Effective Risk Management – Why knowledge of the risk is key

Our latest article for Wind Energy Network Magazine addresses the importance of adequate and Effective Risk Management cover particularly in relation to the renewables sector. Senior Solicitor and Director, Edward de la Billiere shares more.

Over the last two years we have featured articles on a wide range of issues affecting the wind sector, including changes to planning and immigration laws, the legal frameworks surrounding the development of ESG and the ethical sourcing of raw materials – amongst other topics.

We return in this issue to the subject of risk management and the need to purchase adequate – and available – insurance.

Effective Risk Management Coverage

The availability of adequate insurance coverage is becoming an increasingly challenging issue, not least because the insurance industry as a whole has faced serious climate related losses over recent years, losses which are causing a tightening of terms and conditions along with a material reduction in risk appetite. Additional complications have arisen in the form of post covid supply chain challenges, along with the impact of inflation, and these have served further to compound the range of risk management issues which need to be grappled with.

When this backdrop is overlaid on the renewables sector the situation is worsened by its comparatively fledgling nature, along with the gathering speed of change as it develops and evolves. When contrasted against various long standing industrial sectors and their comparatively slow technological evolution, the understanding of risk in the renewables sector is in its relatively formative stages, with the accurate underwriting and pricing of risk showing signs of lag.

Availability

There is now a growing danger that insurance could as a result of these various real and perceived difficulties be priced out of reach or simply become unavailable for many renewables projects. Coverage of the issue is increasing with a number of recent articles including one by GreenBiz titled, “Could insurers pull the plug on renewable energy?” and one by “Risk & Insurance” titled, “Oh, the Irony: Climate Change-Related Catastrophes Put Green Energy Infrastructure in Peril: Risk & Insurance”.

The “Risk & Insurance” article addresses a report by G-Cube which explains that the insurance sector may choose to turn its back on renewables if the increased frequency of severe weather events causes another year of catastrophic losses. The article also includes insights into a number of practical problems such as the difficulties in obtaining the components and spare parts which may be needed to get wind farms back up and running after an incident – delays in the availability of spare parts inevitably extending the period of interruption, further driving up claim costs.

What happens if adequate insurance cover does become unavailable at some future point?

The availability of insurance is a key component in the ability of projects to attract finance. If insurance support is materially degraded, this has the potential to seriously impact positive investor sentiment and the wider viability of new projects. Any impairment in the availability of finance makes the move to net zero even more challenging.

There are possibly two solutions to this.

We have in previous articles covered how companies should approach risk management, and also how to buy insurance, and we have also written on our website about the role of insurance in climate related natural disasters.

The first potential solution is the effective use of the knowledge bank of information about the cause and impact of risks. This can be done by both the operators, who should proactively consider what risks they want to insure and what risks they are happy keeping ‘in-house’, and also by the insurance sector which should ensure (a) that there is a proper understanding of the risks they are covering, and (b) that they are writing policies which adequately address those risks.

Second, operators and others in the wind sector should look to alternative and blended options to conventional insurance. These alternative risk management models (such as mutualising, and / or setting up spare parts pools) already exist, and they should have an increasingly significant place in the risk management conversations taking place in board rooms.

Understanding Risk

Arguably, the renewables sector knows and understands the risks they face better than the insurance industry does. Risk retention within the sector, evidencing a clear understanding of risk along with the alignment of interests this provides, twinned with the formation of strategic relationships with the insurance and reinsurance marketplaces has the potential to achieve the desired outcome for all parties involved.

Other industries and technologies have faced similar challenges during their formative periods and lifetimes. The lessons and parallels should be explored and developed. As is so often the case, the answer to insurance problems is actually out there. It requires some proactive and lateral thinking to identify appropriate solutions.

To read the full Wind Energy Network Magazine on Effective Risk Management please click here

Effective Risk Management – Why Knowledge Of The Risk Is Key

 

If you are interested in understanding what effective Risk Management are available to your organisation, community or group company and would like to talk to a specialist advisor, please click on the individual profiles below to arrange a call.

 

Your Team for Effective Risk Management:

Mark Tetley

Mark Tetley has wide experience gained from senior positions across the London insurance market as both an underwriter and a broker, in a variety of sectors.

David Gudopp

As the Head of Risk Mitigation and Transfer in our Insurance, Mutuals and Risk Management division, David brings over 20 years of experience to the table. His focus is on providing clients with an independent assessment of their risk transfer arrangements and driving targeted outcomes.

Prospect is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, insurance and risk management specialists, and finance experts.

This article remains the copyright property of Prospect Law Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.