the spread of hard market dynamics
A flat market, unlike its international counterpart In 2020, insurance premium rates for local power plants China are basically flat, as they were for 2019. As the economic trend in China continues to slow down, competition within the Chinese insurance market is becoming much fiercer than in 2019. If a programme has no significant losses and/or other material changes in 2020, the Chinese power insurance market will continue to be profitable; most profit will be earnt from underwriting coal-fired power plant programmes.
Appetite for coal-fired plants By the end of September 2019, coal-fired generation capacity in China was about 1,030GW, and combined cycle gas turbine power capacity was about 88.93GW1. Most of coal-fired power plants with capacity less than 300MW have been closed in China. Chinese underwriters are pleased to provide capacity for coal-fired power risks; the average Combined Ratio for coal-fired and gas power plants was about 50%, and most claims were less than US$10million. The range of gross premium rates of coal-fired power plants is around 0.01%~0.03%; depending on the comprehensive loss ratio and the risk management practices, this might decrease slightly in 2020. The situation for combined cycle gas turbine power plants in the Chinese insurance market is similar to that of coal-fired power plants, with the exception of F class and upper classes gas turbines, because of a lack of reinsurance treaty support for most Chinese insurers. In-house Power brokers dominate The Chinese Power insurance market is dominated by Power in-house brokers, with more than 12 now in business; it’s worth noting that the in-house brokers of the top five Chinese power companies charge higher commission above the market level. Profitable hydropower portfolio For hydropower plants in China, total installed capacity was 310GW until Aug 2019, with no new large size hydropower projects being built in China during 2019. The Hydropower insurance portfolio’s profit was good in 2019, including the underwriting of both operational and construction phases with no large losses sustained. Stable market for nuclear At the end of September 2019, nuclear power installed capacity in China reached 48GW. 47 nuclear power reactors are in commercial operation, with technology from France, Russia, Canada, USA and China. Third generation nuclear reactors of EPR and AP1000 were all running well. There has been no record of any losses for these units during 2019. The premium rate was stable in 2019 and will be expected flat in 2020. More interest in international operations following “One Belt, One Road” As many Chinese power companies are merging overseas power assets following the ‘One Belt One Road’ strategy, Chinese insurers have provided more and more capacity for overseas Power business with Chinese interests and have supported these companies by providing competitive reinsurance premium rates. However, Chinese insurers lack international treaty support for Business Interruption (BI) and Terrorism risks. If BI cover is required, Chinese insurers have to obtain reinsurance support from the international market. More appetite for non-CIA business? For overseas power business without any Chinese interest, no more than five Chinese local insurers are able to provide capacity, given the market’s internal restrictive underwriting policy. Because of a lack of treaty reinsurance treaty support, Chinese insurers maintain a conservative stance due to the limited risk situation information and the related loss control (risk management) measurements, and so write this business on a net retained basis. The premium rates offered by the international market are quite attractive compared to Chinese market local rates. At the end of the COVID-19 lock down in China, we have seen that certain Chinese insurers are actively seeking to write larger shares on non- Chinese interest abroad (CIA) business in order to maintain premium income levels.
