Op-Ed: Offshore maritime insurance amid climate change

Robert Mackay

By Robert Mackay, Business Development Lead, FDR

The maritime industry is facing escalating climate-related challenges. The rising frequency and severity of extreme weather events, such as hurricanes and typhoons, profoundly affect offshore construction projects. However, with all the warnings in place, there is a feeling that, despite all the data demonstrating the climate’s shift into dangerous territory, many are refusing to act upon their warnings. These climatic shifts not only disrupt operations but also significantly inflate costs, underscoring the need for outside of the box thinking with insurance solutions that can help mitigate financial risks.

The rise of climate-induced financial risks

Climate change has intensified adverse weather conditions, leading to substantial delays in both renewable and the oil and gas offshore construction sectors. Waiting on weather to resume operations can delay construction, inflate costs, and strain project timelines, potentially leading to liquidated damages and financial distress. Several studies confirm that weather-related downtime can account for 15-30 per cent of total time during offshore wind construction and maintenance phases, depending on the region, time of year, and project phase. Installation and construction activities are especially vulnerable to rough sea conditions, high winds or storms, triggering significant downtime. The maintenance and operations phase typically sees 10-20 per cent downtime due to scheduled and unscheduled maintenance tasks and adverse weather.

In the offshore sector, these delays are particularly costly; rough seas and high winds can halt operations, leading to significant financial losses. Recent research by Rystad Energy revealed that global offshore wind investment is projected to more than double from $46 billion in 2021 to $102 billion by 2030, with Europe leading the charge at an estimated $53 billion in capital expenditure by the end of the decade. Given that a substantial portion of these investments are allocated to crew, shipping, and construction costs, even a conservative 20% downtime could translate to billions in project overruns and financial setbacks, significantly impacting profitability and delaying clean energy transition goals.

According to Standard P&I Club, claims due to increasingly volatile typhoons, storms, and hurricanes are now among the biggest concerns for insurers. As adverse weather becomes more frequent, the risk of delays, structural damage, and financial instability grows. A study by the Environmental Defense Fund projects that, without proactive measures, climate change impacts could impose an additional $25 billion in annual costs specifically on the shipping industry by 2100. These figures highlight the pressing need for the maritime sector to adopt strategies that address and mitigate the financial risks associated with climate-induced disruptions. The data looks glum, and the cost-based risks appear to collectively be growing.

Parametrics play their part

In response to these challenges, parametric insurance has emerged as a viable solution for managing weather-related risks in offshore construction. Unlike traditional indemnity insurance, which compensates for assessed losses post-incident, parametric insurance offers predefined payouts triggered by specific events, such as wind speeds and wave heights exceeding a certain threshold. This approach ensures rapid disbursement of funds, enabling companies to address immediate financial needs without the delays associated with conventional claims processing.

Over the past few years, parametric solutions have evolved to complement traditional insurance models. With standard policies, a claim is reported and then verified before payout, which can take anywhere from three to 18 months. Conversely, parametric insurance provides a pre-defined trigger and payout for a wide variety of scenarios. Once an independent source verifies that conditions have been met, payouts are typically processed within 10 to 15 days. This immediacy allows offshore developers to implement contingency plans, maintain cash flow stability, control the budget and minimise the operational impact of extreme weather events.

For offshore wind farm projects, where installation phases can experience 20-30% downtime due to adverse conditions, parametric insurance provides a structured financial safeguard. The sector, already grappling with significant upfront costs, cannot afford the unpredictability of weather-related delays.  A report by insurer GCube in September, found that contractor errors and defects represented 63% of claims by frequency in 2022, up from 55% in 2020, which, when factoring in unpredictable weather-related delays, can only heighten risks factors which are out of the constructor’s control. Nearly 50% of onshore (wind and solar) construction losses were attributable to natural catastrophes and extreme weather. These statistics reinforce the necessity for more responsive risk mitigation strategies for the elements out of our control.

Integrating parametric insurance into risk management strategies also reinforces investor confidence. The offshore sector is capital-intensive, and financiers seek assurance that projects will not be derailed by unforeseen weather disruptions. With insurance policies designed to activate in response to specific climate conditions, financial stakeholders gain a clearer picture of risk exposure and potential mitigation strategies.

At FDR, we believe that as the maritime and energy industry adapts to an uncertain climate change future, the need for proactive insurance solutions will only grow. Indeed, the risks posed by climate change are no longer speculative. They are real, measurable, and increasingly frequent. Parametric insurance, by offering rapid and predictable financial support, is a crucial tool to help the industry navigate these turbulent waters with greater certainty.