Insurance Thought Leadership Article
Insuring Net Zero –A new perspective on the Insurance-Investment-Data Nexus in Offshore Wind Energy
The electricity sector will be the first to truly decarbonise and will need to drive the low-carbon transition in other sectors in the economy, such as transport and heating. Offshore wind energy is being installed in increasingly large capacities. The UK aims to achieve 50 GW of offshore wind by 2030, more than tripling today’s capacity and planning for 5 GW of floating wind installations1. The Ostend Declaration2 between EU North Sea countries aims to install 120 GW of offshore wind energy by 2030 and at least 300 GW by 2050, a twentyfold increase of current capacities by 2050. Around the world, the Global Wind Energy Council estimates in its latest 2023 report that over 380 GW of new offshore wind capacity will be installed over the next decade, with the large majority from 2028 onwards3.
The trends in offshore wind are clear, ever larger capacity turbines which have exceeded 15MW of nameplate capacity, sites further offshore, in deeper, more exposed locations and larger farms with more turbines. The recently completed Seagreen offshore wind farm4 in the North Sea will be Scotland’s largest with 114 off 10MW turbines, boasting a total of 0.75GW capacity at 27km offshore. It is already being dwarfed by the shadows of the phased Dogger Bank project building 3.6GW in three phases, siting 277 off 13MW turbines 130km out in the North Sea. The first electricity reached the grid in October 20235 and upon completion (planned for 2026) it will be the world’s largest offshore wind farm, with each turbine almost standing as tall as the Shard skyscraper in London. To be precise, the Shard is still 50m higher.
The engineering records are deservingly recognised as monumental milestones. But the complex largescale infrastructure projects require much more than engineering. Leasing, permitting, planning, project management, stable revenue streams and large financial investment are all necessities. The global 5-year rolling average for offshore wind capital expenditure hovered around US$ 3.5million/MW6, with recently reported cost increases in the order of 40%7, which has led to a slight cooling of the market, whilst cost and price balance out for projects under development.
One unassuming but indispensable element is project insurance. No project would reach financial close, be built, or operate without insurance in place.
Meeting Net Zero transition targets means insuring against project risks, which in turn enables project finance, site development, turbine and balance of plant manufacture, installation, commissioning, operation and eventually decommissioning. Yet, project insurance does not often receive the recognition and focus it deserves. It is estimated that the offshore wind insurance market in Europe alone could generate $2bn-$3bn of gross written premiums by 20308 .
This article seeks to highlight the important role that insurance plays in offshore wind. In-depth interviews with different sector stakeholders explored the challenges, benefits and possible synergies of offshore wind insurance seeking out new ideas and opportunities.
The task
The need for insurance is clear and undisputed. Insurance enables project finance and provides an opportunity for risk appraisal and management in the project design and realisation phases. Insurance also provides peace of mind, covering any catastrophic losses and hence ‘smoothing’ the path to successful offshore wind projects.
Meet the insurance market actors
The offshore wind insurance market involves several stakeholders, each playing a critical role in the management and coverage of risks associated with offshore wind projects. Here are the main stakeholders in their roles and in person:
Spotlight 1: Loss Adjuster
In the world of offshore wind insurance, meet the Loss Adjuster, a dedicated professional, meticulous in every detail. They are the investigator who steps in when the storm hits, cables break and gearboxes fail, assessing the damage and evaluating claims. Their responsibilities include on-site inspections, gathering evidence, and providing a comprehensive report to the insurance company.
Matthew Yau is the Director of Lloyd Warwick International in London. He has been a loss adjuster for 18 years. He receives the call when losses occur, so he has seen serial defects, incorrect transition piece designs and installation woes up close in person. He is an expert mediator and has handled large and complex claims for an offshore wind portfolio of over 2GW.
Insurance is ‘circular’: Claims drive insurance product sales and insurance drives claims.”
Matthew Yau, Lloyd Warwick
Spotlight 2: Insurance Company
At the heart of the insurance market, the Insurance Company, also known as the Underwriter, takes centre stage. These experts in risk evaluation determine the terms and conditions of coverage, ensuring that even if things go wrong, the show goes on for offshore wind projects. They assess the risks, set premiums, word the policy and are ultimately paying out claims when losses occur.
