The offshore wind industry is on the cusp of major growth. We are entering an era where oil majors aren’t just making vague ESG commitments, but actually putting their money on the table for offshore wind development.

However, while the results from the UK’s Round 4 tender certainly demonstrate that the likes of BP are willing to bid billions for seabed leasing, there are concerns that the winners of this round may have overbid — raising the cost of developing their projects.

The pressure on developers to keep projects viable often leads them to choose contractors and equipment suppliers based on price rather than quality or proven experience. In recent years, we have seen some developers opt for suppliers with a known track record of losses, simply because up-front costs are low.

Over the years, we have seen this “race to the bottom” result in countless insurance claims due to contractor error. Since 2016, global offshore wind claims across the industry have increased by 30% year on year, with contractor error and defective design and materials making up over 60% of claims by cause of loss. A majority of claims are incurred either during construction, or down the line from errors during the construction phase itself.

The cost of losses typically ends up with the insurer, rather than the developer or even the original manufacturer, where the loss may actually originate from – resulting in a perverse incentive for developers to avoid managing obvious risks due to cost.

Recently, a developer of an offshore wind farm opted to contract a cable manufacturer known for multiple losses in the industry, agreeing to only test 25% of cables for quality and defects in order to keep costs as low as possible. This lack of quality control opens up the project to significant cable losses down the line.

In this case, the developer was likely banking on a soft insurance market, where insurers offer wide terms and policy conditions covering projects even despite glaring deficiencies in risk management, to pick up the bill when things went wrong.

New market entrants must adapt to renewables risk

As more oil & gas majors enter the offshore wind industry, insurers active in the oil & gas market are likely to follow, offering lower premiums and wider terms and conditions in order to buy market share.

However, these insurers are used to policies with the expectation of a similar risk profile to traditional energy infrastructure, with low frequency, high-cost losses. These insurers are also used to limited business interruption and ‘delay in start-up’ exposure, as well as much higher deductibles than has been experienced in the renewable energy offshore market.

As such, insurers traditionally focused on oil & gas exposure entering the renewables offshore market without updating premiums, policies, and terms and conditions will likely be unsustainable and exit the market once losses start piling up. This could limit available insurance capacity and threaten the long-term viability of the offshore renewables market.

If insurers had underwritten every offshore construction project to date, without significant reinsurance — insurance that the insurance market buys for itself to protect its own account — they would have certainly lost money over the last ten years.

We have seen a similar dynamic play out in onshore wind. As losses started to pile up, a number of insurers have been unable to continue underwriting such costly projects and ended up completely exiting the market. Those that stayed have had to re-examine premium, deductibles and terms in order to effectively manage risk and thereby reduce the scale and frequency of losses. What has become increasingly clear is that there needs to be a greater degree of risk sharing, not only between the insurance market and the developer or owner but with all parties, all the way down the chain to subcontractors.

Onshore, this hardening of the market is starting to turn the corner in ensuring a fair allocation of risk throughout the supply chain. However, the offshore industry cannot afford not to go through a similar process, and the entry of new markets with an oil and gas perspective will certainly not help in industry in the longer term.

A major loss would have wide repercussions

As projects can cost billions to develop, a single offshore wind farm can have multiple insurers covering the project on a syndicated basis. A major loss is more likely to have repercussions on the whole renewables insurance industry, rather than one or two unlucky insurers who backed a risky project — and current practices can complicate claims, inflating the cost of a loss.

In order to keep insurance cheap, brokers will often place what are known as ‘verticalised placements’ — with the risks from a single project absorbed by multiple insurers, each offering different policy definitions, terms, sub-limits, deductibles and premiums. These verticalised placements tend to muddle the overall policy terms between each insurer together in an attempt to provide complete protection for a client.

However, this approach could ultimately open renewable energy companies up to complications and extra costs when it comes to settling a claim later down the line, as insurers and expensive legal advisors try to clarify ‘grey’ areas between different policy wordings and definitions.

With the expansion of offshore wind into emerging markets, and the involvement of new players across the supply chain, now is the time to ensure the race to lower the cost of development does not result in disasters due to a lack of risk accountability. By quantifying and managing risk throughout the supply chain, the offshore wind industry can ensure that the market remains insurable and ultimately facilitate a faster, wider rollout of new wind farms at a critical point in the energy transition.

Fraser McLachlan is the chief executive of specialist renewable energy insurer GCube