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Insurers see rising risks as large scale investment enters offshore wind

Insurers engage FG on data provision, appropriate premium for assets

The potential of offshore wind as a viable source of clean power for the energy transition is rising with economic and environmental risks, insurers have said.

According to them, with the rising growth of both economic and tech innovations, it has become imperative that this energy transition is cautiously managed.

Offshore wind is expected to be a pillar of the energy transition and attract almost $1 trillion over the next decade, with offshore wind capacity jumping tenfold by 2030, from 34 GW in 2020 to 330 GW by 2030, WoodMac said in a 2022 report.

Allianz Commercial in its new report ‘ A turning point for offshore Wind’ highlights growth opportunities, tech innovations, risk trends, and loss patterns for the global industry.

According to Allianz, damage to cables is the top cause of insurance claims, followed by turbine failure.

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It also noted that the speed of build-out is creating pressure on materials and supply chains, port infrastructure, and available construction and maintenance vessels.

“Bigger turbines and new technology drive bigger exposures for insurers which need to be understood in partnership with developers” while it also noted that weather and natural catastrophe risks are increasing as the sector expands into new territories.

“Developers and their insurers need to manage a range of risks to successfully scale offshore wind globally, among them prototypical technology, economic pressures, more extreme weather conditions, cable damage, and collision perils, as well as environmental concerns”

“Offshore wind farms are highly complex projects,” says Anthony Vassallo, global head of Natural Resources, Allianz Commercial.

“The lessons learned from past losses – which are primarily damage to cables and turbines – are essential for the industry to continue to grow sustainably. Emerging risks need to be explored, too, as developers prepare for widescale deployment of offshore wind around the globe. The size of turbines is ever-increasing, wind farms are moving further out into harsher marine environments where they are more exposed to extreme weather, and technological innovation is constantly progressing. Navigating biodiversity issues in coastal communities will also become more important as demand for ocean space is set to increase fivefold by 2050.”

According to the report, more than 99 percent of the total global offshore wind installation is in Europe and Asia-Pacific today, but the US is investing heavily in this sector and China has overtaken Europe as the world’s biggest market, with half of the world’s offshore wind installations in 2023 expected to be in the country.

In 2022, 8.8GW of new offshore wind capacity was added to the grid with global installed capacity reaching 64.3GW. Around 380GW of offshore capacity is expected to be added across 32 markets over the next 10 years.

While no offshore wind farms exist in Africa and the Middle East at present, several countries such as Morocco, Egypt, South Africa, and Kenya are exploring the potential to harness offshore wind into their energy mixes. South Africa’s high demand for energy, advanced infrastructure and progressive policies have positioned it as a key player in the continent’s renewable energy scene, with potential for offshore wind projects along its vast coastline, according to the Global Wind Energy Council.

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While growth ambitions are huge, all is not plain sailing for developers, according to the report.

Spiraling costs have halted major wind projects recently and the industry is impacted by inflation, capital expenses, rising interest rates, and geopolitical instability.

The cost of materials and vessel hire has risen, while the supply of materials and access to contractors remains challenging. Supply chain bottlenecks, lengthy permitting procedures and delays to grid connections are also exerting pressure.

“The scale and scope of the global offshore wind roll-out is epic. It requires the expansion of the manufacturing footprint, port facilities, and infrastructure. And it needs to be fast-tracked by all stakeholders in a joint effort – financial institutions, corporates, and governments,” says Adam Reed, global leader, Offshore Renewables and Upstream Energy, Allianz Commercial.

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Both the energy sector and the insurance industry have considerable expertise when it comes to managing the perils of offshore wind activities. In one of its largest offshore wind insurance markets, Germany and Central Eastern Europe, Allianz Commercial has seen 53 percent of offshore wind claims by value from 2014 to 2020 relate to cable damage, followed by turbine failure as the second major cause (20 percent).

From the loss of entire cables during transport to the bending of cables during installation, cable losses have incurred multi-million-dollar losses in offshore wind as cable failure can potentially put a whole network of turbines out of commission.

“Cable risk is critical and therefore the quality of service is vital. Contractors need to provide assurance they have the required expertise to remedy incidents and that they can source replacement components quickly in order to contain losses incurred during downtime,” explains Reed.

“From an underwriting perspective, with subsea cabling work insurers pay close attention to the type of cabling used, the kind of vessels involved, the communication between client and contractor, and how often qualified risk engineers will make site visits to oversee proceedings.”