Renewable energy projects face rising insurance claims

Renewable energy projects face rising insurance claims – GCube | Insurance Business America

Construction & Engineering

Renewable energy projects face rising insurance claims – GCube

Contractor mistakes and natural disasters create complex, costly delays

Construction & Engineering

By
Kenneth Araullo

The renewables sector is facing increased risks as it enters a new phase of global construction activity, with projects affected by contractor errors, defects, natural catastrophes (nat cat), and extreme weather events.

These issues, occurring both onshore and offshore, are causing delays in project timelines and are driving a rise in construction-related insurance claims, according to a report by GCube Insurance.

The report, “Arrested Development: Managing Complex Claims in the Boom-and-Bust World of Renewables Construction,” presents insights from over a decade of claims data, revealing $1 billion in Construction All Risks (CAR) and Delay in Start Up (DSU) claims.

GCube’s findings indicate that contractor error and defect continue to be the primary causes of offshore wind losses, making up 63% of claims by frequency in 2022, an increase from 55% in 2020. This pattern is part of a broader trend in offshore construction, where increased activity has historically been accompanied by a rise in insurance claims, creating a cyclical “boom and bust” effect.

Onshore construction projects, including wind and solar, have seen 48% of their losses, by severity, linked to nat cat and extreme weather events, with contractor error and defect accounting for 16% of losses. Among weather-related incidents, flooding and heavy rainfall have proven to be the most costly, representing 18% of total claims by frequency but accounting for 46% of total claims costs.

While construction claims trends in the renewables sector largely mirror those for operational projects, the impact of human error and weather-related events on construction projects tends to be more severe, leading to more complex and costly insurance claims.

Additionally, new projects are increasingly exposed to risks stemming from two main sources: the rising frequency of extreme weather events and the expansion into emerging markets such as the US, MENA, and Asia, where data to inform effective project management is limited.

Fraser McLachlan (pictured above), CEO of GCube, highlighted that the renewables sector is in a particularly active period due to the demand for new projects. At the same time, the sector faces an unprecedented level of natural catastrophe risk and shortages in skilled workers and specialist installation equipment, such as vessels and cranes.

These factors are likely to make the DSU claims process more complex during the construction phase.

The report also stresses the need for a long-term approach to sustainability in offshore construction, with a focus on achieving successful project outcomes rather than pursuing rapid expansion. This approach requires a growing pool of skilled contractors and specialist vessels.

Addressing construction risks

As construction activity ramps up, GCube recommends that asset owners take steps to mitigate potential losses. These include implementing robust project plans and ongoing monitoring, seeking expert advice when needed, and developing strong relationships with supply chain partners to maintain quality control.

McLachlan observed that the sector’s historical boom-and-bust cycles have led to pressure on the supply chain, resulting in contractor error and defect issues. This, in turn, has caused underwriters to adopt a more cautious approach. He noted that the upcoming period of construction, coupled with the increasing impact of extreme weather, will require enhanced risk management, insurance, and claims expertise as the industry prepares for a likely increase in losses.

Collaboration between insureds and insurers to exchange information and expertise throughout the project lifecycle will be essential for minimising disruptions and avoiding unbudgeted expenses, the report concluded.

What are your thoughts on this story? Please feel free to share your comments below.