Adam Reed is global leader at Allianz Commercial, covering offshore renewables and upstream energy. He has extensive experience in oil and gas underwriting and has seen the challenges in offshore wind insurance.
It is very difficult to price your way out of bad wording.”
Adam Reed, Allianz Commercial
Dr Tariq Dawood leads the Renewables Risk Management Team at Aviva Risk Management Solutions in London. He has worked in the power industry for just under 20 years, including nuclear generation, conventional power as well as onshore and offshore wind assets. He has previously been Lead Engineer and Technical Expert for Offshore Wind Operations & Maintenance at EDF UK, so has a unique perspective of the function and value of insurance in the asset development lifecycle.
The value risk engineering provides is to help the insured party better understand the risk profile of their project or asset.”
Dr Tariq Dawood, Aviva
Fraser McLachlan is the CEO and Founder of GCube Underwriting Ltd. He has over 35 years’ experience in the insurance market and has seen the offshore wind insurance market evolve from the very beginning, having insured the world’s first commercial offshore wind farm, Vindeby in Denmark. Back in 1991 the trailblazing pilot project capacity was just shy of 5MW in total, with 11 off 450kW turbines9. Fraser founded GCube in 2007 and has underwritten projects globally.
Spotlight 3: Asset Owner
Enter the Asset Owner, they are the driving force behind the offshore wind project, the one who purchases insurance policies to safeguard their own and others’ investments. Asset owners work closely with insurance brokers to select the most suitable coverage and manage their insurance needs. In the world of offshore wind insurance, asset owners are the customer, but are they king?
James McCallum is Head of Insurance at SSE Renewables and has over 20 years of experience in the insurance sector. His 12 years at SSE have been governed by offshore wind. Together with his team he led the placement of the Seagreen and Dogger Bank projects, currently the largest offshore wind insurance placement. He is currently working on Ossian Offshore Wind farm, which has the potential to be one of the largest floating offshore wind projects in the world, with up to 3.6GW total capacity.
Whilst the focus from an insurance perspective is often on what can go wrong, claims and defects, there is still a lot to be celebrated. We are building huge structures with, overall, limited issues. If projects are successful, it is to everyone’s benefit.”
James McCallum, SSE Renewables
Spotlight 4: Insurance Broker
Finally, meet the Broker, a true intermediary. They are the bridge between the Asset Owner and the Insurance Company. Their expertise and market experience informs the asset owners’ risk assessment, coverage options, and policy placement. They also assist in claims management and ensuring that the asset owner’s interests are represented in the insurance process. Their role is to find and make the perfect match.
Tom Sexton is Partner and Head of the Renewables, Power and Energy team at McGill and Partners. He has been an insurance broker for over thirty years and has been involved in offshore wind insurance from the very beginning, since the first UK offshore windfarm in 1998, and is one of the most recognised specialists in this field. He has placed over 50 offshore wind projects around the world.
We are in this tricky situation right now, whereby insurers won’t necessarily pick up that prototype and R&D risk; suppliers won’t stand behind their warranties or will demand that insurance does, which means that developers are left holding the risk.”
Tom Sexton, McGill and Partners
For this article all six actors have been interviewed to explore the challenges, opportunities and new ideas for offshore wind insurance and recent developments in asset condition monitoring. Here are six facets of insuring Net Zero, illuminated from quite different angles:
1. Context matters
Adam Reed offers some important context. Insurance for offshore wind used to be based on the so-called WELCAR 2001 wording, developed by the Wellington Syndicate at Lloyd’s and issued in 2001.
It was produced in response to a period with high claims in offshore construction in the 1990s, exceeding premiums by a factor of five10. WELCAR provides coverage on an all-risks basis, i.e., “(…) all risks of physical loss of and/or damage to the property covered (…)”11. Hence the insurance provides the broadest of cover, subject to specific exclusions, e.g., damage caused by inherent wear and tear. Only fortuitous losses are recoverable under this all-risk’s insurance, i.e., the root cause must be accidental, unforeseen and with an element of chance. In other words, all-risks insurance covers any risk, unless it is explicitly excluded.
During the earlier years of Offshore Wind insurance, a number of WELCAR-based clauses had been broadened by brokers and insurers to give levels of coverage that threatened the long-term sustainability of the insurance of these projects. The use of this broad wording in offshore wind had covered a lot of value for relatively low premiums, which caused losses for insurers in the early phase of offshore wind. Adam concisely summarises the insurer perspective:
It is very difficult to price your way out of bad wording.”
