the hard market is happening!
In 2019, rates increased on average by 75% across the global Power Construction market. Rate reductions are now non-existent, as insurers continue to push for price increases. Deductibles have also increased, by up to 100% for the critical areas of technology risks, commissioning and natural perils. Coverage continues to be scrutinised by all reinsurers, especially Defects (Design, Workmanship and Materials), Corrosion, Cyber and Flooding. Underwriters are also becoming more selective over offering the wider coverages obtained within the broader broker wordings when being presented with a new large-scale power project. Global capacity impacted Global capacities have been hit by power plant volatility and this has impacted a number of markets. Natural catastrophe events are likely to increase this decline and we are seeing individual rate increases in exposed locations. One of the most noticeable changes has been the reduction in capacity from the Lloyd’s Consortium, from US$350 million to around US$185 million. 2020 treaty renewals produced a further shake up in capacity, with global Probable Maximum Loss (PML) capacity reduced to approximately US$3.5 billion; however, this is based on best risk, terms, appetite and location. Revision of underwriting practices Many major insurers, including AIG, Allianz, Chubb, Munich Re, Swiss Re and Zurich, have severely revised their underwriting practices and principles with a view to reducing exposure. As a result, reduced line sizes are now being offered on power projects by these key insurers. Furthermore, they are now basing their line sizes on Total Insured Values (TIVs) rather than PMLs, which has resulted in much reduced line sizes being offered.
The recent high-profile hydro claims continue to have an adverse impact on the insurance market appetite for new and existing hydro projects. Furthermore, due to the nature of these projects they are often located in areas that have an increased natural catastrophe exposure. As a result, there is a significantly restricted market for new projects, with those insurers still able to consider a new risk only doing so with more restricted terms on offer. Key considerations Key considerations remain for insurers when considering a new hydro project. In particular, underwriters will want to have a detailed understanding of the monthly mean and maximum river flows and the corresponding river heights over a period of at least 25 years, in order to calculate the maximum flood return period. Furthermore, it is often the case that hydro plants will have large diameter tunnels constructed as part of the project. Regardless of the method of tunnelling proposed for the project, underwriters will seek to restrict insurance cover for loss/damage to tunnels under construction either to a percentage of the original linear construction cost (usually 150%) or a monetary limit of liability but less than the total value of the entire tunnel construction value. All of the above contribute to the challenges that developers of Hydro projects face when approaching the insurance market for Construction insurances.
The evolution of gas turbine technology appears to be showing no signs of slowing down, with the introduction of bigger and more efficient machines. With bigger machines potentially leading to higher replacement values, insurers are keen to maintain a minimum threshold when it comes to the level of deductibles to be applied to large frame gas and steam turbine generator sets. Combined with the hardening of the Power Construction insurance market, this has resulted in a higher minimum threshold than what has been available previously. Insurers also continue to seek increased levels of reassurance on the robustness of the warranty provided by the Original Equipment Manufacturer. Coal loses pace Coal continues to lose pace to gas in some parts of the world, due to growing environmental concerns. Although it is still a major (if not dominant) fuel for power in some parts of the world, the insurance market for new coal power projects is dwindling, with several insurers now turning away from the coal fired power generation sector as a whole. This in itself is resulting in a hardening of terms from insurers as the capacity for such projects diminishes. QA/QC programme vital When considering a new risk, insurers continue to seek evidence of a robust and comprehensive QA/QC programme, including a focus on Positive Materials Identification (PMI) and a detailed understanding of the planned inspection programme for the project. Adherence to internationally recognised industry fire protection codes, standards and guidelines will also be at the top of the underwriter’s list when first evaluating the risk.
In recent years, the development and construction of new nuclear power plants has been limited; however, worldwide capacity is steadily increasing, with around 55 reactors currently under construction in 15 countries, the highest concentration of projects is in China, India, Russia and the UAE. There are selective cases of major investment and technology being provided by overseas companies, which has assisted with the continued development of new plants as well as upgrades and life extensions to existing facilities.
Capacity and appetite contraction In line with the rest of the Construction insurance market, there has also been a contraction in the level of capacity and appetite for this sector. With various markets exiting and others becoming increasing cautious, the scope of cover available has been restricted within the last 12 months. Unlike in previous years, Delay in Start-Up (DSU) cover is no longer being offered at commercially acceptable terms and many more restrictions/exclusions in cover are now being imposed (e.g. LEG2 instead of LEG3 Defects coverage). Scrutiny at placement stage The estimated construction period of nuclear power plants are increasingly being scrutinised by insurers at the placement stage. This is a result of many existing projects requiring lengthy extensions, which can run into years or even decades. Many insurers are now only offering relativity short “automatic” extension provisions, in order to manage their own exposure to this complex sector. Cost increases limit capacity With such delays being common, many projects are also experiencing significant costs increases, which on average can add up to 18% to the original estimated construction value. This has also influenced the amount of capacity that individual insurers are prepared to provide at inception. In consequence, the number of insurers required to support individual projects has increased, resulting in higher average premiums now being requested. As with many large-scale power generation projects, technological evolution is seen on the majority of new nuclear construction projects and therefore OEM warranties and insurability remain a critical factor for all insurers.
As the insurance market for Power Construction continues to harden, the presentation of high-quality underwriting information still remains paramount to enable brokers to secure optimal insurance terms and coverage for their clients developing new projects. Brokers in the Power Construction insurance sector that can offer a large team of specialist power engineers who keep abreast of all key developments across the main power generation sectors, are best placed to assist buyers, and by doing so continue to support developers of new power construction projects in these challenging times.
David Forster is Broking Director, Construction at Willis Towers Watson in London. David.Forster@WillisTowersWatson.com
