Claims activity in the age of greening

• Claims teams are having to adapt to changing loss patterns, understanding new and emerging green technologies, from floating wind farms to green hydrogen.
• Extreme weather events are a particular challenge for renewable projects.
• Technology risks are the main driver of claims for offshore wind projects, where losses can be 10 times more expensive than onshore due to the need for specialist vessels and ports to carry out repairs.
• With the introduction of innovative materials and sustainable building methods, there will inevitably be a period of learning, as the construction industry and insurers establish new loss prevention and risk mitigation practices and processes.

The energy sector is undergoing huge change, with global renewable capacity expected to grow 2.7 times [1]  by 2030. The world now invests almost twice as much in clean energy as it does in fossil fuels: Global energy investment is set to exceed US$3trn for the first time in 2024, with $2trn going to clean energy technologies and infrastructure, according to the IEA [2].

As renewables account for an increasing portion of the global energy mix – and of Allianz’s energy portfolio – the number, size and type of energy claims is continually evolving, according to Dave Wilson, Global Head of Natural Resources / Energy Claims at Allianz Commercial: “Allianz has been insuring wind and solar energy projects for many years, but these projects are becoming bigger, more innovative, and located in even more remote and challenging parts of the world.”

The transition to Net Zero will increasingly affect the risks insurers underwrite, especially in sectors like energy and construction. Under its climate strategy, Allianz will no longer underwrite new single-site or stand-alone oil and selected gas risks, oil and gas activities related to the Arctic and the Antarctic, or extra-heavy oil and ultra-deep-sea risks. It will also require a robust ‘net-zero by 2050’ commitment from the largest hydrocarbon producers as a pre-condition for company-level insurance coverage and investments.

With increased investments in green energy projects, and with the ongoing shift away from traditional fossil fuels, Allianz is now seeing more claims from renewables, says Wilson.

“Our claims teams are having to adapt to a changing pattern of claims, understanding new and emerging green technologies, such as floating wind farms and green hydrogen. We are seeing higher volumes of claims from renewables like wind and solar, and while these are less severe than traditional energy claims, they are getting larger with increasing values at risk and the growing size of renewable projects worldwide.”

The growing relevance of renewables has important implications for insurers’ claims handling with increasing volumes. Claims related to carbon based energy assets and infrastructure – such as power stations and petrochemical plants – tend to be lower frequency and higher severity when compared with renewables. While large petrochemical plants are relatively few and far between, renewable energy sources are more numerous and geographically spread.

“The number and types of claims we are handling is changing. We still have large single losses from power stations and turbines, but with the growth of renewables, we are seeing more natural catastrophe claims, as well as an increased risk of accumulations of smaller losses or a series of claims related to the same cause. For example, we have a claim involving a windfarm where we may have to replace all the turbine blades, due to numerous faults and failures,” says Wilson. 

The expansion of renewables is seeing new technologies scaled up and deployed in new locations. Large solar and/or wind projects already operate, or are being constructed, in remote parts of Australia, North America, China, India, North Africa and the Middle East.

“The energy transition is seeing renewable assets and equipment located in geographies and areas of the world where natural catastrophe exposures and their impact are not yet fully understood. We are having to learn about natural perils in new parts of the world where we have limited experience and data. In the past, we would not have seen large energy infrastructure and construction activity in remote locations, such as in deserts and rural North America,” says Wilson.

Extreme weather events are a particular challenge for renewable projects.

“We are seeing an increase in extreme weather events globally affecting renewable energy projects, with claims in locations we have not previously experienced, such as from floods in Australia and Germany. For example, we recently had a claim where heavy rain and floods caused damage and delays for an onshore wind project in construction, affecting access roads, foundations, and earthworks,” says Wilson.

Insurers have seen a growing number of claims from solar parks, the fastest growing part of the renewable market. Solar projects are exposed to a wide range of perils, including wildfires, storms, tornadoes and snow loading, although hail is by far the biggest risk for solar projects in terms of severity: Hail accounts for 60% of total solar losses with only 3% claims, according to Swiss Re [3].

“As the technology improves, solar panels should become more resilient, but we are also seeing more severe weather, including larger hail events, with bigger and more damaging hail,” says Wilson. “There have been some sizable claims from hail damage to solar farms. In March last year, a hailstorm caused significant damage at a solar park in Texas, while floods in the United Arab Emirates caused damage to foundations and construction at one of the world’s largest solar projects.”

While renewable risks do not yet present exposures on the scale of a big petrochemical plant (which have insured values in the billions of dollars), they are becoming larger, creating sizable accumulations of risk for insurers. For example, a project such as the UK’s Hornsea 2 [4] offshore windfarm covers 178 square miles, with 165 turbines producing enough energy to power 1.4m homes.

“Where turbine claims would previously have been in the hundreds of thousands, they are now in the millions, as turbines and projects have grown larger and larger. We have seen some significant windfarm claims from damage to sub-sea cables, as well as lightning strikes, fires and mechanical breakdown,” says Wilson.

