21 September 2026
Estimated Maximum Loss: Insurance Purchasing with Credible Loss Scenarios
As interconnector and subsea cable projects continue to grow in scale and complexity, clients should be increasingly focused on ensuring insurance limits reflect credible loss scenarios rather than total project value.
When Full Project Value Reflects the Risk
Insurance is generally rated on the basis of the project’s Estimated Contract Value (ECV) or full replacement value. The reason these values are used is because it allows insurers to gauge the scale and overall exposure on a project when pricing up the cover, values being easily comparable across different projects.
For many projects in the upstream energy space, this is less of an issue, as most of the project’s value will typically accumulate in one place at some stage. For example, consider an FPSO project or an offshore platform. The production unit is likely to represent the lion’s share of the overall insured value. As a result, the loss of that property has the potential to represent total loss event and absorb most of the insured values; particularly if the loss of production unit occurs at the offshore location and causes damage to nearby subsea infrastructure. To say nothing of other additional costs associated with the loss such as removal of wreck or debris and sue and labour.
In these circumstances purchasing a significant limit, which represents a high proportion of the overall values makes sense, especially as premiums in the upstream insurance market represent a much smaller proportion of CAPEX or OPEX than compared to the subsea cable market.
When Values Exceed the Risk
For interconnector or other high voltage offshore grid projects, purchasing insurance up to full ECV or replacement value may not always reflect the project's actual risk exposure, as it is extremely unlikely that an entire cable system would be damaged by a single event. Cable is much more likely to be damaged at specific points along the route, and of course the converters are separated by their nature at two separate locations. What this can mean from an insurance perspective is that you may be paying for insurance market capacity that will almost certainly never be utilised .
The insurance market generally recognises this state of affairs and an appreciation of this should be factored into pricing, however, there is a base cost associated with tying up market capacity and doing so purely for the sake of it is an inefficient use of insurance spend. Many brokers address this issue by introducing a sub-limit to their policy to reflect a possible maximum loss event, this can carry a credit which reduces the cost of insurance, however, the methodology used to establish these limits can vary significantly between projects.
The Role of an Estimated Maximum Loss Study
What this limit should be is established by performing something called an Estimated Maximum Loss (EML) study. An EML study identifies the largest aggregation of value within a project and uses that analysis to establish an appropriate insurance limit, normally well below the ECV or full replacement values. When done effectively this can drive premium efficiencies and also open the door to conversations around possible ART solutions. However, not all EML studies are created equal, deriving a limit which is bankable with lenders and other stakeholders requires an in depth, clear and structured process. This process requires specialist advice and guidance to avoid the worst possible outcome of under-insuring the project, and leaving balance sheets exposed.
Gallagher continues to invest in risk engineering capabilities and specialist expertise to build an EML framework with a particular focus on HVDC subsea cable projects which is designed to help projects and their stakeholders assess credible loss scenarios and gain greater confidence that the limits being purchased align with the project's risk profile, and ultimately a more efficient risk transfer solution.
SETTING THE PACE
Subsea power cable is not a particularly new technology, with the first commercial power cable system installed in the 1950s. However, as the world races to meet ambitious net zero targets and energy security concerns, the utility and importance of interconnectors has become increasingly important.
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The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher (UK) Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
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