a challenging year for clients and insurers
Following years of unprofitability, 2019 saw a fundamental shift by Property insurers in their approach to underwriting technical and engineered occupancies, including (but by no means limited to) Power risks. Some carriers no longer write Power risks, while others have reduced their capacity. In recent years, Power insurers have paid numerous attritional losses, some of which have been severe. Major losses have developed well above estimated reserve levels, and that development impacted 2019 results. In particular, wildfire losses have impacted both the Property and Excess Liability markets. The retreat from risk Insurers were particularly concerned because, for most, Property losses exceeded premiums in 2019, despite relatively quiet CAT activity and increased rates. Some insurers were able to limit their losses through efficient use of facultative reinsurance, but this will be significantly more expensive in 2020. Insurers that were nearly profitable took a surgical approach to reviewing each program, not only for price but also for both terms & conditions and risk engineering. Buyers should expect this disciplined approach to spread to all insurers, with underwriters only looking to write new business which improves their portfolio. Insurers are exercising discipline not seen for many years, requiring higher rates, higher deductibles and reduced coverage terms. This “retreat from risk” makes it extremely difficult to insure some risks at any price. Consequently, it has become increasingly difficult for brokers to deliver renewal terms to buyers in a timely manner, as many renewals are going down to the wire or beyond. Coal-fired and other assets struggle to access cover Furthermore, it became extremely difficult to find coverage for coal-fired generation risks in 2019, as key insurers were driven to avoid these risks as a result of corporate sustainability initiatives. Those willing to continue underwriting coal-fired generation assets were being pressured by their reinsurers to exit this space; this trend is expected to continue through 2020 and beyond. Some insurers also ceased writing Waste-to-Energy risks, due to poor loss history and risk control issues, so these risks also became difficult to place. Even renewable energy risks such as wind and solar, which have been competitively priced for many years, were seeing challenging renewals, particularly those located inn CAT-zones and/or involving troublesome technology or reliability issues for insurers. Better news for gas generation assets However, for gas-fired generation assets, significant domestic North American capacity remained, estimated at over US$3 billion for the right programs, although this dropped off significantly if the risk had extensive loss experience or catastrophe peril exposure.
Losses continue to mount Power sector losses remained high in early 2020, with the result that some insurers continued to sustain overall underwriting losses. Some of these losses involved proven machinery where well-established “fixes” (upgrades) had not been installed, such as the 501FD3 units (without the enhanced torque tube which reduces the chance of cracking in the torque tube) and the 7FA (without the compressor pack upgrade). To date, insurers have continued to cover these non-upgraded units where other protection means are in place, such as strong maintenance practices, online vibration monitoring and where compliance with OEM guidance. The insurer response However, given recent losses, underwriters will now be more wary of insuring these non-upgraded units; where they do, they will require more conservative terms such as the LEG /1 defects wording, higher rates and increased retention levels. Insurers continue to encounter problems with newer equipment, including the quick start aero—derivative/frame machines such as the LMS100, as well as F-Class and H-Class units, although some of the main problems with these units have been resolved. Larger machines are expensive, presenting greater risk to insurers; indeed, insurers paid significant losses for early operating issues when recent large frame units were introduced. Insurers historically considered a new gas turbine unproven until several units in its fleet achieved 8,000 hours of satisfactory operating history. Given recent experience, insurers now wait at least until these units have satisfactorily reached a scheduled hot gas path inspection before considering them proven, at which time underwriting terms became less onerous. For example, insurers still consider H-class machines prototypical/unproven, with some seek deductibles as high as $10 million for Physical Damage and 120 days for Business Interruption for these units. Some underwriter concerns regard not only the machines but also experience with specific OEMs and vendors. Insurers believe that vendor liability, transferred to the client in OEM contracts, should be transferred back to the source. For example, in their contracts with clients, Gas Turbine OEMs strictly limit their liability for overhaul work to a modest sum, say $500,000. Should the OEM inadvertently leave tools behind in a machine during maintenance, the Property insurer could be responsible for a substantial property claim, with no ability to subrogate against the OEM/vendor. Insurers suggest that relieving Property insurers of this contractor liability would benefit clients and carriers alike. Rates continue to firm as deductibles increase Through Q1 2020 rates continued to firm, and we expect this trend will continue throughout and potentially beyond 2020 as insurers need to generate an underwriting profit or risk being shut down. Some have ceased underwriting Power risks, while others are at risk of suffering the same fate should their portfolios remain unprofitable. Buyers should expect higher equipment deductibles (PD & BI), as well as clawing back accommodations made in the soft market, as well as limit reductions and some coverage restrictions.
