In Australia’s most populous state, New South Wales (NSW), 2022 will go down as the costliest year on record for Nat Cat claims. A prolonged La Niña weather system has inundated widespread areas of the state, as well as Queensland and other parts of Australia to a lesser extent.
The flood claims bill has reached over A$5.5 billion in NSW alone, according to figures released by the Insurance Council of Australia in November 20221. It is not surprising, with several areas of NSW being impacted several times over the year, that some risks have been deemed uninsurable. For those still able to attract cover for their Nat Cat exposures, premiums have soared as capacity has steadily left the Australian market.
Three consecutive La Niña events have wreaked havoc in the renewable energy industry, catching many operators and developers out in terms of their risk mitigation, management and transfer.
It has led to a major rethink, not only in terms of their approach to risk but also changes in working practices throughout the construction of new renewable projects. Many such considerations have led to increased costs for developers, after decades of practices geared around the prevailing drought conditions.
Flood risk is not unique to Australia; many of the changes in construction and development practices we are now seeing will have significant implications for renewable energy projects around the world.
While flooding is directly responsible for a major shift in insurer attitude in Australia, other Nat Cat perils across the country such as wind and hail damage, have added to the claims bill and resulted in a reduced insurer appetite for renewable risks.
Australian projects are also competing for global capacity that continues to be selectively applied. There is no hard and fast ratio, but capacity is highly dependent on the size and complexity of the project.
Several renewable energy projects throughout Australia, but most notably in NSW and Queensland, were caught out by the severity of flooding throughout 2022 with widespread damage to open trenches and unsealed roads, with some evidently failing to account for the cost of dewatering. Project developers and operators are clearly on notice that anticipating adverse weather and planning an appropriate risk management strategy are now paramount.
Given the reduction in insurer capacity and appetite, having principal oversight of risk management at any renewable energy project site is key to a successful long-term relationship with the insurance market. This is vital for projects seeking the most favourable renewal terms; insurer portfolios are running at a loss, resulting in increases in premiums, much higher deductibles and more restricted coverage.
Essentially, any practice the insurance market deems to be unsafe or likely to cause physical damage (especially following an adverse weather event) is increasingly resulting in it being excluded – or at least, severely restricted coverage.
Here are some major examples:
All these restrictions have come into force for renewable energy projects over the last 12 months and, to be fair, have come as a bit of a shock to many; however, all insurers offering capacity for these risks have taken a hit throughout 2022. Having said that, the response by the industry is more of an evolution of work practices than wholesale changes and should not be onerous for most projects.
Risk intermediaries work with insurers and projects to make sure that these restrictions are adapted and incorporated into the project methodology, ensuring that there is minimal impact to the schedule. Projects that fully embrace risk management into their project methodology get the best results with premium rates and coverages, while minimising potential issues/conflicts in the event of a claim.
1 NSW floods become most expensive natural disaster on record with $5.5b in claims
John leads our Renewable Energy team in Australia and New Zealand. He is responsible for advising Renewable Energy clients on risk and strategy during all phases of the project life cycle.
Kishan has over 15 years insurance experience and has been at the forefront of some of the region’s largest construction and energy projects. Kishan is responsible for strategic growth for construction and natural resources across Australia and New Zealand. He works with clients offering his strategic expertise to manage risks during all phases of the project life cycle from Early Words, Construction to operational and eventually decommissioning.
