The global insurance and reinsurance market should pay close attention to North Africa, with the region attracting increasing energy investment driven by rising demand for natural resources and ambitious infrastructure programmes.
As governments and investors expand conventional and renewable energy capacity, demand for tailored insurance and reinsurance solutions will certainly grow, as will the potential for coverage disputes to arise.
The opportunities are significant, but so are the challenges – the (re)insurance market will need to navigate legal, commercial and geopolitical risks if they are to support investment effectively while managing exposure. Africa’s long-term growth prospects are substantial, with UN projections suggesting that the continent’s population could reach around 2.5 billion by 2050 – meaning more than a quarter of the world’s population will live in Africa.
Energy investment accelerates
Rising populations will inevitably drive demand for electricity, industrial development and infrastructure, creating many opportunities in the energy sector. At the same time though, Africa remains a region where energy potential significantly exceeds current levels of investment. The continent has vast renewable energy resources, including solar, wind and hydroelectric power, but without the infrastructure, the potential has yet to be reached.
As governments chase decarbonisation and energy security objectives, renewable energy projects are likely to expand, and with this, insurance and reinsurance will be critical to securing project finance and attracting investment.
North Africa is already home to several flagship renewable developments – Egypt’s Benban Solar Park is among the largest solar facilities in the world, while Morocco’s Noor Ouarzazate Solar Complex has become one of the most prominent renewable energy projects globally. Both countries have also invested heavily in wind energy and continue to explore onshore and offshore opportunities, as do other countries.
Construction risks grow
An increase in energy construction projects is likely to lead to more (re)insurance claims. We have seen historically that construction projects often lead to complex coverage issues, particularly where technical defects or operational failures occur. A common aspect where disputes arise is the distinction between physical damage and defects – whether a loss results from insured damage or the discovery of a design or manufacturing defect. Closely linked to this is the issue of whether a defective component itself is covered or excluded under the policy – the definition of a defective “part” can be significant and it has major implications for the scope of recovery.
Testing and Commissioning (T&C) provisions are another common source of dispute. These clauses govern the transition from the construction phase, typically insured under a Construction All Risks (CAR) policy, to the operational phase, where cover is provided under a separate operational programme that may include business interruption protection.
The issue is especially relevant for projects completed in stages – wind farms, refineries and similar developments often have some assets commissioned and handed over while other elements remain under construction. Determining whether a particular asset has passed the testing and commissioning stage is critical in establishing which policy responds to a claim. Given the scale of energy projects planned across North Africa, these issues are likely to become increasingly important.
Renewables bring accumulation risks
The growth of renewable energy projects has also increased the importance of series loss provisions. Many renewable developments are built using large numbers of identical components –wind farms can contain hundreds of turbines or gearboxes manufactured to the same specification, while solar projects can involve the installation of millions of identical panels. This standardisation creates efficiencies but also creates accumulation risk, as a defect in the design, manufacture or installation of one component may be seen across an entire project. Where that occurs, losses can escalate quickly and affect a broad proportion of the insured assets.
Series loss clauses are designed to manage this exposure by reducing the indemnity available where multiple losses arise from the same underlying cause or defect – their purpose is to prevent insurers from facing potentially catastrophic liabilities resulting from widespread design or manufacturing problems. For insurers, these clauses provide important protection against accumulation risk, but for insureds, they can significantly affect the scope of available recovery where systemic failures are identified. As renewable projects continue to grow in scale across North Africa, these clauses are likely to remain a key feature of policy negotiations and claims adjustment.
Geopolitical risks remain
Geopolitical issues are also a key factor when underwriting risks in certain parts of Africa. Some countries occupy strategically important positions within regional and international energy supply chains, while also experiencing levels of political instability, civil unrest or terrorism-related threats. In these circumstances, energy infrastructure can be particularly vulnerable – for example, Libya’s Greenstream pipeline is strategically important and closely linked to wider political developments.
Operators and investors should consider whether Political Violence and Terrorism insurance forms an appropriate element of their risk management strategy. Even where adequate cover exists, terrorism and political violence claims can be difficult to investigate, as access restrictions may limit the availability of witness evidence reports and loss-adjusting investigations. Similar issues arise in relation to civil conflict losses, particularly where disputes emerge regarding the application of war exclusions.
Getting the cover right
Underinsurance is another important issue to consider. The value of an energy project generally increases throughout the construction process as additional assets are incorporated and works progress towards completion. Economic conditions can complicate matters further, particularly where inflation, exchange-rate fluctuations or supply-chain pressures increase replacement costs. If the values of insured assets are not updated regularly, the assets may become underinsured.
Depending on the applicable wording and governing law, underinsurance can result in claims being reduced proportionately, leaving insureds exposed to significant uninsured losses. Given the size and complexity of many energy developments, maintaining accurate valuations throughout a project’s lifecycle should be treated as a priority.
Regulatory framework
Another factor to consider is the regulatory framework governing local insurance placements. A number of African jurisdictions require domestic risks to be insured through locally admitted insurers, and although these insurers often reinsure much of the exposure into international markets, the arrangement can create an extra layer of complexity. Disputes may arise where the governing law of the underlying insurance policy differs from that of the associated reinsurance or retrocession programme. Differences in legal interpretation, claims handling obligations and dispute resolution mechanisms can create uncertainty if issues emerge following a loss.
While such challenges can often be addressed through careful policy design, the (re)insurance market should ensure that these issues are considered at the placement stage rather than after a claim has arisen.
While North Africa is likely to become an increasingly important market for the (re)insurance industry, the market should approach these opportunities with a clear understanding of the risks involved. Construction coverage disputes, serial defects, political violence exposures, underinsurance issues and local regulatory requirements, to name but a few of the kind of issues that we expect to arise, all have the potential to affect project outcomes and claims experience.
Those that understand and proactively address these challenges will be best positioned to support the next generation of energy projects. As North Africa’s energy sector continues to expand, demand for complex (re)insurance solutions will only increase.
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