The Emerging Challenges in Insurance for Renewable Energy Projects Amid Climate Risks

Renewable energy projects are increasingly under pressure from insurance coverage challenges due to the escalation of natural catastrophes and extreme weather risks. A new report by GCube Insurance highlights how evolving weather patterns are impacting risk transfer and project financing globally. The report stems from the company's extensive claims data analysis and sheds light on the need for the insurance industry to reconsider terms and pricing as a response to rising claims and increased weather volatility.

For many years, the United States has been at the forefront of the renewable energy industry's battle with natural catastrophe and extreme weather risks. According to Fraser McLachlan, CEO of GCube Insurance, while North America has traditionally been the epicenter of these challenges, the phenomenon is spreading globally, affecting regions such as Europe, the Middle East, and Australia. These areas acknowledge the heightening climate-induced risks, but due to limitations in modeling and data, the full extent of these risks remains uncertain.

In the U.S., natural catastrophe-related losses, particularly from hail and wildfires, have surpassed $300 million at times, resulting in stricter coverage conditions as insurers impose higher deductibles and lower limits. Such changes influence how risks are managed and transferred, eventually impacting insurance cost and availability. Similarly, in Europe, an increase in both the frequency and severity of claims has been noted. The continent's renewable assets experienced unprecedented insured losses in 2024, alongside extensive flood damage. This situation is compelling some insurers to reassess their exposure and amend underwriting strategies in specific areas.

Historically viewed as lower-risk concerning extreme weather, the Middle East and North Africa are now witnessing a shift in insurer perspectives. As renewable infrastructure grows, exposure rises, necessitating greater scrutiny of project resilience and insurance coverage adequacy. In contrast, insured losses from extreme weather in Australia have been minimal, but the expansion into new regions elevates the risk of bushfires, cyclones, and hail exposure. These insurance intricacies also impact the financial structuring of renewable projects. Some projects face delays or need additional adjustments to meet lender requirements due to policy exclusions or escalating premium costs. Despite these challenges, projects remain financially viable, though difficulties are real, as noted by Cecile Luciano, Director of Structured Finance Energy Origination at NORD/LB. For instance, flood-prone areas might find flood exclusions in insurance policies unacceptable, pushing developers to seek alternative markets for coverage. Consequently, enhanced engagement among lenders, insurance advisors, brokers, and developers is necessary to ensure that insurance policies are adequately bankable from inception, preferably before the finalization of construction insurance.