Diving into energy industry claims
In this article, Risk Consulting spoke with Amel Islamagic, Senior Claims Advisor in Denmark about the different types of claims If Insurance has seen among energy industry clients. Amel worked with claims handling for more than 19 years at various international insurance companies before he joined If.
What kinds of claims do we see amongst our energy clients?
We experience a variety of different types of claims, which often depend on whether the risks are in the construction or the operational phase.
In the construction phase, we often experience claims related to inferior workmanship, human error and/or poor design. For instance, during the last couple of years, we have experienced an increase in the number of damaged offshore subsea cables that are related to low-quality workmanship and/or human errors. Here, it is critical the cable layout speed is in alignment with the speed of the vessel to position the subsea cable correctly on the seabed. If the cable layout speed is not in alignment with the vessel speed, there is a significant risk that the cable will bend beyond its designed bending radius and thus become damaged.
The replacement or repair costs of damaged subsea cables is complex due to different factors and bottlenecks such as vessel and crew availability, spare parts availability, and the repair window (the weather season). Therefore, subsea cable claims are often expensive. Experienced crews and increased awareness of the cable laying process through the implementation of operational protocols, have a key role to play in avoiding subsea cable damage in the future.
Claims related to machinery breakdown
We also experience claims related to machinery breakdown — both in the construction and the operational phase of the risk. In many cases, machinery breakdown is due to inferior design, and poor-quality material and/or workmanship on turbogenerators, transformers, switchgears and/or boilers.
Across recent years, we have experienced several examples of machinery breakdowns related to inferior design and/or materials. For example, the breakdown of a steam turbine in a power plant last year caused a significant business interruption and a resultant lack of power supply to the local grid.
The breakdown was due to the poor-quality design and material used with a critical part within the steam turbine. We also experienced a breakdown of a transformer in an onshore wind farm last year, caused by less-than-optimal workmanship.
The onshore wind farm consists of 100 wind turbines and two transformers that each distribute 50% of the generated wind power to the local grid, causing a significant business interruption. The wind farm could only operate at 50% capacity for several months before the damaged transformer was replaced with a new one.
With the increased focus on renewable and green energy, new technologies and manufacturing processes increasing, it appears that many products are being put on the market without necessarily being fully tested in the research and development process.
Extreme weather related claims
Due to climate change, we are also experiencing an increase in the number of extreme weather related claims. One example relates to the number of hail or flood damage incidences at solar parks. In 2022, news media reported that there was hail damage at a solar park that caused damage in the triple-digit millions USD. When developing solar parks, it is important to understand the NatCat (natural catastrophe) exposure in the local area and make all necessary adjustment in the project to avoid the occurrence of damage.
It is likely that claims caused by extreme weather will increase as the climate changes. To that end, we will both experience an increase in the number of claims, but also an increase in the magnitude of the damages.
Larger, more expensive claims in the future?
With the increased focus on renewable and green energy, we will most likely experience bottlenecks in relation to labour and parts, which could potentially lead to larger claims. For example, we are already seeing a bottleneck in relation to experienced crews working with offshore windfarms, and the lack of cable laying vessels built for the purpose.
More and more vessels from the oil and gas industry are being modified for the purpose of being able to work with subsea cable laying. On the one hand, this is a positive development since the cable laying vessel fleet will increase. On the other hand, modified ships that are not built for the purpose may pose a higher risk of claims.
Looking at machinery breakdowns, the tendencies towards a higher risk of claims increase in magnitude as the operating parameters increase – for example in the increase of temperature, power, pressure, voltage or similar. It is also the case that the risk of failure probability increases in line with the unit sizes and the installed production capacity.
Over the past two years, the inflation caused by electricity and fuel prices, and bottlenecks with crew and equipment availability, combined with manufacturing and supply chain challenges worldwide, have led to claims that have become increasingly more expensive. Accordingly, our experience has also been that business interruption claims have also increased in size due to the development of the energy prices.