Massive expansion of offshore wind will bring challenges and opportunities for insurers

An expected seven- to tenfold expansion in the Gigawatt output of the offshore wind energy sector over the coming decade will provide insurers with opportunities and challenges, a panel at Marine Insurance Nordics said last week.

The panel was moderated by Søren Lassen, Head of Offshore Wind Research, Energy Transition Practice, Wood Mackenzie, with participants Michael Andrew, Senior Broker, Parisco AS; Alexandra Koefoed, CEO, Fred Olsen Windcarrier; Radmil Kranda, Vice President, Head of Energy Underwriting, Gard AS, and Bin Wang, Senior Underwriter, Norwegian Hull Club.

Analysis from Wood Mackenzie found that 253 GW of offshore wind would be employed in the next decade, although 58% of that would not be until 2026-2030. 29% would come online from 2021 to 2025.

The location of the offshore wind that was being employed now was predominantly in Europe (73%), with nearly all of the rest being in China. From 2021 to 2025 (when twice as many GW would be deployed) the distribution evened out, with 32% being in Europe, 42% in China, 11% in the Americas and 15% in APeC (Asia-Pacific excluding China).

From 2026 to 2030 (once again, twice as much as 2021 to 2025, and four times the amount in use today), the distribution was 47% Europe, with subsidy schemes being ramped up and European emerging markets starting to play a role, 29% China, 14% Americas and 11% APeC.

While the established markets were Germany, Benelux, Denmark, the UK and China, Lassen said that the rapidly emerging markets at the moment consisted of Norway and Sweden, Spain, Poland, Turkey Lithuania, India, Bangladesh and Ireland.

Committed were France, the US, Japan and Vietnam.

However, the bulk of countries were still classed as “pre-emerging”, including such significant nations as Canada, Brazil, South Africa, Australia and Italy

Alexandra Koefoed, Chief Executive Officer, Fred Olsen Windcarrier, said that one important point to highlight was how young the offshore wind industry was at the moment. We started very small scale about 20 years ago and for the first 10 years we got probably 3 GW installed, while in the last decade there had been another 30. Turbines were getting larger, and, as the industry matured, financing was getting cheaper.

Koefoed said that oil and gas offshore construction companies coming into this field, which was a natural move for them. “I think that one key difference is that oil and gas, speaking very generally, is high margin, and there are more one-offs, while offshore wind is lower margins, but with lots of repetition”. Although there were significant opportunities, she warned that the supply chain could be a little bit stretched when it comes to competence to do these projects properly.

Michael Andrew said there were skills in marine and energy offshore insurance that could be transferred across to offshore wind. As oil and gas scaled down there would be insurers looking to move across to offshore wind. He said that there was also a changing environment within the insurance industry, with some insurers signalling that they were going to pull out of fossil fuels cover. “Those insurers are going to want to redistribute some of their teams towards offshore wind so that they can use the lessons that they have learned elsewhere”, he said.

Bin Wang said that insurers in the Nordics had gone through a major change when in the late 1960s and 1970s oil and gas arrived in the North Sea and Norwegian Sea. He said that offshore wind was the next iteration. Insurers would be there to facilitate the transition of the customers and, for mutuals, members.

Bin Wang noted that for insurance there had in the past been a traditional “hard line” between marine and non-marine, but with Offshore Wind there was a juxtaposition of the two sectors. “Shipowners could become asset owners and asset owners could become first-time vessel owners.” He felt therefore that it was important to take a holistic view. He said that Nordic insurers had historical expertise with loss prevention and the deployment of assets such as tugs, firefighting, salvage. This experience, he hoped, would prove to be an asset to parties arriving from a more onshore utilities perspective.

