has expanded and public support for cleaner energy has soared. As a result, the market for insuring renewables saw new entrants looking to undercut premium prices, win business and take advantage of the soft market.

McLachlan said: “There were a lot of new entrants that didn't fully understand the attrition rates that come with insuring renewables. What’s more, both the number of claims and the size of claims increased meaning a number of players left the market.”

Claims are also becoming more costly due to increasingly extreme weather conditions, especially in North America, as McLachlan flagged up solar power plants as being far more susceptible to damage from hail and highwinds than other renewables. Figures from GCube suggest that solar accounts for 90 percent of claims that result from extreme weather.

Conversely, the figures show 90 percent of claims for onshore and offshore wind come from issues within the wind turbine structure, for example mechanical breakdown. An exception to this was in Puerto Rico, which lost around 120MW of onshore wind capacity when Hurricane Maria swept over the island in 2017.

“The weather in the US has changed dramatically. We’re seeing more tornados, hail and heavy rain with increasing severity. Climate change is therefore altering the risk profile for insuring renewable energy,” said McLachlan.

With significant rate increases in the re/insurance market, GCube underwriting is now looking to reset the benchmark that existed in the renewables insurance space five years ago. The company is now seeing growth in Asia having worked on the 128MW Formosa offshore wind farm in Taiwan as well as covering the construction and float-out risk of many of Japan's floating offshore wind farms.

Looking to the future, McLachlan believes insurtech could play an important role especially with the wind power sector suffering from such a high percentage of mechanical breakdowns. “We are looking at ways to relay data from the wind turbines. If the turbine is operational we can charge a premium but if the machine is idle we wouldn't charge a premium at all, it’s a pretty exciting development,” McLachlan said.

GCube underwriting is a specialist MGA with almost 25 years in the industry, writing around $120 million in premiums a year.