Whilst there is a tension between asset owners, preferring broad wording, and insurers, preferring specific wording, it is in the interest of both to arrive at a premium level that covers the risks and pays on claims. Of course, it still must be profitable for the insurer, allowing the insurer to achieve a combined ratio well under 100. Otherwise, the necessary underwriting capacity will not be available for offshore wind.
In Tom Sexton’s view, insurers have supported the industry very well. The current and repeated push to bigger turbines that do not have long-standing certification and are relatively untested is challenging for insurers, because they do not want to take on prototype or research and development risk.
Given the timelines of the large offshore wind farms, manufacturing contracts are often placed ahead of insurance. The earlier the insurer can be involved the less surprises will appear in the process. The whole value chain – design, contractors, investors – can be informed by insurers and the information they receive from their loss adjusters, Fraser McLachlan explains. James McCallum agrees:
The insurance placement process should be designed to allow insurers to augment the asset owner activities; hence insurers should be a key member of the project development team. SSE’s goal is to be the most open and engaging developer in the market.”
2. New data-driven insurance products? The trigger – trend dilemma
Wind turbine condition monitoring is now generating a wealth of data that can inform on the reliability and health of the asset12. The increased and continuous availability of condition and monitoring data is an opportunity for new insurance approaches, that are technically feasible and should –in theory – lower the premiums.
In practice, and the way the insurance contracts are structured, there needs to be a definite trigger to enable a claim. Assuming extensive health monitoring data would reveal a deteriorating inter-array cable, the operator/asset owner would be obliged to avoid further deterioration (e.g., limit the output of the affected turbines) or repair the fault. In other words, if the potential trend / pathway to a trigger is identified early, the threshold for a claim is no longer met.
Thus, Matthew Yau raises that if the health condition monitoring is directly applied to existing insurance products, the conditions for a valid claim would often not be met any longer. This trigger-trend dilemma would require all parties to rethink existing products, premiums, and claim-triggers. One possibility could be data-driven, so-called parametric products.
The literature defines parametric insurance as “conditioning the indemnity paid to the policyholder not on the financial value of the losses incurred, but on publicly observable information correlated with these losses.”13 They already play a role for underwriting climatic risks in agriculture, e.g., amount of rainfall, and property catastrophic insurance.
James McCallum agrees that whilst conditions for this type of insurance are not quite there yet, a combination of traditional products with parametric elements is feasible. If data would be accessible as a report to insurers, revealing individual turbine performance, it should enable tailored products. A live policy using incoming data would enable to update the risk and better understand ongoing risk exposure.
12 Artigao, E., Martín-Martínez, S., Honrubia-Escribano, A. and Gómez-Lázaro, E., 2018. Wind turbine reliability: A
development. Appliedenergy, 228, pp.1569-1583. 13 Louaas, A. and Picard, P., 2022. On the design of optimal parametric insurance. wu.ac.at/fileadmin/wu/d/i/finance/EGRIE_2022/Papers/B1.1._Picard.pdf
3. Insurance market capacity constraints
Insurers have reported concerns regarding cluster developments. For example, the planned developments in Taiwan, the US East Coast and Scotland would concentrate over 25GW of installed capacity within the next 10 years. This may lead to a limited insurance capacity in the market, that could in turn be a constraint for planned developments14.
James McCallum offers a way forward to best use available capacity:
One thing we need to do better as project developers is to properly understand the amount of insurance capacity we require building future projects.”
If the severity of losses could be better understood, if confidence in the data could be increased, then asset owners can insure to a lower level with more confidence, which would free up more capacity in the market. So as an industry, asset owners could only buy the insurance capacity that is needed.
Dr Tariq Dawood is aligned with this thought, albeit from the other side:
Insurance is not there to pick up the tab. Insurance is there to provide financial security, so that banks lend, to cover highly unlikely, unforeseen scenarios. Currently, insurance is picking up risk over and beyond what the market should be doing.”