Ray Zhang is Power Leader, China, Willis Towers Watson. ray.zhang@WillisTowersWatson.com
1 https://www.researchgate.net/publication/242691798_ Demand-Side_Management_in_China’s_Restructured _Power_Industry_How_Regulation_and_Policy_Can_ Deliver_Demand-Side_Management_Benefits _to_a_Growing_Economy_and_a_Changing_Power_System
In 2019, much like the rest of the world, the Dubai Property market for Power risks went through a period of correction. Buyers, having enjoyed favourable conditions for many years as part of the ever-softening phase of the market cycle, had become accustomed to competitive market conditions and so continued to expect rating reductions year on year. 2019 – a seller’s market Instead, 2019 proved to be a seller’s market; after several years of poor regional underwriting results, insurers had decided that rates had hit the bottom and an adjustment was needed. Underwriting guidelines were clamped down and many International leading insurers therefore were only in a position to apply technical rates. Underwriter hands were tied with the introduction of a more stringent review process, and commercial considerations began to feature less and less. As a result of this, we found that some clients that had previously enjoyed lower rates than their peers due to excellent risk management were being heavily affected, which meant that, while percentage increases were not consistent, rating levels were becoming increasingly more so. It’s only just begun… By the end of 2019, this adjustment had only just begun in many cases, with lead Power underwriters appreciating the budgeting restraints of power companies, meaning that they were simply nudging the rates closer to technical. However, the current feeling from many international insurers is that we are not yet there; the strategy has therefore been in some cases to get back to technical levels over the next several renewal phases. This strategy not only eases buyers’ pain but also bridges the gap between current conditions and the underwriting technical rate. Shake-up in regional capacity In terms of regional capacity, there was a degree of shake up in 2019, with Swiss Re closing their operation in the DIFC and moving the underwriting function for their MENA book back to London. LIU also moved their underwriting function for Power business back to London which suited their global strategy. ACR ceased trading in this market and moved to Singapore, while Arig Bahrain also ceased underwriting operations. US$1.5 billion still available from the region Despite this trend, there is still in excess of US$1.5 billion of Power capacity available from international reinsurance markets in Dubai, with AIG, Allianz, Chubb, Zurich, Axa XL, RSA, Samsung and Korean Re, together with back-up capacity from the indigenous market; this means that regional programmes can still be comfortably fully placed in the local market. One small win for the region was that 2019 saw the introduction of the MGA Aspire UW, offering $25 million of Chinese capacity that can write non-Chinese interest abroad (CIA) excess of loss business on a follow basis. Indigenous (re)insurers take advantage The indigenous (re)insurance markets, being ADNIC, IGI, Oman Insurance, Kuwait Re, EIC, Africa Re, Al Koot, GIC, MISR, Al Ain Aliya, Elseco and ARMA (the last two being MGAs), that would act as follow capacity for the most part, have been taking advantage of the improved market conditions. However, we find that when they are able to lead, they can be more sensitive to commercial considerations for regional clients. ADNIC especially have become very active, writing internationally domiciled business and have taken advantage of the declining regional capacity, providing alternative quotes for many layers and in some cases quota share. They have even begun to write Gulf of Mexico natural catastrophe business on a case by case basis, preferably on an excess of loss placement. As a result, we saw an increased trend in regional client programmes going to tender during 2019; when times are tough, risk managers have to justify their roles and so we don’t see this trend slowing down in 2020. Time to redesign your programme? Brokers are therefore required to find new ways to keep within buyers’ budgeted premium spends. The norm now is for programs to be restructured and redesigned, and a global marketing strategy is required in order to retain business and finish placements. Now that premium spends are higher, there is an emphasis from international brokers to add additional value through excellent service and enhanced offering, including analytics, claims function, risk management and engineering; this development may lead to smaller local brokers being unable to compete.
