Building an insurance strategy for interconnector projects
Who, What, Why and How?
Subsea interconnector projects are critical to the global energy transition, enabling the transfer of renewable energy across borders. However, these projects come with unique risks that require careful management.
There are many levels of risk management in an interconnector project, from due diligence around investment decisions down to toolbox talks. each aspect plays its own important part in de-risking the project.
Insurance plays a central role in this process and is of critical importance to many stakeholders. However, bringing together the various elements of the project into one coherent strategy and using insurance as efficiently as possible requires specialist expertise.
This short article sets out to provide a high-level guide to the who, what, why and how of the insurance risk management process.
Who?
One of the earliest and most important decisions from an insurance strategy perspective is who should arrange the insurance programme. Possibly, the first and most fundamental insurance strategy decision is, who should buy the insurance? There are two approaches: Contractor Controlled Insurance Programmes (CCIP) and Owner Controlled Insurance Programmes (OCIP). Each offers advantages and disadvantages depending on project scale, contract structure and lender requirements.
In recent years there has been a noticeable shift towards the use of OCIPs instead of CCIPs. This trend is primarily driven by the rise in financed projects, where lenders mandate Delay In Start-Up (DSU) insurance. DSU coverage can only be purchased by the project itself and must be integrated with the construction policies, making OCIPs the preferred choice.
Interconnector projects also generally have two main construction contracts, one for the cable works and one for the converter works, often with different contractors or consortiums. The challenge of ensuring there is no gap in coverage between separate contractor programmes has been a contributing factor in many projects opting to procure an OCIP.
What?
Once it has been decided who will buy the insurances, the next step is what insurances do we need to buy? The final insurance strategy depends on several factors, including:
- What is available from the insurance market
- What is required under other project agreements, especially lending agreements, and
- What are the project specifics
At a high level, a construction programme typically includes: inter alia, Construction All Risks (CAR)/Erection All Risks (EAR), DSU (as required) and third party liability policies. There may also be cargo policies depending on the insurance structure adopted. The exact combination of policies will depend on project specifics, who is buying the insurances and cost.
For instance, it may be more cost efficient to split the converter, and cable works into two separate policies to drive cost efficiency, although this creates a more complex placement that requires greater care to dovetail the different towers of cover.
It is important to remember that Contractors will always be required to provide some insurances, regardless of whether the project is using OCIP or CCIP. These might include covers for vessels, equipment, personnel and a degree of liability insurance.
At this stage we may also consider whether Alternative Risk Transfer Solutions (ARTS) might add value to the project. Understanding what these solutions might look like, how they would work, as well as what these would cost is important for the project to make informed decisions and drive insurance efficiency.
Once it has been decided who will buy the insurances, the next step is what insurances do we need to buy? The final insurance strategy depends on several factors, including:
- What is available from the insurance market
- What is required under other project agreements, especially lending agreements, and
- What are the project specifics
Why?
In the context of Engineering Procurement and Construction (EPC) contracts, insurance works as a bulwark upon which the indemnity regime rests, giving each party a reasonable degree of confidence that loss or damage will be rectified or, at worst, some degree of CAPEX will be recovered.
Insurance is not directly part of the risk transfer apparatus in EPC contracts. Liquidated damages, guarantees, force majeure clauses and indemnity regimes are all operating in concert to move risk between the contracting parties and will operate whether there is insurance or not. Indeed, liquidated damages will invariably go uninsured.
In terms of loss or damage events, very few contractors, or even project developers, have the balance sheet to cover significant loss events, or extensive attritional losses, which is why the placement of insurance is so critical to securing stakeholder confidence and contract certainty. In a sense, insurance is only there to provide as a form of guarantee that the parties are good to their word.
There are of course other project agreements, such as crossing agreements, wayleaves or easements. Any of these can impose significant contractual liabilities on projects, especially in respect of crossing roads or railways. Leases from entities like the Crown Estate can also contain insurance requirements as will certain licenses.
Finally, the most important agreement of all is the lending agreement, which will contain extensive insurance obligations which need to be carefully managed. From the project perspective therefore, creating a coherent and efficient insurance strategy, to implement over all the various project agreements is essential to ensure seamless cover, cost effective use of insurance expenditure, and critically for bankability with lenders. It is important to remember though that the insurance programme is a product of the projects various contracts as much as it is a part of them.
How?
How much insurance should be purchased?
Too little insurance may prove very expensive in the event of a loss, whilst buying too much is hardly an efficient use of capital either.
There are, again, numerous factors which influence the decision-making process: contract structure, values, and project specifics all feed into mix. An Estimated Maximum Loss (EML) study involves analysing potential loss scenarios to determine the maximum credible loss the project could face. This helps in deciding the appropriate level of insurance coverage, ensuring both cost efficiency and lender confidence.
How do we secure the desired level of cover?
Early engagement with insurers, clear communication of all risks and well-coordinated placement strategy are key to achieving the required outcome.
Let’s talk. If you would like to explore how a tailored insurance approach could support your project, contact us
Let's talk
Alexander Millar
Executive Partner
Energy Transition, EPR
The Walbrook Building 25 Walbrook London, EC4N 8AW
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