Technology risks are the main driver of claims for offshore wind projects, where losses can be 10 times more expensive than onshore wind due to the need for specialist vessels and ports to carry out repairs. Recent years have seen large losses in offshore wind from damage to sub-sea cables, which can account for about 70-80% of losses in terms of overall claims amount incurred. Loss or damage to cables during transport or installation, as well as damage caused by anchors and vessels, have driven multi million euro claims in offshore wind.

Renewable energy technology also continues to evolve. For example, as windfarms are located further offshore – where winds are stronger and more reliable – floating wind turbines are being employed to cope with deeper waters. These, however, require deep ports for repairs, which can lead to increased costs in claims.

The energy transition is also breaking new ground for insurance, giving rise to new loss scenarios and coverage issues, explains Wilson: “Series loss clauses have been introduced to policies for wind projects that control the risk for insurers by limiting the coverage for damage caused by design issues affecting a number of turbines in a wind park – but these are relatively new wordings that have not yet been fully tested.”

The green building industry is expected to grow rapidly in coming years as governments and business look to cut their emissions and hit net zero targets: Over a quarter (26%) [5] of all greenhouse gas (GHG) emissions come from the construction and built environment.

Achieving net-zero carbon emissions in the built environment by 2050 will require investments of $1.7trn annually, according to McKinsey [6]. Decarbonization of construction and the built environment will require a wide range of changes, from the development and adoption of low-carbon building materials, such as engineered wood, green steel, and low-carbon concrete, to the greater use of insulation, heat pumps and offsite modular construction.

“While the construction industry is only at the start of its transition journey, we are starting to see an influence on construction claims,” explains Christian Kolbe, Global Head of Construction Claims at Allianz Commercial. “With the introduction of innovative materials and sustainable building methods, there will inevitably be a period of learning, as the construction industry and insurers establish new loss prevention and risk mitigation practices and processes.”

With the push for more sustainable buildings and construction, contractors are increasingly using materials that they are not familiar with, which can lead to accidental damage and costly mistakes, explains Kolbe. For example, Allianz has seen claims where non-traditional building materials, such as engineered wood, stored incorrectly, or left out in the elements, are no longer fit for purpose.

“New materials and methods of construction bring new risks. For example, we have seen claims from the construction of modular buildings related to inappropriate storage or water ingress. Once moisture gets into modular units it can be hard to remove and can lead to mold issues. As new sustainable building materials and methods of construction are adopted, the industry will need to develop procedures and processes to prevent losses,” says Kolbe.

Innovation can also lead to claims for insurers as some contractors seek to transfer entrepreneurial risks to insurers. Operating with squeezed margins and under fixed price contracts, contractors can be under immense financial pressure, while overly optimistic project schedules leave little room for increased cost or delays. As a result, some contractors are turning to insurance to recover costs related to problems that occur during construction, according to Kolbe.

“Over time, we have observed a growing tendency for some companies to transfer entrepreneurial or commercial risks to insurers. Where companies incur costs from design faults, flaws or defects during construction, some are now presenting a claim. Costs that they would have understood as their own risks in the past are now resulting in large claims for insurers. Some construction policies are based on broad wordings, and an argument can be found to claim against a policy, even when such cover was not originally intended by the underwriter,” explains Kolbe.

Several claims have recently come in front of US courts that have tested the scope of cover under construction all-risk insurance, also known as builders risk insurance, and the interpretation of wordings intended to limit cover for defects. In South Capitol Bridgebuilders (SCB) vs Lexington Insurance Company, a US court found in favor of the policyholder, which had claimed that a defective concrete pour constituted “damage” under its construction all-risk policy and was not excluded by the defect exclusion (known as a London Engineering Group or LEG3 clause).

SCB vs Lexington is the first time a LEG3 clause has been tested in the courts in this way and appears to have set a precedent. The District of Columbia court decision in 2023 was followed by a similar LEG3 case involving defective concrete in Florida (Archer Western vs Ace) [7], which also found in favor of the insured.

“For the industry, these LEG3 cases demonstrate the need to clarify and simplify coverage in construction all-risk policies, and make wordings around damage and defects less ambiguous,” says Christian Kolbe, Global Head of Construction Claims at Allianz Commercial. “These rulings make it necessary to have a better and clearer definition of damage in our policies. In parallel, there are also ongoing market projects to improve and clarify defect clauses.”

Insuring commercial risks like defects are not the intention of underwriters, explains Kolbe. “Despite the recent LEG3 ruling in the US courts, construction all-risk insurance is not designed or intended to cover defects, such as the costs of fixing a flawed concrete pour. A defect is a ‘state of affairs’ and should not constitute damage, which is a sudden change.”

Another potential area of contention is ‘betterment’, where repairs or replacements to insured damage involve improvements that go beyond the original project design or specification. For example, following a tunnel collapse during construction, the tunnel lining may require reinforcement, leading to additional costs.

“When you look at various defect clauses, ‘betterment’ or improvement is not part of the scope of construction all-risk coverage. Such insurance is designed to put the insured back into the position they were before the incident, but the intention has never been to pay the additional costs of improvements,” says Kolbe.