Are Hydropower Projects Uninsurable? Expert Analysis from Hydro 2020
Multi-million dollar losses, industry trends, and a tightening construction insurance market could threaten the viability of hydropower projects.
The hydropower sector has undergone steady growth in recent years, and is projected to represent about 28% of the world's power by 2030[ref 1]. However, a number of high-profile project losses have raised questions about the availability of suitable insurance. This has coincided with a tightening construction insurance market, and a trend for projects to be developed in challenging locations.
In a contracting market, how should construction companies manage their projects' risks? And what other measures should they take to obtain the cost-effective construction insurance needed to help optimise a project's bankability?
My Marsh JLT Specialty colleague, Stuart Freeman, and I were asked to present on the challenges faced by hydropower project owners and developers in a webinar at Hydro 2020.
The topics raised in the webinar are expanded on in our white paper, Hydropower Projects: Insurance Market Update.
Improving Project Bankability
In a contracting market, companies can makes insurers more comfortable, and therefore facilitate the bankability of hydropower projects, by proving that they understand the risks and are deploying effective risk mitigation strategies. Our Hydro 2020 webinar, Hydropower Project Insurance: A Challenging Landscape, focused on the issues affecting hydropower project insurance. Topics covered in the presentation included key risks for hydro works, the construction insurance market cycle, and reasons why insurers regard this sector as increasingly risky. We also looked at the consequences of hydropower construction claims during the past five years and offered advice on how to manage the insurance process to attain the best available outcome.
Understanding the Hydro Project Insurance Market
We asked insurers what they perceive to be the greatest risks affecting current and future works. Our white paper, Hydropower Projects: Insurance Market Update, which is available for download now, explores some of the topics introduced in our Hydro 2020 webinar, and is partly based on their answers.
Topics covered include the reasons why private sector involvement places more risk on contractors, the difficulties surrounding lump-sum contracts, why tunnelling losses are under increased scrutiny, and issues surrounding site quality and seasonal conditions.
Years of low pricing and wide cover mean that claims are catching up with many construction insurers, with some reporting loss ratios in some cases of up to 300% (without factoring in some very large unsettled claims). We explore the availability of cover in the paper, along with exclusions, limits, and defects cover.
In order to benefit from the broadest cover possible, and to receive the lowest prices and deductibles from the insurance market, hydropower construction companies need to offer detailed information about their risk management plans. By engaging with their insurance broker as soon as possible, construction companies will receive the best advice on how to engage effectively with construction insurers during this challenging transitioning market.
1. Source: Marsh JLT Specialty - Hydropower Projects: Insurance Market Update