Offshore wind industry needs domestic insurance markets to achieve ambitions

Offshore wind projects are expected to play an important role in the global energy transition. But in order to be viable and sustainable, they require robust risk management and insurance programs that allow project sponsors to secure investment and cost-competitive contracts. Without well-structured insurance programs, developers may struggle to secure the partnerships needed to turn plans into viable projects.

At the same time, in the US, adhering to federal green energy requirements and meeting the growing consumer demand for cleaner energy resources often requires significant investment in domestic supply chains. Requirements include renewable portfolio standards — which demand a certain percentage of energy come from renewable sources — and low-carbon fuel standards, which set limits on a fuel’s carbon emissions.

As the first offshore wind projects are being established in North America, so are the first regional supply chains for turbine design, manufacturing, assembly, and construction, which may help organizations. A growing network of companies are collaborating, with investments expected to economically benefit host communities.

Still, projects often face regulatory uncertainty and complex headwinds from individuals or entities whose interests could be impacted (sometimes referred to as interveners). Projects that meet or exceed requirements for a specific percentage of content to be made in the US and adhere to other quantifiable measures of regional investment are more likely to garner the support needed to proceed.

Robust insurance programs required for project success

Insurance plays a crucial role in the viability and sustainability of offshore wind projects. A robust risk management and insurance program is typically a prerequisite to securing both investment and cost-competitive contracts for sponsors.

Offshore wind and other major energy infrastructure projects face complex, low frequency/high severity risks. Marsh data shows that the annualized cost of risk over a project’s lifetime can be in the hundreds of millions of US dollars, and can exceed 10% of the overall capital expenditure.

The total insurance premium expenditures for US debt-financed offshore wind projects, across all lines of insurance coverages purchased, often reach hundreds of millions of US dollars over the lifetime of the asset, especially considering the extensive costs to insure named windstorm risks. The sheer cost of insurance throughout the life of US offshore wind projects, as a percentage of operational expenditures, can significantly influence asset valuation. This underscores the importance of a well-planned strategy that focuses on securing adequate coverage that meets shareholder risk appetite and lender/investor insurance requirements at competitive pricing.

5 benefits of securing coverage in your project’s region

As it stands today, the majority of insurance capacity for North American offshore wind projects has been provided by established overseas markets, including the wholly owned subsidiaries of domestic specialty insurers. With the exception of industry-owned captives and mutuals, this means the majority of premium dollars spent are leaving the region where the projects are located. While this practice has provided access to specialized underwriting experience, it often presents a number of challenges. Excessive reliance on foreign insurers, whose decision-makers are far removed from North American project stakeholders, can lead to increased costs as well as delays securing both coverage and recovery of claims.

Further, the absence of a robust domestic insurance marketplace can hinder the development of tailored solutions designed to address the unique risks of offshore wind projects in North America, which may differ from those in other regions.

As the offshore wind industry matures, project sponsors, investors, lenders, regulators, and the stakeholders and communities they serve increasingly understand the benefits of building strong regional insurance markets. These include:

Ease of doing business. Local risk and insurance resources not only eliminate language barriers, time zones, and subtle cultural differences, but also tend to foster more effective and efficient communication. This can enable project stakeholders to more easily articulate their specific challenges and how insurers can support them. Collaborating with local teams may also improve response times for underwriting inquiries and claim adjustments. This agility can be especially critical in times of change or crises, when timely decision making can significantly impact perceptions, timelines, cash flows, and outcomes.
Access to expertise. Regional advisory, brokerage, underwriting, and claims resources typically possess a more comprehensive understanding of the local regulatory environment, market dynamics, and the specific risks associated with offshore wind projects in the region in which they are based. This localized knowledge can enable them to provide more relevant and effective solutions tailored to a project’s unique circumstances. Region-based teams often prioritize projects in their region, which might otherwise compete for attention with projects elsewhere. Access to expertise is especially important in North America as the offshore wind industry continues to mature.
Reduced costs. Proximity to the insurance provider can lead to more favorable pricing for insureds as it is generally less expensive to provide high-quality services closer to home. In addition to reduced travel and marketing expenses, potential benefits and cost savings can include avoiding excise tax when purchasing insurance in the US, having fewer intermediaries to compensate, more efficient dispute resolution, and advantages of regional differences in insurance capital costs on the overall project. Increased competition between regional and global providers can also drive product and service innovation, in addition to incentivizing higher levels of cost competitiveness overall.
Enhanced collaboration. Regional engagement may also help foster deeper relationships between all project stakeholders and the insurers they engage. These strengthened partnerships can improve reliability and sustainability, reduce volatility of expenditures and recovery outcomes, and ultimately accelerate the necessary alignment of insureds’ and insurers’ interests over time. Regional insurers with foreign subsidiaries are more likely to join offshore wind industry trade groups, attend conferences, and weigh in at regulatory forums when their budgets and expertise are based locally.
Improved stakeholder and community relations. In the past, premium dollars spent regionally were more likely to be reinvested back in the region. Job creation, increased tax revenues, and a broader informed advocacy base can lead to the benefits of offshore wind investment being shared more broadly. While the US’s domestic content requirements do not include insurance premium spend, offshore wind projects often face opposition from communities, interveners, regulators, and policymakers. When regional incentives are used to finance a project, and regional consumers become the customers, the location of premium spending and payment obligations may become increasingly important.

Offshore wind projects are expected to play a transformative role in the energy transition. But their success is partly dependent on the availability of robust insurance solutions at premiums that allow projects to remain competitive. As the industry grows and risks evolve, the benefits of improved regional and global partnerships with insurance companies supporting offshore wind development are expected to meaningfully differentiate those who pursue them.

Why Marsh?

Marsh has established a domestic offshore wind risk advisory and insurance brokerage team in the US to deliver the most effective insurance placement and risk management advice to our clients. Our colleagues have offshore wind specialty experience and expertise partnering with a global network of offshore wind professionals in the UK, Europe, and Asia.

For more information on the benefits of placing coverage for offshore wind investments domestically, contact your Marsh representative.

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Article

Offshore wind industry needs domestic insurance markets to achieve ambitions

Robust insurance programs required for project success

5 benefits of securing coverage in your project’s region

Why Marsh?

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Offshore wind industry needs domestic insurance markets to achieve ambitions

Robust insurance programs required for project success

5 benefits of securing coverage in your project’s region

Why Marsh?

Related insights

Delivering on hydrogen: Transport and storage solutions

Offshore wind: Resourcing for growth

Tested and proven: The role of nuclear power in the future energy mix

Risk Trend Reporting Across the Energy and Power Industry