Insurance rates for wind and solar projects around the world are rising by 20-40% after a long overdue “correction” in the market, Recharge has learned.

Over the past decade, rates have fallen by 5-15% annually as multiple insurers entered the renewables market and offered cheap policies in order to build up their share of the business. But the bubble seems to have burst in the past few months, with several major players withdrawing from wind and solar insurance after sustaining heavy losses. These include Royal Sun Alliance (in Europe), Denmark’s CNA and Lloyd’s underwriter Ascot.

“Renewables has moved from ‘not very cool’ to what everybody wants to put on the front page of their annual report,” says Fraser McLachlan, chief executive of specialist renewables insurer GCube. “[But] as fast as they dived in, they’ve dived out again.”

The underpricing, increases in extreme weather and overly generous terms and conditions have created a “perfect storm”, McLachlan tells Recharge.

He explains: “We're having people coming to us saying, ‘I used to be with Royal Sun Alliance in Europe and they told me they're not prepared to renew because they're closing down [their renewables business]. So what can you do?’ And then we look at the pricing [offered by other insurers] on some of these risks and it is massively underpriced. I don't know how anybody can afford to make money at some of the rates that we're seeing coming in now. And we're saying, ‘we'd love to help you, but it's going to cost you between 20 and 40% more than you were paying a year ago’.

“I think the result of people actually physically saying 'we're closing down, we can't afford to do this anymore', has exacerbated the pricing increases in the renewables market, which is a shame because we've been banging on for years — for at least three or four years now — that this is coming.”

As insurers often split developers’ policies with each other to spread the risk, McLachlan knows that his competitors are also increasing their prices by 20-40%, with the highest rises being seen in North America.

McLachlan points to wind turbine blade replacement as an example of recent unsustainable insurance practices.

“Back in the day we could change out a blade with one mobile crane and it would probably take a day or two. Nowadays you've got to erect scaffolding, bring in two cranes, bring in two crews, it will take you weeks to change a blade, plus you've got lost revenue associated with all of that. It Is a much, much more complex, bigger operation than it ever used to be, but the deductible [ie, the excess] on the insurance policies has pretty much remained unchanged.”

McLachlan explains that while the rates — ie, the underlying cost of coverage determined by the insurer — are rising by 20-40%, this does not necessarily mean that premiums will rise by 20-40%. As anyone insuring their car or home will know, you can reduce the price of your insurance by accepting higher excess fees or stricter terms and conditions.

“If it's not the premium, it's the deductible. If it's not the premium and the deductible, it's the terms that insurers are prepared to actually put out,” he says.

Extreme weather

While wind and solar power can reduce the threat of global warming, climate change is also increasingly threatening wind and solar projects.

“What we’re seeing, especially in places like North America, are significant natural events that have either never happened before or that are occurring in places where you just wouldn't expect them to happen,” says McLachlan.

He points to a $75m insurance claim that GCube recently paid out to a solar farm in Texas after half of it had been “wiped out” by a severe hailstorm. “Ordinarily all the models that we use would have never predicted that you would have that quantum of loss on a solar project in Texas. So we're seeing weather patterns changing, which is driving an increase in the severity of the claims.

“We're seeing more and more of those [extreme weather] events. We're seeing flooding where, you know, if you model it, it's not in a flood zone. So why the flooding?”

Contractors taking advantage

One of the biggest cases of renewables insurers shooting themselves in the foot has been overly generous terms and conditions, McLachlan explains, particularly when it comes to allowing developers to add contractors to their existing policies.

This enables them to win contracts with low bids, then claw some money back through the insurer.

“It's become normal for the contractors in their contract to say, ‘If I'm coming onto your site, you will name me as an additional named insured on your insurance policy. And the contractor ends up claiming on the insurance policy for as much as they possibly can,” says McLachlan.

For example, contractors working in heavy rain are damaging the temporary roads between wind turbines and then “submitting a claim for what they’re calling damage”.

Allowing this to happen has been a major mistake by insurers, which is now being clamped down on, explains McLachlan.

“I don't think anybody envisaged that the sort of claims that [insurers] are seeing were the claims that they thought they should be paying.

“I think they've allowed the terms and conditions to become far too broad, covering far too many people. And now it's come back to bite them.”

Impact on the renewables sector

While increased insurance premiums, or less generous policies, will obviously increase the cost of building wind and solar farms — and by extension, the levelised cost of energy — the correction in the market should not have a major impact on the renewables build-out.

“The insurance premium as a component of the overall capex cost of a project is pretty small,” explains McLachlan. “We’re dealing with $100m-400m projects and the premiums for those are in the hundreds of thousands. So I don't really think it's going to make a developer say, ‘I don't want to build this wind farm or solar project because my insurance is going to be too expensive’.”

However, he points to the potential problems that might be seen if the market correction is not made.

“With the number of insurers that we've seen withdrawing [from the market] over recent months, the worst state of affairs would be that there isn't an insurance market that is prepared to insure renewable energy because it's lost so much money.

“If we don’t do this. will there still be a market for renewables? And the answer is probably not unless we take this rate correction.”

Wind

Why insurance rates for wind and solar projects are rising by 20-40%