By Rikki Stancich

By making risk their business, insurers enjoy a unique insight into the industries in which they operate. With a clear vantage point of the sector coupled with inside information on why costly mistakes have been made, insurers like GCube should play a pivotal role in knowledge exchange within the offshore wind industry. Yet most developers wait until the last minute to bring the insurers on board - and in doing so, miss out on a huge opportunity for risk mitigation.

“The insurance market sees everything. We are more informed about lessons learned than any other party out there,” says Jatin Sharma, head of GCube’s offshore renewable energy unit. “But most developers hold off bringing the insurance company onboard until around a month before financial close - by which time it is too late for any transfer of best practice knowledge.”

Déjà vu

The offshore environment is harsh and things often do go wrong. So far, however, there is limited evidence that the industry is learning from its mistakes; on the contrary, insurers are seeing the same mistakes being repeated.

Mr Sharma highlights the installation of infield and export cables as an example. “We’re not seeing the lessons learned that we would like to see.”

He blames the fact that the cable market is limited to a handful of players and that there is a tendency among these players to fire employees when mistakes are made. “It is impossible to learn from past experience with such a high turnover of personnel.”

Another issue beginning to characterise this particular sector of offshore wind farm installation is moral hazard – where contractors seek to benefit from making mistakes instead of getting things right first time. “The way things are, contractors actually stand to make more from getting it wrong. This introduces an element of moral hazard in the margins contractors make on remedial work for developers", notes Mr Sharma.

To resolve this, he suggests that a ‘carrot and stick’ approach is needed, whereby contractors are rewarded for achieving a given level of performance in a given time frame; and penalized if they do not. He argues: “This is the way it is done in oil and gas and the conventional power generation sector; and it will help differentiate bids from contractors and how insurers evaluate and reward risk transfer.”

False economies?

According to Mr Sharma, the offshore wind industry is currently driven by two key factors: cost reduction, and increasing the speed of installation. “Few care about doing it better – instead, the focus is on doing it cheaper and faster. But not better.” he says.

“Time and again we see that the lowest bid from a contractor is not necessarily the best. Some contractors take greater risks than they normally would in their proposals to secure new contracts, many which they do not have the balance sheet to sustain when it all goes wrong. Some insurance companies have a similar model."

While developers and contractors in the offshore wind industry are focused on maximising returns, the insurers are focused on managing how much money they can afford to lose, explains Sharma. “It would be naïve to underwrite offshore wind without expecting losses such as loss of life or loss of equipment. The trick is to understand why some projects are better than others and reward them accordingly with lower insurance costs.”

This close scrutiny of projects in order to identify and quantify risk places insurers in a strong position to feed their industry knowledge into projects, and in doing so, contain risks and their associated costs.

Mr Sharma highlights several costs that crop up regularly. “Stand-by charges, in the event that vessels are prevented from access to perform repair work due to bad weather and lack of auxiliary power supply, are two key factors that can escalate cost overruns that are not accounted for in the CAPEX models,” he says.

“One recent project in the UK lost access to their jack-up vessel and were forced to day-charter, which resulted in an enormous cost overrun. Similarly, understanding the extra expense involved when you cannot provide auxiliary power is key. Having access to back-up power is a crucial consideration.”

This level of insight could flag unforeseen risks for developers and consequently mitigate cost over-runs. “There is so much we could do for the industry if we were involved earlier on,’ says Mr Sharma.

“Project developers speak to everyone engaged in the project at the earliest possible stage but they don’t necessarily inform insurers of what they plan to do. Insurers by nature are highly informed about lessons learned – and the more confident we feel about a project, the more competitive the terms and conditions of the insurance will be. More importantly, we will be closer aligned with the project making it easier to settle and pay claims when it does go wrong.”

To respond to this article, please write to the editor: Rikki Stancich