Oh, the Irony: Climate Change-Related Catastrophes Put Green Energy Infrastructure in Peril

The insurance industry may turn its back on the renewable energy sector if it endures another year of unprecedented natural catastrophe losses like 2022.

That’s the view of Fraser McLachlan, CEO of GCube Insurance, which recently published its North American Nat CAT Update report.

The study has found the North American renewable energy industry sustained record losses running to the hundreds of millions of dollars from extreme weather events this summer, with McLachlan telling Risk & Insurance® that he estimates total losses to be around $700 million, excluding Hurricane Ian, with insured losses coming in between $350m to $400m.

“It’s by far the worst year for natural catastrophes that we have seen to date,” said McLachlan. “And the trend is only going to get worse, as we have seen in previous years.

“It’s the perfect storm: there have been a plethora of catastrophic losses in a very short timeframe; insurers have been hit with $50 billion to $70bn in losses from Hurricane Ian; and reinsurers need to increase pricing to cover their costs. And my biggest fear is that, if we have another year like this, insurers could decide to stop offering coverage for renewables altogether.”

Then there are the multiple supply chain shortages and delays, and significantly increasing repair and replacement costs for insureds caused by the current inflationary environment. The very matter was raised as recently as September by U.S. renewable energy insurance market leaders at GCube’s annual advisory council meeting.

Dramatic Weather Pattern Shift

According to the GCube report, as a result of some of the most destructive natural catastrophes in recent years caused by a dramatic shift in weather patterns, the renewables sector has vastly exceeded many of its sub-limits of up to $50m. Most of the damage has stemmed from unmodeled weather events such as hail and windstorms, which are far more prevalent and damaging than traditional catastrophes like hurricanes and flooding.

Additionally, as renewable projects have increased in size, so a greater surface area has been exposed to these events. Most vulnerable are solar installations, with 80% of claims arising from external events such as flooding, hail and tornadoes.

Worse still, current predictive models are struggling to keep up with these unprecedented events. And the financial impact of these losses is hindering the development of robust mitigation strategies to tackle the problem.

“While the increasing frequency of extreme weather and Nat CAT events is not surprising to us, the rising severity of losses and the industry’s continued difficulty in managing these risks is a concerning trend,” said McLachlan. “The unprecedented growth potential unlocked by the Inflation Reduction Act will count for little if the North American renewable sector is unable to combat extreme weather risks.”

The fact is that the market correction hasn’t gone far enough to address the growing severity of these events and protect the U.S. renewables sector’s sustainable growth, the study has found. But so severe is the problem, that a significant rate rise could jeopardize the growth of the U.S. wind and solar segment faced with these evolving risks, it has cautioned.

“The solar market, in particular, has been underpriced for years now,” said McLachlan. “Insureds have become so used to a certain pricing that when it has to be put up so that re/insurers can cover their costs, it comes as a big shock and often means they aren’t able to go ahead with building the renewable project because they hadn’t factored it into their initial budgeting.”

Increasing Unmodeled Events

The situation is only going to get worse, the report has revealed, as unmodeled events are on the rise, outpacing modeled catastrophes in terms of frequency, with 40 severe storms encompassing high winds, hail, tornadoes and derechos recorded over the last three years. That compares with 13 traditional windstorm events such as hurricanes over the same period.

They’re also more severe, as evidenced by the fact that hail losses in Texas alone this year are projected to reach in excess of $300m. In context, that’s almost 10 times the estimated losses from Hurricane Hanna in 2020.

Among those installations which have sustained the most damage, solar has been far more impacted than wind since 2020, both in terms of claims frequency and severity, with operational projects and those under construction alike exposed to losses.  That is in stark contrast to technological developments in wind turbines, which target scale, strength and weather-proofing against severe events such as typhoons.

The study has concluded that the renewables industry needs to do more to improve the quality and strength of materials used in its structures and facilities. For example, solar technologies have proven particularly vulnerable to hail, exposing weaknesses in the sector’s current impact testing standards: the International Electrotechnical Commission’s hail tests uses 25mm projectiles, which are half the size of the average hailstone from a severe hailstorm.

Better Historic Data Usage

Moving forward, risk modelers and insurers need to use available historic weather data to track these unmodeled events. By determining an established pattern of events, they can more accurately assess, mitigate against and underwrite the risk.

Losses must also be separately logged for each type of event to help model more effectively against that specific peril. For example, distinguishing between tornadoes and derechos.

For their part, project managers and renewable energy firms need to work with their insurers and brokers to regularly revise sub-limits. That requires using the latest understanding of natural catastrophe and extreme weather risks to ensure their assets are fully covered in the event of a claim.

McLachlan concluded: “Concerted effort is needed across the value chain to strengthen policies, improve data utilization and update modeling and testing procedures and support sustainable growth for the sector. Our latest report issues a clear call for collaboration in the U.S. renewables industry to develop measures to combat the fallout for extreme weather and support a stable, successful energy transition.” &