Authors: Kirsten Bonke Robert McMillan
The start of 2025 has brought a new recognition from many governments that the world is becoming a more dangerous place. The tactics of war, terrorism and sabotage are changing fast — and (re)insurers are already responding.
The offshore energy and infrastructure markets in particular face a tricky combination of rising risk (and hence rising demand for insurance), with a lack of consistency in what actions are covered. But as in any fluid situation, uncertainty may breed opportunity – for the nimble.
(Re)insurers help protect vast swathes of energy infrastructure built out at sea, such as offshore wind installations and undersea pipelines. Regulations and insurance practices vary widely across the globe.
Offshore infrastructure is an increasingly important part of the energy mix, with wind turbines built at sea now accounting for around 70 gigawatts of capacity worldwide1, and another 19GW expected this year.2 This is also leading to more investment in undersea interconnectors, which allow for electricity transmission and trading between countries, balancing variable renewable supply with demand.
Europe's grid operators have argued for investment of EUR5 billion a year in cross-border transmission infrastructure.3 The UK has plans to become a net exporter of electricity by 2030.4 Southeast Asian nations are also pursuing greater interconnectivity, including across the islands of the Indonesian archipelago.5
Subsea infrastructure assets are becoming key points of vulnerability, as was shown by the Nord Stream attack of 2022.6 In December, an interconnector cable linking Estonia and Finland was also severed, with an oil tanker that has been linked to Russia suspected of causing the damage.7
Russia is estimated to have invested billions of dollars into a shadow fleet8 of several hundred discarded vessels,9 primarily as a means to evade sanctions. Suspicions have been rising in some quarters, however, that they may also be used for acts of sabotage.
(Re)insurers' approach to war and sabotage
While limited war covers are certainly available for vessels and cargo – and can command very attractive premiums for the insurers prepared to offer them – this is not common practice in policies for fixed infrastructure. The potential losses are too large and hard to predict.
However, these newer sort of sabotage losses are not widespread war actions, but rather "needle" attacks for which it is often hard to identify responsibility. At best, guilty parties may be identified by intelligence services or security investigations; at worst, there may never be anything but hints and rumours.
The standard war exclusion clauses that (re)insurers have relied upon for many years – such as the Lloyd's Market's JNR 2022-37, for example — have arguably not properly captured these new tactics. As a result, they have often fallen under the definition of terrorism — which is commonly covered in standard policies under buyback arrangements. It is also possible to buy a separate terrorism (political violence) policy.
In November, the Lloyd's Joint Natural Resources Committee (JNRC) published a new War Exclusion and Terrorism Buyback Clause, known as JNRC 2022-37A.10 This is intended to replace JNR 2022-37, and is similar to exclusions already applied in Asia, where it is quite common for terrorism coverage to be split off from standard contracts and insured separately.
The JNRC's new clause is materially more restrictive. Where previously it excluded the "use of weapons of war" by a government, or parties supported by them; now the clause refers to "malicious acts." Furthermore, it shifts the burden of proof onto the insured party. This means that in order to receive damages, the owner of the offshore windfarm or undersea cable would have to be able to prove, in court, that a government was not involved in the malicious acts — a challenging task that even national intelligence agencies sometimes struggle with.
Assess and mitigate, or carve out?
This new JNRC clause is emblematic of a market trend, in which terror and sabotage (in addition to war) are increasingly carved out from standard coverage. Instead, they are (partly) covered in a separate insurance line. This has been particularly the case in Asia but is spreading across the Marine and Energy class worldwide.
There has been no shortage of demand for these specialist policies; they are covers that insured clients are prepared to pay for. It has become a profitable line for insurers assuming those risks.
Nevertheless, the widespread exclusion of sabotage would be a material adjustment for the market, particularly in Europe. Since capacity in some specialist terrorism markets is more limited – such as offshore energy in particular regions – some primary-market demand could go unmet. This could become a critical issue for securing the financing of renewable energy infrastructure in particular, as that industry expands as expected (and required).
If the perceived risk of sabotage also worsens, then asset owners may prove willing to pay high rates for risk transfer solutions. Particularly those that are easier to claim from, and less onerous with respect to burdens of proof.
Of course, pricing the unknown is never easy, and this is a new form of political risk. Premiums are calculated on prior experience, so (re)insurers face understandable difficulties where little or no historic data are available. Yet if they sit on the sidelines entirely, they risk missing out on a substantial opportunity — something that may prove helpful in a softening market.
In considering this risk, insurers have several points to consider:
- What's my exposure? Together with their clients, insurers can review the exposure of their portfolios. Practical and engineering considerations include the depth at which cables are buried on the seafloor, for example – some academics believe 3m should be sufficient to protect against damage from anchors.11
- What do reinsurers think? Reinsurers are in fact-finding mode on this issue; they are not (yet) adopting blanket exclusions or asking cedants to do so. But they certainly want to understand more about this risk.
- Will the market standardize? Lloyd's JNRC is to be congratulated for grasping the nettle and capturing these threats in a broad but also precise manner. Its suggested exclusion is a valuable contribution to the discussion, but not the end of it. Market practice will continue to vary considerably around the world, and insurers need to consider the risk carefully. There is still ample space for them to do so.
At Gallagher Re, our role is to help facilitate these conversations. We have invested in engineering as well as insurance expertise, and can draw upon our insight into evolving practices right across the industry.
Whether individual insurers decide to exclude sabotage risks or not, our aim is to ensure their exposures are understood as thoroughly as possible by the reinsurance community, from new threats to mitigation strategies. Ultimately, where there is risk, there is always opportunity.
