Article
Let’s not let history repeat itself
4 December, 2023
By : Fraser McLachlan, CEO & Co-Founder
Having been in the renewables insurance business for well over 25 years, maybe I’m more susceptible than most to a feeling of déjà vu.
However, as I welcomed our guests at this October’s GCube Advisory Council meeting – the 20th session of a magnificent program for our US insureds and brokers - I did have to remark that not much seemed to have changed since we met last year.
It’s fair to say that we entered 2023 with a new degree of optimism. Global economies were starting to unlock again, and, with the Inflation Reduction Act in the US, we were all preparing for a fresh wave of renewable energy investment.
As ever, the reality was more difficult. The Russian invasion of Ukraine continues to drive inflationary rises, affecting everything from the price of energy to consumer goods – and we don’t yet know what further economic complications the Israel-Gaza conflict will create.
Continuing constraints on raw materials are having huge impacts on global supply chains – and nowhere has this been felt more acutely than by wind turbine OEMs. Having struggled to make a profitable return for nearly five years, the top three manufacturers again announced severe losses.
Siemens Gamesa’s struggles have been the most prominent - with a €5.45 billion reserve on its balance sheet for defective equipment brought to market over the past few years – but it is not alone. As we outlined in our Vertical Limit report earlier this year, the result is the insurance sector is starting to see more failures, which until now have largely been picked up by manufacturer warranties.
US offshore, which was showing promising signs of growth under the IRA, has just been dealt a major blow, with Ørsted’s withdrawal from its Ocean Wind schemes a sign that the risk profile of these projects is almost unsustainable in light of wider market forces.
However, it’s not just the wind market having a hard time; solar too has had a tough 12 months. In the US alone, this year has seen more than $35 billion of economic losses due to convective storms, of which $25 billion was insured.
To put that into perspective, we’ve seen over 50 tornadoes this year rated F3 and above on the Fujita scale, with windspeeds over 136 miles an hour and hailstones of near 5 inches in diameter – twice the size of a tennis ball.
Today we officially launch our latest report – aptly titled Hail No! – in which we outline the scale of the hail problem faced by the market, and some innovative, practical solutions that can help our insureds face up to this threat.
We will urgently need more of this innovation in the years to come, as it’s clear that unprecedented extreme weather and Nat Cat losses aren’t limited to the US market.
In Europe, we have seen €59 billion of losses due to heavy flooding in Italy, Spain, Greece and Bulgaria, alongside the devastating earthquake Turkey.
In the Middle East, we have seen the first of two windstorm losses on solar projects reach the market, one at around $80 million.
And around the world, Morocco, Hong Kong, Brazil, and now Libya, have all recently seen significant natural disasters leading to billions of losses to the insurance market.
It would be flippant to suggest that we have seen losses – or a combination of circumstances - quite like this before. However, the story that is all too familiar - giving me that sense of déjà vu - is that the renewable energy insurance market is still struggling to make a real profit.
I speak regularly with our peers in the market, who openly admit that they are unlikely to make any kind of reasonable underwriting profit in 2023, faced with pressure from senior management to ‘jump on the renewables bandwagon’ and increase the top line at the expense of the bottom.
My senior colleagues at Tokio Marine HCC, Simon Button and Ben Kinder both spoke candidly about the hugely challenging ‘balancing act’ that insurers face in managing ESG requirements. Working with GCube, TMHCC is in a unique position to approach the market in an educated and considered way.
But I’ve been around long enough to remember renewables insurance in the ‘80s and ‘90s. Insurers and MGAs jumped into the renewables space back then, fuelled by the US Tax Credits that were in place, not dissimilar to the IRA today.
They wrote insurance policies on very broad terms, cheap rates and without due consideration for the technology involved. The result? They lost their shirts, ran for the hills and it was virtually impossible to find an insurer who was willing to stake their capital on a renewable energy project.
Simply put, the large, composite insurers found they could make better money elsewhere, so they walked away. I can categorically tell you that, if history repeats itself, GCube will still be here underwriting projects and paying claims.
As the renewables market has matured, the insurance market needs to mature too. We owe it to ourselves to ensure that we are around for the long term to support the renewable energy industry as it faces up to the biggest challenges in its history and strives to meet those ambitious targets that governments around the world are setting for it.
So, as I said at our 20th Advisory Council, let’s not let history repeat itself.
Let’s work collectively to ensure that we build a sustainable market that is there to support the renewable energy industry, let’s try to understand that cheapest is not always better, and let’s share ideas and knowledge so that we can all make this industry - both renewables and insurance - a long-term and viable proposition for all of us and our future generations.
