Securing a sustainable reinsurance market for renewables

The global shift toward renewable energy is poised to be transformative, with renewables expected to meet 45-50% of the world’s energy demand for power generation by 2030, and up to 72% by 2050, according to McKinsey’s ‘A Global Energy Perspective’. But for the renewables sector to fully realize its potential and support the transition to net zero, adequate insurance coverage will be essential – covering both the construction and operational phases of projects – whether offshore or onshore.

The reinsurance market has a critical role to play in ensuring that this coverage is available by offering plenty of supporting capacity to insurers. However, delivery of this support will require a consistent and sharp focus on policy language from reinsurers, especially when it comes to addressing risks like war, terrorism and serial loss coverage. In doing so, reinsurers can give cedants the confidence they need in the coverage they provide to their insureds.  

A growing market

The renewables market is expanding rapidly. By some estimates London alone is already underwriting more than  US $1 billion annually of core renewable energy power generation business. It’s a big, rapidly growing sector that has drawn together underwriters from diverse disciplines which, in itself, introduces new challenges. The renewables insurance market merges underwriting expertise from a variety of disciplines — onshore energy, upstream/offshore construction, cargo/project cargo, and engineering. This amalgamation of expertise has led to a convergence of different classes’ terms and conditions within renewable energy policies. As it stands, it’s clear that not all reinsurers in the market have adapted their excess of loss products to address the unique exposures the renewables projects present, which has the potential to create gaps and discrepancies in cover for some cedants.

Unintended cover

One of the challenges facing the reinsurance market is the generalist approach to renewable risks. At present, there are few dedicated renewable reinsurance treaties, so many companies push their renewable portfolio exposures into existing multi-class treaties. This can lead to unintended anomalies in coverage.  For example, onshore exposures may end up being included in marine and energy excess of loss programmes which traditionally cater predominately for offshore.

Consider an insurer that underwrites offshore wind risk, and has a reinsurance write-back for terrorism coverage, or war coverage. As they expand into onshore renewables or emerging technologies such as battery energy storage systems, the same reinsurance terms may unintentionally extend to cover onshore risks. This means that cover originally designed for offshore terrorism and war perils, could be applied to onshore incidents, possibly leading to unrealistic expectations of cover and potentially costly litigation in the event of a claim.

Joint Excess Loss Clauses CL 432

It’s a problem that necessitates a review of the clarity of policy language. The Joint Excess Loss Clauses (JELC) CL432 designed to be used in reinsurance excess of loss contracts for marine and energy risks, were last updated in 2017 and do not specifically reference renewables which can lead to potential shortcomings. These can, however, be addressed with the use of alternative wordings. For example, while the Clause 11 terrorism exclusion within the CL432 wording works well for offshore renewables, contract teams may want to consider adding Non-Marine Association’s NMA2921 for onshore risks, which also satisfies Lloyd’s NCBR (Nuclear, Chemical, Biological and Radiological) requirements. Similarly, Clause 12’s war exclusions are suitable for offshore renewables but fall short for onshore risks, which could result in a breach of Lloyd’s guidelines. A practical solution here could be the integration of the NMA464 clause for onshore exposures.

‘Serial’ loss language

In addition to terrorism and war, serial loss language in reinsurance programmes is another area that requires close attention. This language, common in direct insurance, protects against losses that occur for the same underlying cause over an extended period. For example, a design flaw in a manufacturer’s wind turbines could lead to multiple turbine failures, potentially spanning multiple reinsurance periods. Without clear serial loss language in the reinsurance policy, this could result in uncertainty about how claims may be handled.

To avoid this, it’s crucial that reinsurance policies include serial loss provisions which consolidate such losses under a single contract. This adjustment gives the cedant certainty that they will be able to collect from their reinsurance if they do have multiple turbine losses. It also means that reinsurers are not going to have multiple years being notified. The inclusion of serial loss language ensures fairness and consistency. It represents a win-win for all parties.

Reinsurance can fuel the renewables revolution

Ultimately, drafting in the appropriate war and terror exclusions for all classes of renewables together with the right serial loss language is a foundational component in making sure that there is reinsurance capacity available to support the rapid growth in renewables. This is about providing certainty, clarity, and consistency around reinsurance coverage to the benefit of reinsurers, insurers and the clients themselves, helping to foster a sustainable reinsurance market to fuel the renewables revolution over the coming decades.

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