Mark Hiles is Head of Power and Utilities, CEEMEA, Willis Towers Watson. Mark.Hiles@willistowerswatson.com
Hydro continues to dominate Large hydro projects have long been the dominant source of power generation in Latin America and this remains the case, even much of the attention for new capacity development has shifted to solar/wind and smaller hydro projects. Thermal power mainly gas fired, but also fuel oil and coal maintains an important part of the Power Gen mix, while gas fired projects continue to be developed. Hardening process follows international suit The Latin American facultative reinsurance market continues to be concentrated in Miami, with other underwriting hubs within the region itself, mainly in Brazil and Colombia. The main players remain subsidiaries of major reinsurance providers: AIG, Chubb, Munich Re, Swiss Re Corso, Swiss Re Fac, LIU, CV Starr, Allianz, Scor, AXA-XL and Hannover Re. The Latin American Power market has started to harden substantially, following suit with the global trend. There is a tendency to decrease line sizes and focus on nat cat limits. Asian markets (especially Chinese insurers) can provide additional capacity. Loss free programs can expect rating increases ranging from 15% to 20%. Some insurers are taking harder positions than others; a rule of thumb is that quality of underwriting information and timely preparation of the renewal submission continues to be key to any successful renewal. Local capacity required for smaller programs In respect of minimum capacity, some important players require a minimum project value of US$250 million. This means that for smaller stand-alone projects, local capacity will often have to be sought to complete the placement. Market developments Important market developments include:
Engineering Engineering continues to play a dominant role. As any kind of power generation project has very specific technical aspects, insurers are increasingly very well informed about these aspects as they have their own engineers to follow up any technological developments. To balance this, it is therefore even more important for buyers to take advantage of their broker’s in-house engineering expertise to act of their behalf as a suitable counterweight. Business Interruption values Due to the changing Power market environment as a result of the COVID-19-driven decrease in demand, it is of huge importance that clients obtain guidance from their brokers as to how to adapt BI values in the current environment and make sure that they remain prepared for more changes when demand for Power rebounds as the regional economy re-emerges from the current crisis.
Outlook Further down the line in 2020, we expect the Latin America power market to continue to harden and scrutinize quality and loss experience of accounts. Challenges lie ahead, but with timely preparation, buyers should ensure that their broker is confident of continuing to provide adequate insurance solutions that are tailored to their respective power generation/distribution portfolios.
Marc Vermeiren is Power & Utilities Regional Industry Leader, Latin America, Willis Towers Watson. Marc.Vermeiren@WillisTowersWatson.com
2019 – Asia’s first glimpse into a hardening marketplace The global insurance market experienced a devastating stream of catastrophic losses in late 2018, with the worst being the Harvey, Irma and Maria Hurricanes. According to Swiss Re’s Sigma, global insured losses from disaster events in 2017 were US$144 billion, the highest ever on Sigma’s records1. As a result, underwriters around the world received directives from insurers’ head offices to increase rates to stabilize profitability. This increase was successfully achieved throughout Europe and Australia but not in Asia, due to an abundance of new capacity. In our region we were able to achieve flat renewals, especially for clients who had demonstrated excellent risk quality and where natural catastrophe exposures were minimal. Although the 2019 global insurance markets did not experience the same devastating catastrophic losses as 2018, the total (insured and non-insured) losses from natural catastrophes reached US$150 billion last year, out of which the global insurance market insured almost a third (US$52 billion), according to Munich Re2. The Power Gen market was further impacted by large losses caused by machinery breakdown (gas turbines) and fires/explosions, causing significant insurance market departures. This combination triggered a steady increase in rates by all markets as the year progressed. More insurers (both small and large) reduced their capacity, closed their Power Gen portfolios and, in some instances, closed the entire offices (for example, the downgrade of Trust Re at the end of 2018 and the acquisition of ACR by Catalina Holdings and voluntarily withdrawal from rating Services of AM Best and S&P at the end of 2019). Recent rating increases in the Asian market The Asian Power Gen market closed off 2019 with a minimum of 7.5% to 20% rate increases on well-managed loss-free risks without natural catastrophe exposure. However, the upward momentum of market correction has continued into 2020; first quarter renewals this year have been challenging and difficult to complete for programmes without adequate rate increases. Insurers have grown stricter in their requirement of adequate rate increases and are holding back their capacity in pursuit of opportunities with pricing that meet their minimum requirements. Impact of COVID-19 Many of the challenges met in 2020 so far have generally been in line with expectations; however, the