Koefoed and Bin Wang both noted that in terms of contract requirements there had been a tendency to push risk “down the supply chain” with, for example, deductibles imposed on principals being passed down the line to the contractors. Koefoed said that the best plan for insurers would be to have experienced contractors who were less likely to make claims. She also noted that another modern trend was localization. She said that a balance needed to be struck between the demands in new markets that local companies and staff be employed, and the need to ensure that the project consisted of people with enough experience to keep low the risk of something going badly wrong. “Yes you do get the local jobs but you also have to have the right knowledge to execute these projects”, she said.

Radmil Kranda said that it was important to appreciate that the offshore wind industry was still fairly young, so the insurance infrastructure supporting it was also quite young. This meant that in places the market was still trying to establish what the correct pricing should be. There had been a degree of volatility, with low capacity and high prices being followed by a soft environment, and then another rebalancing with prices going back up, and terms & conditions being made more rigorous.

Kranda noted that a number of oil and gas companies going into that business, and he felt that this could alter the market dynamic.” Most of the projects at the moment are financed by project financing and very strict bank requirements on how much has to be insured and how much risk they want to take on themselves. That will now shift to customers investing their own equity, rather than putting it all on the banks”, he said.

Bin Wang said that he saw three key challenges facing insurers as they moved into offshore wind cover.

The first was the previously mentioned erasure between marine and non-marine and wet and dry. “The irony here is that for the underwriters that are used to writing onshore, they are particularly concerned about the wet risk – the towage, maybe the sub-sea work, offshore lifting, etc. For us, coming from the marine side, those tend to be the areas where we are a bit more comfortable, For us, maybe it’s the cabling that we are not as familiar with. Because we haven’t seen them. Cables are going to be the new pipelines.”

He also noted that this happened to be where insurers had seen a substantial proportion of the claims. “So I think it’s about one being very realistic about what things are easily translatable, and what things are you going to have to do your homework on”. Bin Wang observed that different people coming into this area of transition were going to have different strengths and weaknesses in different fields.

The second challenge for marine insurers was that it was going to be a new way of underwriting. Historically marine cover had mainly been navigational or operational. “We think about groundings, collisions, fires”, but now we would be looking “a more holistic, supply chain risk-management process.

One comparison might be container fires, which are not operational. They are how well the cargo has been marked up and down the supply chain. “They aren’t operational. They are a cargo issue. It’s a matter of how well marked the cargo is up and down the chain.” Offshore wind is also about a chain of contracts. “It’s about properly vetting your equipment suppliers. It’s an industry where there is maybe going to be a longer tail. Certainly It will be more of a contract-by-contract exposure analysis for some of the contractor clients, rather than simply buying traditional products such as hull or loss of hire”. Bin Wang felt that it might be more of a contractually based liquidity damages assessment, rather than a firm sum that is renewed just once a year.

Bin Wang said that the third issue was quite philosophical, namely “how do you fairy allocate that risk up and down the supply chain from lenders to principals to contractors to sub-contractors to commercial insurers”. He also pondered what the line should be between ‘fortuitous perils’ that insurers should be expected to accept, and risks which might be seen as effectively subsidizing R&D risk as the turbines get bigger, go deeper, further out to sea and then maybe floating.

He also accepted that in offshore wind, margins for principals were thinner. This was the first time in history that an energy transition was from a more concentrated source of energy to a more diffuse source. “The temptation on the commercial side is to get in and be a part of this, but can lead to some unfortunate results if you are careless and over-eager in your desire to participate, without further thought as to what is different to what you know and what you really need to study up on”, said Bin Wang.

Radmil Kranda said that insurers would try to take the lessons learned in the first years. A system of marine warranty surveys and certifications would emerge.

“If you have a design that multiplies by 50 we will probably have to adapt the policies in some way as to who would carry the risk for a series of losses”. Kranda hoped that, with more equity coming in, the people who benefit from the new designs would be able to protect their suppliers and would take on a bit more of those risks themselves “rather than pushing the risk onto the insurers and/or the contractors”.

Floating Wind Turbines would bring a whole new set of issues. “I would imagine there would be specific conditions catering for the moorings and the floating. There is still work to do”, Kranda said.