He sees the major pinch points regarding losses are the cables and offshore sub-stations, which also leads to tightened capacity. A way to improve this and to indirectly increase capacity by avoiding losses is to build redundancy into the wind farm. This is an ongoing tension between insurers and asset owners – investing into quality components and monitoring is one strategy supported by developers, constructing redundancy is another strategy to increase available capacity. The main mechanism is of course the price of premium. As soon as the initial experience (e.g., with typhoons) is secured and premiums are still attractive, the capacity will be widely available in the market, suggests Tom Sexton, so no immediate need to worry.
4. Tomorrow’s insurance, what are the next-generation insurance products?
Fraser McLachlan sees prospect of new products in the use of data analytics to project forward and estimate failure likelihoods. These products would be a benefit to all, the owners, the developers, and the manufacturers, which will help the insurance industry overall and hence reduce the cost of insurance.
The main hindrance is the lack of data sharing, where most data is owned and retained by the manufacturers. Hence the insurers try to promote data sharing and the greater use of data across the industry. Whilst this may cause short-term pain in the sector, it holds the potential to be of long-term benefit to the industry.
Bespoke risk modelling to estimate exposure has a future for offshore wind thinks Tom Sexton. For example, specific loss modelling for typhoons in Asia has not been conducted for offshore assets yet, as so far, the main insurance losses in those events were onshore. There is work underway that seeks to establish this dedicated risk appraisal for future insurance calculations15
For Dr Tariq Dawood, there are lessons to be learned from other asset classes, which adopted a holistic risk management approach. It is a common insurance challenge, that although certain hazards are known, the implications of those hazards have not been assessed holistically. New market approaches are possible, when the risk, i.e., the likelihood of hazards and their consequences, is managed jointly. For offshore wind, the sector has experienced similar types of losses, but the risk management approach has not necessarily changed to sufficiently mitigate the losses, as insurance was available to be relied on. As a result, projects worth billions of pounds might not get insurance cover and would have to be self-insured, backed by asset owners, balance sheets.
As a sector, we are trying to apply standards that have been developed and are continuously evolving because the pace of innovation in offshore wind is going so fast, the standards can’t keep up.”
This creates uncertainty, as constructing and operating offshore wind to existing standards is relying on past experiences, rather than looking ahead.
5. Trading Risk – risk allocation amongst stakeholders
There is a challenge around risk allocation. The asset owner sits between the contractor and the insurer.
James McCallum:
Insurers are very focused – they don’t want to be picking up unnecessary risk, risk that they don’t think should be covered. It means the quality of our information has to be much better. It has to be in a concise format so that the insurer can interpret it.”
Some of the challenges for asset owners are already visible: Insurers are squeezing down what they offer, applying higher scrutiny on claims, higher deductibles, restrictions on coverage, and restrictions in sublimits. On the other side, the contractors expect insurance cover at a higher level, where the market was a few years ago.
“As a modus operandi, asset owners should act as a prudent uninsured, which is what I tell my team (James McCallum). An insurer would typically tell the insured part to act as a “prudent uninsured”, in situations where the insurer has denied cover, or wants more time to decide whether a claim is covered. This means that the asset owner should make decisions, as if it did not have any insurance cover, i.e., carrying all the risk, as if uninsured16. Whilst this is a cautious mindset, asset owners and investors do want to shift the risk to the insurance or supply chain where possible.
Fraser McLachlan argues with verve: “There has got to be a greater degree of risk sharing across the industry. That’s developers, that’s manufacturers, that’s insurers and that’s investors, it’s got to be more balanced.”
6. Pie Chart of Facts
By virtue of their definition pie charts show the ‘whole’ picture, making it easy to compare and visualise different elements at a glance.
In an attempt to visually summarise the perspectives of the different insurance market actors, let the pie charts speak on behalf of the actors. The charts take a high-level view and there is good agreement on the proportion of mechanical and human error between the loss adjuster and the asset owner.
The separation between construction and operating phase is in line with readily available insurance products and underlines the different risk profiles along the project phases.
Perhaps surprising, weather, and natural catastrophe is a relatively small fraction for current installations but is envisaged to dominate claims in Asia and Japan in the future.
“What is the percentage cause of losses in offshore wind?”
Conclusions
Reflecting on the different interviews with all actors, some common themes and insights emerged.
It is useful for offshore wind developers and asset owners, to take the perspective of insurers, brokers, and loss adjusters, who are exposed and are operating in other sectors, i.e., different asset classes. Offshore wind is generally classed as a sector that has horizontal risks, i.e., no substantial peaks in losses, compared to other asset classes, that potentially face high impact catastrophic losses. In other words, steady minor losses and the absence of large loss excursions are a pedigree for investment, if the horizontal losses are underwritten.
