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By CYRIL TUOHY, managing editor of Risk & Insurance®

Insuring a bunch of propellers rotating 60 miles offshore? A good idea? Are you mad? Let's wind down that idea right now. I'm no propeller head, but even if I were, I'd take a pass on this one. Think about it: How do you run the numbers on an offshore wind farm?

Have you seen the kind of equipment you need to drive pylon casings down into 100 feet of water? You need special ships boats that rise out of the water on pylons. You need to slip into the channel in favorable weather--in other words when there's no wind. You need to have an undersea grid to move the power to shore. You better hope the local sea captains in their fishing trawlers stay well away from the jumble of pipes and electrical cables on the sea bed.

I'd hate to think of the damage a $50,000 trawler could do to a $10 million forest of high-tech propellers. It's not like you can call your HVAC contractor to come out and fix your grid.

It's true that you can get some sort of cradle-to-grave coverage for these power projects, but that's the easy part. The stickler is what's known as "time-delay exposure" coverage, which covers a project when it produces less power than planned ... like when a blade comes off its shaft, like when a vessel runs into the wind farm at night, like when all of a sudden Mother Nature decides she's not in the mood to provide any wind.

What actuary in his or her right mind would dare underwrite a time-delay exposure on a wind farm? How do you calculate the loss when you don't know when the project is going to be spinning at full power?

I'm not saying it can't be done. All I'm saying is that there are a lot of other energy projects where the insurance coverage can be priced more accurately. It's not like there's a whole lot of precedent and historical loss trends actuaries can rely on to price this kind of risk.

Extracting that viscous stuff we call crude oil is dangerous and may well choke us to death. But at least the black gold trades on the free market. We all know how much it costs to suck out of the ground, and what the risks are in extracting it. We also know how much it's worth come time to buy and sell the commodity in the open market. At least we can price that risk.

But insuring a bunch of oversized propellers, that's tantamount to tossing premium to the wind.

(Read Senior Editor Dan Reynold's Point "Wind Turbines are a Good Bet.")

September 1, 2010

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