Staff reductions at Power Gen sites COVID-19 has impacted the US Power Gen industry in many ways. With less travel and the shutdown of many businesses and other facilities, demand for power is down, reducing prices. Power Gen plants have reduced staff at their sites to key operating personnel; some have fully or partially furloughed non-essential staff and executives. Scheduled maintenance has been reduced and/or delayed beyond established norms, increasing risk of failure. Getting maintenance done or acquiring and installing replacement parts is more challenging; consequently, there is an increased likelihood of loss, and a potential delay in identifying and responding to any loss events that do occur. More on the risks of COVID-19 relating to power plants is discussed in Jamie Markos’ article in this publication. Are Power Gen Property programs affected? COVID-19 has, of course, impacted the insurance marketplace as well. With offices closed, client meetings, carrier engineering visits and claims updates are proceeding virtually instead of in person. From a coverage perspective, COVID-19 is a virus; hardly the type of peril typically thought of as triggering “All-Risk” property insurance coverage. While some property policies provide modest coverage for Communicable Disease, Event Cancellation, etc., most property policies were not intended to cover pandemics.
Nonetheless, some buyers have filed claims for lost revenues as a result of the pandemic; unsurprisingly, insurers generally believe such claims are without merit, a scenario which might potentially lead to expensive court battles1. Separately, the US Federal and State governments have proposed legislation to require insurers to pay Business Interruption claims associated with the virus under their property policies. Insurance executives believe any such legislation would violate the contracts clause in the US Constitution and could bankrupt affected insurers in months. In any case, the possibility that insurers may need to pay claims for the pandemic certainly adds to the stresses within the Power marketplace. Separately, consideration is underway to develop a government backstop for future pandemics, to help insurers to offer coverage for this peril going forward akin to the Terrorism Risk Insurance Act (TRIA) of 2002 and the legislation that succeeded it.
Key Property insurers for the Power sector in North America include the following:
FM Global continues to predominately offer 100% of capacity needs, while AEGIS is often willing to increase line sizes for their members and OIL continues to offer significant capacity to its members. AIG no longer offers a single carrier solution for its Power Gen clients, but still strives to lead programs and provide engineering as a quota-share player. Zurich also continues to offer significant capacity and can lead programs. Munich Re and Swiss Re continue to offer significant capacity, but no longer strive to lead. Both Liberty Specialty Markets (LSM, formerly LIU) and The Hartford (formerly Navigators) no longer write US power generation business, with The Hartford out of all Downstream operations completely (LSM continues to write Power business through their Bermuda and London operations). Other insurers are similarly struggling, and potentially could exit this space should their performance not improve. No new capacity has yet entered the space, though Nuclear Electric Insurance Limited (NEIL) offers Property coverage for their Members’ non-nuclear assets and will sometimes offer capacity to non-members as well. Ample capacity remains available to complete Property programs, but clients have fewer options and less leverage than in recent years.
