International
Rate increases the norm for 2019 Following an unprofitable 2017, US insurers pushed for rate increases in 2018. Ample market capacity remained, tempering these rate increases to single-digit level for most clients, and some enjoyed modest rate decreases. In our opinion, insurer performance in 2018 will be better than 2017, but still unprofitable following a few large risk losses, California wildfire losses, and another above-average hurricane season. Consequently, modest rate increases are expected to continue into 2019.
Key markets Key markets for the thermal power sector in North America remain Associated Electric & Gas Insurance Services (AEGIS), FM Global, Munich Re, Swiss Re, Zurich, AIG and Liberty International (LIU). AIG has reduced its property capacity on many risks, including power generation, as it takes a fresh look at how it underwrites risk. There is still significant domestic North American capacity available, estimated at over US$3 billion for the right accounts, although this drops off significantly if the risk has extensive loss experience or catastrophe peril exposure. Less capacity is available for coal-fired generation as separately discussed elsewhere in this Review.
ILS: filling the Excess Liability gap In recent years, Excess Liability carriers have reduced the amount of wildfire coverage they provide. To partially fill this gap, Investment-linked securities (ILS) have been developed to provide clients with limited coverage in place of - or in addition to - what their excess liability policies provide. The Camp Fire and Woolsey Fire of November of 2018 were expensive events for California clients and their insurers; these fires exhausted any coverage provided by these ILS products, and the cost to purchase wildfire coverage going forward will grow significantly.
Thermal and renewable assets: move to separate programs
Insurers writing thermal power generation also entertain renewable energy risks, along with HSB, AXIS, and MGAs GCube and PERse. In recent years, many large clients have looked to separately place insurance for thermal assets in one program and renewable assets in another. AEGIS and PERse partnered in 2018 to help facilitate this development in 2018 with AEGIS’ blessing. Renewable programs typically are cheaper than thermal programs, with significantly lower deductibles; this trend is expected to continue as traditional insurers look to promote renewable energy for public relations reasons, as well as replace premium lost by exiting the coal-generation space.
Bad actors highlight cyber risk
Creative and persistent “bad actors” continue to present new challenges impacting Grid Security and Cyber Resilience. The proliferation of threatened and successful attacks on global power distribution systems has highlighted the fragility and susceptibility of the grid to malicious attack. Furthermore, the increasing decentralization of power distributions systems and interconnection of smart energy assets create more entry points for malevolent actors to enter utility systems.
Clients continue to invest in cybersecurity and cyber risk mitigation efforts, with most considering the purchase of cyber insurance, a product that has emerged in recent years. Insurers continue to struggle with “soft cyber” losses – cyber events covered in non-cyber policies. Underwriters are attempting to reduce or exclude “Soft cyber” in their renewal policies, and encourage their clients to purchase their stand-alone cyber policies to protect against this exposure. More work will be done to move coverage for cyber-related events to these cyber policies.
Uninsured exposures highlighted by RTOs and ISOs Capacity Performance markets developed in recent years by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) present exposure to power generation clients that are not typically insured. Power producers who clear in the capacity auctions are contractually obligated to provide capacity on demand; when a power producer is unable to meet its obligation when called upon, these organizations assign steep non-performance charges.
Several carriers – namely Archer (an MGA), AEGIS, Swiss Re and Munich Re/HSB – offer stand-alone coverage to protect against this exposure. To date, most clients do not buy this coverage due to its relatively high cost. Limited coverage for this exposure is creeping into traditional policies, subject to high retentions, at more manageable cost.
Michael Perron is Power Generation Leader for North America, Willis Towers Watson.
Growth of clean power as shift from thermal to renewables continues Latin America leads the world in clean power generation, producing over 50% of its power with clean energy. Hydro has historically been the main contributor to that, followed by wind, solar, bioenergy and geothermal. Specifically, wind and solar investment keeps on growing.
The main reasons to shift further away from thermal to renewables are the effects of climate change and the reduction of global emissions of carbon dioxide. Recent hurricanes (Caribbean) and floods (Peru/Colombia) have shown the negative effect of climate change. This has led local governments to support renewable projects, mainly through power auctions. In addition, the high cost and exposures of large hydro dam constructions and climate change impact (unpredictability of rainfall/water levels) and falling investment cost/MW makes alternative renewables such as wind and solar more attractive, with wind generation taking the predominant part in Latin America for new investments.
Brazil, Mexico and Argentina will continue to be leaders in terms of percentage MW investment in alternative renewables in Latin America. In terms of growth percentage, Chile is likely to outnumber other countries. Meanwhile Uruguay and Costa Rica continue to be the countries with the highest percentage of renewable installed capacity (nearly 100%).
In respect of the insurance market, Latin America´s insurance capacity for large power projects remains the international markets in Miami, London and Spain. Some important global insurers also have underwriting capacity form other countries in Latin America, being Mexico, Colombia, Chile and Argentina. Brazil’s insurance market remains strong for Brazilian power risks and is also expanding internationally (e.g. Instituto de Resseguros do Brasil (IRB).
Policy wording challenges
Wordings used in Latin American markets are often very limited in scope of cover and therefore need attention to provide adequate protection to power clients. In most countries, insurance regulation allows the use of tailor-made wordings; still often standard general forms are the norm. Brazil requires special attention in that respect because wordings are regulated and even the use of a specialist insurance consultancy is essential for buyers to make sure they have the quality product they arelooking for.
