Nat cat losses loom over global renewables insurance market: GCube

By Rebecca Delaney

April 14 - (The Insurer) - Increasing natural catastrophe risk is threatening the long-term sustainability of the global renewables insurance sector, with extreme weather events more frequently affecting assets located outside the U.S., the latest report by renewables underwriter GCube said on Monday.

The softening North American renewables insurance market has seen sustained nat cat losses (particularly driven by severe convective storms, which are less predictable and more widespread than named storms), leading to tightened coverage.

As GCube noted, many projects are now securing sub-limits between $75 million and $50 million, or lower. This reduction in available limits has created more difficult negotiations between insurers, lenders and project owners.

Another key change in the market is the evolution of deductibles. While project owners previously faced flat deductibles of $250,000 to $1 million, many insurers are now implementing percentage-based deductibles tied to asset values.

"This means that instead of a fixed-dollar deductible, projects must cover a percentage of the total insured value before coverage applies. For large-scale developments, this can significantly alter the financial impact of an extreme weather event," explained James Papazis, director of operations and legal counsel, North America at GCube.

With lenders and project owners left weighing the risks of lower coverage against the reality of increasingly volatile extreme weather events, there have been instances where lenders have declined to finance projects owing to gaps in available coverage.

"This dynamic has created an ongoing push-and-pull between insurers, lenders and developers, as each party seeks to balance risk, cost and long-term project viability," Papazis added.

"Developers are being asked to take on more of the financial burden through higher deductibles and lower limits, while lenders are reluctant to finance projects that cannot demonstrate adequate risk management. Insurers, meanwhile, must navigate the fine line between maintaining capacity and ensuring that their exposure remains sustainable in an increasingly volatile market."

EXTREME WEATHER 'NEW NORMAL' IN EUROPEAN RENEWABLES MARKET

While the U.S. has been at the frontline of extreme weather risk in the renewables market for several years, this issue is no longer confined to the U.S.

Momentum in the global renewables market is pivoting away from North America and, while the sector understands that climate-driven risks are increasing, the scale or complexity of these risks is not yet fully appreciated in other regions, including Europe, the Middle East and Australia.

As renewables projects expand at pace, infrastructure is built in new and often unstudied regions where weather patterns are less understood, data is incomplete, and risk models are outdated.

Europe, once considered a "safe haven" for insurers, is now experiencing rising losses from various weather perils, including flooding, hail and high-wind events.

"With almost every nat cat and extreme weather claim type becoming more frequent, Europe’s reputation as a market immune to natural perils is under threat," said Josh Shimali, GCube's head of onshore underwriting.

Solar is the asset class most at risk, with between 90% and 95% of solar losses driven by external perils, particularly in Northern Italy and Germany.

"Although there is no shortage of renewables insurance capacity in Europe, complacency about the growing threat of nat cat and the creeping sum of insured losses will only pave the way for the kind of market hardening we have seen in the U.S., with a direct impact on the financing of projects," said Shimali.

"Faced with intensifying natural perils and shortfalls in risk modelling, the European market needs to re-evaluate the insurance packages required to finance and build renewable energy projects and, like the U.S., start to consider extreme weather risks as part of the ‘new normal’ for project development and operation."

LACK OF REGIONAL DATA IN MIDDLE EAST AND AUSTRALIA

Outside of Europe, the Middle East has voiced bold ambitions for solar, wind and hydrogen to contribute 70% of the region's power generation by 2050, a sharp increase from 5% in 2023.

While there is no shortage of capital to finance projects as renewables development is strongly driven by governing states, the historical perception of the Middle East as a benign market for extreme weather was shattered in April 2024 after the region was hit by record-breaking floods.

"Last year’s costly nat cat losses revealed a level of risk that has perhaps been underappreciated in the Middle East until now: the impact of flash flooding and strong winds. More and more capacity is arriving to develop, finance and insure renewables in the region and not all of that capacity has long-term experience in the sector," said GCube senior underwriter, Phil Pavey.

Pavey continued that, compared to other mature renewables markets, there is very little weather modelling in place across the Middle East. In the absence of historical data to accurately price weather-related risks, insurance premiums for renewable energy assets have increased in line with larger losses.

Elsewhere, the rapid expansion of utility-scale renewables in Australia has led to building infrastructure in untested regions.

The two key "known unknowns" for insurers are hail risk for the solar developments in Eastern Australia, and cyclone risk for wind turbines placed within the cyclone zone.

"It is good news for the rapidly growing renewables industry that its high-profile assets have been spared the worst of extreme weather and nat cat events. However, the Australian market can ill-afford to let this good fortune breed complacency," warned GCube underwriter Will Hiller.

"The need for disaster preparedness will become more apparent as the expanding sector is further exposed to Australia’s testing climate."