Liability coverage & Wildfire risk Casualty and Excess Liability markets firmed significantly in 2019, with many carriers reducing their available capacity with significant capacity reductions. Rate increases of at least 5% - and up to 10% and higher - are now “normal” for loss-free risks; these trends have accelerated over the course of the year and will continue through 2020. Investment-linked securities (ILS) remain available to supplement wildfire coverage in E/L policies, albeit at high cost given recent loss history. Clients need to demonstrate to insurers why they believe their exposure to wildfire is well managed to secure any coverage, while insurers are also concerned about the impact of litigation financing, which has caused more severe claims development than in past years. Cyber Some studies suggest that utilities are among the industries that are most often targeted for a cyber-attack. Government officials concede that foreign components in the US electrical grid may present a hidden threat, prompting federal oversight of utility purchases going forward and a plan to root out embedded gear thought to be compromised2. Property insurers universally exclude cyber coverage, but most US insurers continue to provide coverage for ensuing loss. With few exceptions, explicit provision of any cyber coverage has disappeared from the Property insurance marketplace; any coverage provided is designed to cap exposure to a modest total to avoid court battles. Other insurers such as AIG can offer optional cyber coverage in their Property policies for additional premium, underwritten with the help of their cyber team. US insurers continue to provide coverage for ensuing damage, following cyber events, but will want to limit such coverage to Fire and Explosion only. Insurers are seeking to remove coverage for ensuing damage following Machinery Breakdown. We are also seeing some insurers imposing absolute cyber exclusions, and this trend is expected to continue to spread. Underwriters continue to strive to specifically exclude “Soft cyber” in their renewal policies and encourage buyers to purchase their stand-alone cyber policies to protect against this exposure. More Power Gen firms are buying stand-alone cyber coverage, to ensure they have the coverage rather than rely on attempting to find coverage not explicitly provided under their other policies.
For Property renewals, buyers without losses can expect rate increases of 20-25% or more, up from 15-20% in late 2019. Those with losses and engineering issues should prepare for higher rate increases, possibly as much as 200% or even more. Buyers should expect insurers to pay more attention to values reported, particularly with respect to Business Interruption. In addition to the above, in order to return to underwriting profitability, insurers will seek to reduce nat cat limits and increase deductibles and pull back terms and conditions surrendered during the soft market. In some cases, these terms do not meet lender agreement requirements, and steps need to be taken to renegotiate these agreements, or to purchase additional coverage (DIC nat cat coverage or deductible buydown insurance) in order to comply with the terms of the agreements. Renewal planning Significantly more time, effort and planning are needed in negotiating property renewals in 2020 than in years past. Insurers are being inundated by submission activity, overwhelming underwriters and their engineers. Buyers should take steps early in the renewal cycle to demonstrate to insurers that their risk is one that they will want to insure, and plan early to provide more information and spend more time marketing their program than previously. They should work hard to ensure that their program is in the marketplace at least 60 days before renewal, with a much more detailed submission than in previous years, including provision of:
Providing well thought-out responses is critical, particularly for recommendations that have not been addressed for years. Additionally, buyers should plan on meeting with insurers, in person or virtually, ideally after underwriters have had time to review the detailed submission; at that meeting, they would have the opportunity to answer any underwriter questions. More than in past years, and with the aid of their broker, buyers should also canvas the international retail and wholesale insurance/reinsurance marketplaces and consider approaching Bermuda, London and Asia as well as facultative reinsurers.
Michael Perron is Power Generation Leader, North America, Willis Towers Watson New York. Michael.Perron@WillisTowersWatson.com
1 http://search.ambest.com/texis/search/redir.html?query=onslaught&pr=BINA&prox=page&rorder=500&rprox=500&rdfreq=500&rwfreq=500&rlead=500&rdepth=0&sufs=0&order=r&u=http%3A//www3.ambest.com/ambv/bestnews/newscontent.aspx%3Faltsrc%3D108%26refnum%3D224999&m=0&p=2 2 https://www.wsj.com/articles/u-s-moves-to-block-imports-of-some-power-equipment-11588346518?mod=searchresults&page=1&pos=2