However, as I welcomed our guests at this October’s GCube Advisory Council meeting – the 20th session of a magnificent program for our US insureds and brokers - I did have to remark that not much seemed to have changed since we met last year.
It’s fair to say that we entered 2023 with a new degree of optimism. Global economies were starting to unlock again, and, with the Inflation Reduction Act in the US, we were all preparing for a fresh wave of renewable energy investment.
As ever, the reality was more difficult. The Russian invasion of Ukraine continues to drive inflationary rises, affecting everything from the price of energy to consumer goods – and we don’t yet know what further economic complications the Israel-Gaza conflict will create.
Continuing constraints on raw materials are having huge impacts on global supply chains – and nowhere has this been felt more acutely than by wind turbine OEMs. Having struggled to make a profitable return for nearly five years, the top three manufacturers again announced severe losses.
Siemens Gamesa’s struggles have been the most prominent - with a €5.45 billion reserve on its balance sheet for defective equipment brought to market over the past few years – but it is not alone. As we outlined in our Vertical Limit report earlier this year, the result is the insurance sector is starting to see more failures, which until now have largely been picked up by manufacturer warranties.
US offshore, which was showing promising signs of growth under the IRA, has just been dealt a major blow, with Ørsted’s withdrawal from its Ocean Wind schemes a sign that the risk profile of these projects is almost unsustainable in light of wider market forces.
However, it’s not just the wind market having a hard time; solar too has had a tough 12 months. In the US alone, this year has seen more than $35 billion of economic losses due to convective storms, of which $25 billion was insured.
To put that into perspective, we’ve seen over 50 tornadoes this year rated F3 and above on the Fujita scale, with windspeeds over 136 miles an hour and hailstones of near 5 inches in diameter – twice the size of a tennis ball.
Today we officially launch our latest report – aptly titled Hail No! – in which we outline the scale of the hail problem faced by the market, and some innovative, practical solutions that can help our insureds face up to this threat.
We will urgently need more of this innovation in the years to come, as it’s clear that unprecedented extreme weather and Nat Cat losses aren’t limited to the US market.
In Europe, we have seen €59 billion of losses due to heavy flooding in Italy, Spain, Greece and Bulgaria, alongside the devastating earthquake Turkey.
In the Middle East, we have seen the first of two windstorm losses on solar projects reach the market, one at around $80 million.
And around the world, Morocco, Hong Kong, Brazil, and now Libya, have all recently seen significant natural disasters leading to billions of losses to the insurance market.
It would be flippant to suggest that we have seen losses – or a combination of circumstances - quite like this before. However, the story that is all too familiar - giving me that sense of déjà vu - is that the renewable energy insurance market is still struggling to make a real profit.
I speak regularly with our peers in the market, who openly admit that they are unlikely to make any kind of reasonable underwriting profit in 2023, faced with pressure from senior management to ‘jump on the renewables bandwagon’ and increase the top line at the expense of the bottom.
My senior colleagues at Tokio Marine HCC, Simon Button and Ben Kinder both spoke candidly about the hugely challenging ‘balancing act’ that insurers face in managing ESG requirements. Working with GCube, TMHCC is in a unique position to approach the market in an educated and considered way.
But I’ve been around long enough to remember renewables insurance in the ‘80s and ‘90s. Insurers and MGAs jumped into the renewables space back then, fuelled by the US Tax Credits that were in place, not dissimilar to the IRA today.
They wrote insurance policies on very broad terms, cheap rates and without due consideration for the technology involved. The result? They lost their shirts, ran for the hills and it was virtually impossible to find an insurer who was willing to stake their capital on a renewable energy project.
Simply put, the large, composite insurers found they could make better money elsewhere, so they walked away. I can categorically tell you that, if history repeats itself, GCube will still be here underwriting projects and paying claims.
As the renewables market has matured, the insurance market needs to mature too. We owe it to ourselves to ensure that we are around for the long term to support the renewable energy industry as it faces up to the biggest challenges in its history and strives to meet those ambitious targets that governments around the world are setting for it.
So, as I said at our 20th Advisory Council, let’s not let history repeat itself.
Let’s work collectively to ensure that we build a sustainable market that is there to support the renewable energy industry, let’s try to understand that cheapest is not always better, and let’s share ideas and knowledge so that we can all make this industry - both renewables and insurance - a long-term and viable proposition for all of us and our future generations.