COVID-19 crisis has been entirely unprecedented. Fortunately, the Power Gen industry is viewed as an essential service, so we are not seeing the same impact on this sector as others such as Aviation, Hospitality, Travel and Events. Although power plants may have experienced operational restraints caused by restrictions of number of people on site (i.e. split team arrangements), it has not brought operations to a standstill as the industry is necessary to keep powering the countries. The COVID-19 impact on the Power Gen industry has been largely felt by Contingent Business Interruption (CBI) losses as a result of closure by government authorities and prevention of access. This impact on the Power Gen industry has been reasonably manageable for buyers and insurers for the time being; instead we are seeing a larger impact on power plant projects under and/or due for construction as a result of scheduling restraints and massive delays. If there are losses suffered by either operational or construction power projects during this period, the COVID-19 restrictions will have a much larger impact as they cause significant delays in timelines. These delays may start with the deferred arrival of loss adjusters on site, which may then escalate further by triggering a domino effect on later works such as transportation and installation. The result of this domino effect could lead to increasingly significant BI claims as these timelines continue to be delayed. Responding to the crisis, insurer management now have strict requirements for their underwriters to exclude cover across all lines of business. While the LMA 5393 Communicable Disease exclusion is the clause being used most often, many key insurers are strictly imposing insurer-specific forms of wording for COVID-19 and/or Communicable Disease exclusion. As in the case of similar crises in previous years which have led to standard Asbestos Exclusion, Nuclear Exclusion and War Exclusions, we should not be surprised to see a standard exclusion as a result of COVID-19 being imposed after this crisis. Outlook for rest of 2020 At the time of writing, midway through Q2-2020, we are seeing a continuation of similar premium expectations where well-managed loss free risks without natural catastrophe exposure require a minimum of 10% to 25% rate increases. Loss-free risks that have natural catastrophe exposure require a further 15% to 30% increases as a result of large natural catastrophe losses that have driven up pricing levels substantially. Risks affected by smaller losses are seeing increases ranging from 15% to 50% and anywhere up 100% and even 200% if impacted by larger losses, depending on the power plants’ risk management and exposure to natural catastrophe. The majority of insurers have strict instructions from their senior management not to accept long-term agreements in preparation for these impending rate increases. The only exceptions made are those long-term agreements that have adequate rate increases built into them, with break and review.
Market capacity for coal continues to shrink Owners of conventional coal powered plants will see an even more stringent market environment in 2020 than the general Power Gen industry. The ever-increasing departure of significant coal market leaders and shrinkage of international capacity has left behind a vacuum that is driving a much more aggressive rate increase and reduction of cover. Coal plants, which require full limit cover, will pay much higher premiums for the limited capacity available. The high value natural catastrophe cover, which was available in the past, is now significantly reduced due to these strict coal restrictions and what is available is being priced upwards accordingly. As the “Extinction Rebellion” movement continues to add pressures on our remaining insurers to shrink their coal appetite, it will become increasingly difficult to complete large placements, even at the higher prices. It is therefore more important than ever for coal plants and mines to engage with their brokers and insurers early to develop alternative insurance solutions.
Conclusion: differentiation is key to sustainable insurance solutions The insurance market is now income-driven rather than capacity-driven, and underwriters are focusing on bottom line. Current market rates are considered unsustainable and insurers are willing to walk away from programmes that are seen to be unprofitable. There is a greater focus on risk quality; it is therefore even more critical for power plant owners to provide more detailed underwriting information to set themselves apart. Through their brokers, buyers should engage closely with their insurers to demonstrate commitment and drive towards long-term growth with each other. At the same time, differentiation is encouraged through the implementation of valuable risk advisory services provided by internationally recognized broker engineers and insurers, to achieve an improved risk profile and, ultimately, a better result for buyers in respect of insurance terms and coverages.
Elizabeth Kobes is Division Director at Willis Towers Watson Natural Resources Asia in Singapore. Elizabeth.Kobes@WillisTowersWatson.com
1 https://www.researchgate.net/publication/242691798_Demand-Side_Management_in_China’s_Restructured_Power_Industry_How_Regulation_and_Policy_Can_Deliver_Demand-Side_Management_Benefits_to_a_Growing_Economy_and_a_Changing_Power_System 2 https://www.munichre.com/en/company/media-relations/media-information-and-corporate-news/media-information/2020/causing-billions-in-losses-dominate-nat-cat-picture-2019.html
