Increasing focus on cost-competitiveness has led to cost-cutting in the design, manufacture, construction and operation of offshore wind farms over the past decade, which is putting pressure on the insurance market, according to a report by GCube Insurance.
The GCube report – ‘Uncharted Waters’ – said the increased competitiveness has increasingly come at the expense of quality control, increasing the frequency and severity of insurance claims in the sector.
GCube said “corrective action is needed to incentivise quality control processes and accountability for financial losses throughout the offshore wind supply chain, as well as to promote a fairer sharing of risk with all the parties, not only insurers involved with offshore wind projects”.
The report noted that combined market losses grew to £500m by 2020 from £124m in 2010-2015, with the average insurance claim nearly doubling from £1.67m to £3.08m in the same period.
Contractor error and component defect have accounted for 55% of these claims by frequency and 83% of total claims spend, GCube said.
It said that subsea cables – both array and export – have been particularly affected, with 44% of all cable claims spend attributed to contractor error in transit and cable laying.
“This has contributed to subsea cables being responsible for the most frequent and expensive losses between 2010-2020, totalling 30% of claims incurred and over 50% of total claims spend,” GCube said.
It added that the adoption of international standards, designs and expertise will be needed to reduce technical risks and permit the adoption of a fairer sharing of risk across the sector.
A ‘race to the bottom’ on project costs, combined with a soft insurance market cycle exacerbated by broad policy terms, has resulted in significant change in the overall insurance market, according to GCube
A re-evaluation is needed of how risk is allocated to support the market’s longevity, it said.
“As new players from industries such as oil and gas enter the market, these destabilising factors must be addressed before they become embedded practices,” the report said.
GCube chief executive Fraser McLachlan said: “Put simply, the insurance sector must take a more unified approach to writing offshore wind insurance, and the supply chain must accept its share of accountability on offshore wind claims.
“The cable protection system issues unearthed earlier this year have hopefully brought to attention the fact that action on quality control needs to be taken if the industry is to prevent further losses down the line.”
Meanwhile, natural catastrophe risks will continue to increase and test the applicability of designs, procedures, best practices, and insurance terms in the coming years-particularly in emerging offshore wind markets such as the US and Japan, GCube said.
Cooperation between the supply chain and insurance markets will be critical to secure, along with learnings from the research and development process, ensuring knowledge sharing for the formation of sustainable practices in new risk environments, the company said.
McLachlan said: “Further accountability from all parties for their corresponding risks is now needed to share the load of responsibility, permitting sustainable development of narrower terms and bespoke policies.”