Although cabling makes up just 11% of the capital expenditure when it comes to building an offshore wind farm, with 50% of the capex going on turbines, cable claims made up 40.3% of the number of claims to insurers from 2005 to 2023, attendees at Energy Insurance London were informed on Friday October 13th.
A panel consisting of Robert Bates, head of claims at specialty insurance broker Nardac, Matthew Yau director of Lloyd Warwick International (London), part of international specialist loss adjusting and claim management company Lloyd Warwick, and GQ Xu, Scor Energy Practice Head, agreed that cables had been a problem for insurers for a long time, and that no obvious solution was available. However, recent large losses had increased the sense of urgency that something needed to be done.
Yau pointed out that 83% of insurance monies paid out in the sector were cable-related, of which vessel costs were the main contributor – with 65% of the costs being vessel-hire. The average claim cost was $5m, while export cable damage ranged from $10m to $75m. He also noted that 57 of the last 60 construction projects had seen cable claims, with an average repair time of 100 days.
The smaller losses occurred when the contractors were still In situ. The costs spiralled for losses which occurred after they had left, said Yau. “You have to pull vessels from the spot market, and contractors take full pricing advantage of that”.
Three instances were cited, with the largest, a $50m-plus claim after two export cables were lost in their entirety due to missing hatch covers and flooding of the ballast tanks, emphasizing the importance of having the right marine warranty surveys done. Such export cables cannot be replaced at the drop of a hat. The long lead times led to losses across the board for the whole project, and the size of the claim in a sector where a $20m claim had previously been seen as exceptional, had been a factor in premiums and deductibles rising.
Robert Bates said that the situation was reaching a point where customers were becoming either unwilling or unable to pay, and talks had increased about the mutualization. “Mutualization of the OFTO market will probably come – they are starting to think about the value of doing this”, Bates said.
GQ Xu said that there was no “naughty list”, which meant that “the bad guys” hadn’t really been punished. “We even find that they can’t repair the damage they caused”, he said. While having a high deductible is one tool, this was not a route that Scor liked to encourage. “Basically we would like to see fewer claims and a spreading of the pain across the entire supply chain”. He noted that at the moment the loss was focused on particular parts of the supply and installation sector .
Robert Bates noted that the supply chain was feeling some pain. Deductibles had risen from some $650k to $2m. “We are seeing brokers asking for deductible to be cut. Boskalis said that it wasn’t making anywhere near the margin that it used too”.
An additional factor to be considered was that the items being insured were changing. The additional production capacity of offshore wind generated a concomitant need for additional capacity in cables, with 66kvs taking over from 33kvs and direct current appearing instead of alternating current. New design features were necessarily harder to insure than established technology. Yau said that the industry was moving so rapidly that the ancillary network (e.g., the cables) was playing catch up. “We have to upgrade the voltage and we find ourselves in new territory”, he said.
When it came to solutions, Bates said that better engagement with the client was a must. “We are approaching the limit with what clients can bear in terms of deductibles and rates. Perhaps we can make a move with wording, but we must have early engagement to reducing the underlying risk – certification, training and more standards.” He also noted that “clients are increasingly valuing consistency, sustainability and certainty of terms”.
In terms of capacity, Xu said that for fixed offshore wind there was currently no shortage, but for floating offshore wind it was more difficult, with only about a handful of businesses offering cover for what was very much a new technology.
Also of interest was Xu’s reference to China, where everything was completely different. There was no shortage of contractors in the offshore cable market, and if something went wrong it was considerably cheaper to get it fixed. All of this worked in favour of the Chinese offshore renewable energy market.