Why Insurance Claims in Renewable Energy Industry Are Rising

April 4, 2019

The frequency and severity of insurance claims in the U.S. renewable energy market have significantly increased over the last five years, meaning insurers and asset owners must reset their benchmark for renewable energy risks, according to an insurer that specializes in the renewable energy market.

According to California-based GCube Insurance, the claims burst can be attributed to component vulnerability, defective designs and changing original equipment manufacturer (OEM) warranties, along with extreme weather damage.

GCube said that at its recent Advisory Council meeting, asset owners and risk managers in the U.S. renewable energy market raised concerns about the impact of cost pressures, both on the integrity of assets and on sustainable insurance pricing.

In particular, accelerated build times have caused an unusual amount of material damage during construction. As construction firms have come under pressure to build projects more efficiently and in shorter timeframes, less experienced personnel are being used to handle increasingly complex equipment, resulting in a higher frequency and severity of claims, attendees were told.

At the same time, component failure has meant higher costs. The increased complexity of components makes them harder to replace in isolation. In wind energy, with newer blades, any component damage may mean replacing the entire blade, which raises operation and maintenance costs, according to the insurer.

Also, design issues in some uncertified models are resulting in equipment failure. While this issue may be resolved over time, both wind and solar projects remain vulnerable to mechanical and electrical breakdown in this period of continued technical innovation in the sector, the insurer said.

A recent focus on cost-cutting and efficiency has also led to diminished OEM warranty strength. Due to increased losses and financial pressure, the quality of OEM guarantees has been reduced, GCube said, meaning that asset owners may end up without sufficient OEM support when equipment fails.

These challenges have been further exacerbated by extreme weather risk, with wildfires, hurricanes and tornadoes now occurring out of season and accounting for 15 percent of all claims in 2018. For 2019 GCube expects continued high levels of extreme weather losses, including continued wildfire claims in California, tornado damage in the Southeast and hurricanes.

At the meeting, Jatin Sharma, president of GCube, discussed how the renewable energy industry has changed.

“The renewables market has started to outgrow subsidies and with that comes a whole new level of competition. This pressure often has unforeseen results: apart from anything, increased M&A activity means you might end up with a project with a loss history that isn’t factored into calculations,” he said.

He stressed the value of dialogue between insurers and insureds as a way to tackle these issues collectively.

“We cannot overstate the benefits of open discussion between insurers, asset owners and investors. There are concerns within renewables that as the industry has matured, the insurance market has not kept up. Frankly, if we want to protect our future renewables growth, we collectively need to accept that it’s not the same industry as it was five years ago,” Sharma said.

“Increased price competition and a rush to acquire developer pipelines mean that some areas of the industry pose a much higher risk than before – and some aspects are more routine. It’s time to adjust our expectation of ‘normal’ risk,” he said.

GCube offers marine, property, liability and political risk insurance for renewable energy risks.

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