The quality of the wording has also its bearing on bankability of projects. Renewable projects tend to have non-recourse finance and therefore require a tailor-made approach. Furthermore, an understanding of how direct assignment of reinsurance security to the lenders can be arranged is key to having the project reach its financial close in time.
Marc Vermeiren is Latin America Regional Industry leader for Power & Utilities, Willis Towers Watson.
Background – a buyer’s market The Middle East (re)insurance hub has provided an interesting landscape for placement of technical Power, Utilities and wider onshore Natural Resources risks in recent years. As capacity has drifted towards the region, mainly in the form of new branches of international reinsurers as well as the Lloyd’s platform and a number of MGAs, buyers have taken advantage of extremely soft market conditions, represented by a significant over supply of capacity, a drive for underwriters to focus on top line growth and generous percentage reductions on well performing business as well as competitive supply of capacity for business with less favourable claims histories.
Today – profitability challenges The last twelve months have provided an unprecedented profitability challenge, as the Middle East marketplace struggles to assert its identity on the global (re)insurance landscape. Losses in the industry, both globally and regionally, continue to be significant and the rate of premium rate decline for the last few years has eroded any possible ability for (re)insurers to make a return on investment.
DIFC withdrawals as reinsurance capacity shrinks The recent winding up of a number of “branch” and “MGA” operations in the Middle East (specifically the Dubai International Financial Centre) as well as company markets with branch operations in the wider Middle East (e.g. Bahrain) illustrates the current shift in the market. (Re) insurance capacity in the Middle East is shrinking, with a significant chunk of authority moving from the region back towards the centre (whether in London, Europe or the US). A number of reinsurers are demanding certain percentage rate increases and reductions or eradication of soft credits such as No Claims Bonus and Long Term Agreements - all as mandated by Head Office, in many cases with little room for interpretation or negotiation. This process seems to be geared towards a recalibration of rating within the sector rather than a knee jerk reaction.
Conclusion – buyer expectations should be managed! The Middle East marketplace continues to have an important part to play in the rating of power and utility risks in the region but it will be even more important than ever for brokers to manage client expectations as well as judge the best access point for risks emanating from the region, specifically regarding those reinsurers who have multiple geographical branches e.g. London, Singapore or the Middle East.
Will Peilow is MEA Regional Leader - Downstream Natural Resources at Willis Towers Watson in London.
Notwithstanding a remarkable nine typhoons that made landfall in Asia in 2018, with the most severe, Typhoon Jebi, generating more than US$7bn in insured losses1, the last twelve months have witnessed a very marginal market softening in Asia, as the oversupply of capacity has driven the market slightly lower. This is despite the power sector remaining challenging for insurers, who continue to incur high levels of attritional losses together with a number of individual loss events that have resulted in claims in excess of US$100 million. So while it can be considered to be a strain on insurer profitability, the Asia Power market remains well capitalized, with a blend of local and international insurers/reinsurers remaining committed to this sector.
Against this backdrop, Singapore’s position as an insurance and reinsurance hub for the power sector in Asia continues to strengthen, with increased penetration from European insurers (including Allianz Global Corporate Solutions, Axa Corporate Solutions, Zurich Insurance and HDI) and other international reinsurers, who generally operate with full underwriting authority through their local subsidiaries. In addition we continue to see strong competition for domestic and regional business from Korean and Chinese insurers.
Risk selection continues to be a priority for insurers striving for profitability in this challenging sector, maintaining a high level of competition for those power companies who can demonstrate superior risk management and a good loss record. Those with significant losses and/or a poorer risk profile, on the other hand, are likely to have been subject to increased rates and premiums.
Looking into 2019, Asia is likely to be the part of the world most impacted by the negative position taken by reinsurers to coal fired power generation, discussed elsewhere in this Review, with 13 of the top 20 countries still building new coal capacity being located in the region2. This will inevitably give rise to challenges for many Asia Pacific power companies, and will require the deployment of innovative insurance placement strategies.
Steve Richardson is Head of Power at Willis Towers Watson Singapore.
1 https://www.insuranceinsider.com/articles/122680/reinsurers-eyeing-rate-rises-in-asia-after-cat-struck-2018 2 https://www.eco-business.com/news/coal-is-in-decline-globally-but-asia-is-driving-new-plant-development/
While significant capacity remains in the Australian market, there has been a shift in available capacity, particularly from European insurers as they have been reviewing their positions in providing capacity to coal fired power generation assets. These markets are tending to restrict, or no longer participate in, stand-alone assets or programmes that are dominated by coal generation.
For single site, or independent power producers, this reduces the potential number of lead insurers competing for business and could result in less favourable terms than what we’ve seen in recent, more competitive cycles.
As forecast in our last Review, rates have continued to increase as insurers seek to improve their underwriting results. They are looking to deploy their capacity to quality risks with sound risk management and good claims performance.
With the continued move towards a low carbon environment, the renewable sector has remained competitive as insurers seek alternative sources of premium income. With the withdrawal of certain capacity from coal operations, local Insurers are seeking increased involvement in renewable programmes which have traditionally flowed to overseas markets.
Stephen McDermott is Placement Services Director at Willis Towers Watson in Brisbane.