There was general agreement that whilst there was immediate pressure on the existing insurance market capacity, this should not be an issue in the future. There were two viewpoints: 1. Asset owners question if they buy too much capacity for the losses they expect, which will have to be corroborated by more experience and data. 2. Insurers and Brokers are confident that the capacity will react on price, so a tightening of capacity now, should subsequently make more capacity available.
All stakeholders were aware of the history of risk allocation in the sector and that the majority of risk has been passed around between Insurance, contractors, and manufacturers. There is a recognition that the risks need to be jointly assessed, mitigated, and shared between all parties. If all sides are willing to compromise and enter a contract, every party should carry an acceptable degree of risk, making it a joint undertaking where all parties are likely to benefit modestly, providing for a sustainable sector approach.
The increased availability of data and the computational power of Artificial Intelligence will open new opportunities for data-driven insurance products. Existing health and car insurance products already make use of the data monitoring and data analysis return for reduced insurance premiums.
Prominent examples include the monitoring of lifestyles choices, including physical exercise, with wearable devices or the monitoring of car driving behavior with dash cams. Both products are examples of so-called “behavior-based personalization”17 where products and goods are increasingly focused on the behavior and lifestyle of actors. Condition monitoring data is certainly widely available in the offshore wind sector, but the definition of use cases and suitable pilot products is more complex, with different operating conditions and restrictions on data ownership. Hence, whilst the potential of Big Data for offshore wind insurance is recognised, it cannot just be applied to the sector but will require the creation of new data-centric insurance markets.
With increasing underwriting values and capital investment in the billions of pounds the role and function of insurance will evolve, just as the turbines themselves.
To conclude, here are future perspectives for all actors in order of appearance:
The loss adjuster will continue to be an important connector and ‘risk mediator’ between asset owners and insurers. Project involvement will also include to be a critical friend to both parties in the early project development stage.
Insurance providers have a potential role as ‘risk mediator’ and critical friend in the early stages of project development. There was a preference from both sides, insurers, and asset owners, to be engaged as early as possible in the project development to have the opportunity of project risk identification and mitigation. Avoiding losses and claims that way would benefit the entire value chain.
The asset owner is ultimately responsible to deliver the installation and operation of the offshore wind assets. Following all capital and operational cost, including insurance, the investment must be profitable, necessitating a careful calibration between existing practice and innovative costreduction measures. The aim for project insurance is to cover specific risks with value for money insurance premiums.
The insurance broker has the market overview and independence to evaluate the common ground between asset owners and insurers, enabling them to assist in the complex trade-offs and structuring of insurance cover for future projects. The combination of market intelligence and project experience is the bridge between insurer and asset owners.
In summary, all stakeholders have an important role to play in the Insurance-Investment-Data Nexus in Offshore Wind Energy. There is drama, informed discussion, hard-nosed negotiation, and targeted mediation on display. Whilst existing insurance products might not yet be fully compatible with the state of the art in condition monitoring in offshore wind, there is ample opportunity to innovate. Insurance could not just be tailored to the asset owner and project finance requirements and capabilities, but could also update dynamically, depending on asset health; shift focus, and coverage depending on project stages/concerns and could consider the asset history regarding production, maintenance, and claims in adjusting premiums. In short, current, and future offshore wind installations will have an abundance of condition monitoring, operational and contextual data available, that offers an opportunity to evolve insurance products. The offshore wind industry is on its way to ensuring society has the electricity it requires for the Net Zero transition and insurance evolves and innovates around this sustainable asset class.
Acknowledgments: This article would not have been possible without the thoughts and insights of the leading experts in the field, who all kindly agreed to share their views and patiently answered the insurance questions of an engineer. Thanks to SSE, who commissioned this work and the Exeter Design Studio for their artwork.
About the author: Prof Philipp Thies is a Professor of Renewable Energy at the University of Exeter. His research focus lies in risk and reliability engineering and component testing. Much of his work has been in the area of offshore wind, including cable reliability testing, operations and maintenance strategies and failure rate assessments. With a background in industrial engineering, he enjoys the interdisciplinarity of engineering projects.