Certain parts of Asia are prone to natural disasters like typhoons and earthquakes. These phenomena mean the region is not a great match with the massive renewables energy infrastructure investments that are planned and already underway. Japan, South Korea, China and Taiwan are all vulnerable as are many parts of the US, which has several large offshore wind farms in the pipeline.
Expertise in offshore wind insurance sits in the heads of a few experienced insurers and brokers mainly from Europe. None of them have any real experience of natural catastrophes in these regions since no-one has yet had to deal with the impacts of a big typhoon or earthquake hitting an offshore wind farm.
At a technology level, manufacturers are developing typhoon resistant turbines, but they have yet to be put to the test in real-life conditions. For insurers, this means risk can only be assessed based on modelling, rather than actual experience. Instead, insurers are basing their assumptions and analysis on experience from other industries that are as close to offshore wind as possible. Such uncertainties will drive an increase in premiums as insurers will need to add in a buffer to accommodate the considerable unknowns.
Another, and more serious, matter for project developers is potentially being left without any insurance capacity following an accumulation of risk.
The general view within the energy insurance industry is that wind energy assets will be less susceptible to large losses than oil and gas on the basis that the value concentration is much less and spread across a bigger area. For an individual wind farm owner, however, the risk remains that the available insurance capacity will not be enough to de-risk a project and satisfy lenders.
Until now, the insurance market has been able to offer individual offshore wind farms in Asia with full cover. As greater numbers of wind farms are built and start operating in the region, however, there will be an increased concentration of values, especially in areas like Taiwan, where all planned wind farms are in the Taiwan Strait.
There are good reasons for stacking up offshore wind farms in that relatively small geographical area as typhoons are less severe there than in other parts of the country. But, at the same time, it means insurers will have to control how much capacity they can deploy in the area. In insurance terms, this is referred to as accumulation of risk. It basically means the values onsite exceed what the insurance industry can pay in the event of a major natural catastrophe loss where a strong typhoon goes through an area where multiple wind farms have been deployed.
Such a shortage of capacity can prove a real challenge to project developers and owners who so far have sought to pass the entire risk of natural disasters onto the insurance market. The new reality will be that clients will have to accept significant limitations in the protection they buy and this may affect the appetite of investors for offshore wind assets in areas prone to these risks.
Ultimately the question arises: if a project is not insurable, is it bankable? The likelihood is that the offshore market will continue to grow and will not be forced to slow down because of issues related to insurance.
Developers and project owners in vulnerable areas must, however, prepare themselves for a different risk appetite from insurers and develop strategies in which they are willing to accept more risk on their own balance sheet. At the same time, insurers must invest more resources in understanding and quantifying onsite exposure and work proactively to solve the problem. Insurance brokers are also looking at the issue and starting to develop reinsurance protection that insurers could tap into if and when necessary.
Collaboration between project developers, brokers and insurers is pivotal for success and the continued insurability of large-scale offshore wind farms in areas prone to natural catastrophes.
The views expressed in this opinion are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy
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