Fabio Iacono (FI) is Head of Power CI UK at Zurich Insurance Company Ltd. Last month Willis Towers Watson’s Carlos Wilkinson (CW) and Ed Cooper (EC) caught up with him via videocall to find out a bit more about how he and his underwriting team are emerging from the pandemic and what they are focusing on in terms of developing Zurich’s Power portfolio. The following is an edited transcript of their conversation.
CW Fabio, how do you think the pandemic has changed the Power insurance market? What are your general thoughts, one year on? Are any of these changes here to stay?
FI Just like the rest of the London market, we have shown that we have been able to maintain cover and deliver an uninterrupted service to our customers during the pandemic. That’s quite a feat, seeing as we all had to move towards remote working very quickly; as a market, we have always been used to face to face negotiations, with clients travelling to meet us and vice versa. But going forward as we all emerge from the pandemic we will need to re-establish a face to face presence to develop and maintain key business relationships. These relationships will still make a massive difference to the business – if interaction just boils down to transactions, then the Power industry wouldn’t need people like us. Going forward, Zurich will look to strike a balance between working remotely, being in the office and travelling to see clients. Myself and the power team are discussing alternatives, with an option being a balanced mix of remote technical work and office days to engage with our brokers and customers; it is important that the market liaises and consolidates on a framework to ensure that underwriters, brokers and clients are still able to meet each other.
CW Your role, like ours, is global - we have seen certain insurers centralising their approach to the Power portfolio around centres of excellence such as London. Do you think that the pandemic has accelerated this trend?
FI Up to a point, yes, because we are using technology in a way that we have not done before. It’s now much easier to coordinate and monitor aspects of our more complex lines of business as we can liaise with our colleagues abroad quickly and efficiently. A general market centralisation of underwriting authority into London is also related to negative underwriting results and the hardening insurance market, which coincided with this pandemic, so it was a kind of perfect storm in that sense. Within Zurich our SME board has quarterly virtual meetings with every Power-authorised underwriter and engineer across the network; we have set up a structure whereby we have regional leaders that tie into the SME hub every month, so we get to monitor consistency and steer our global underwriting appetite effectively. That is definitely a very positive development from my perspective.
CW Speaking of positives, what do you think has been the best thing to have come out of the pandemic from your perspective?
FI There’s no doubt that allowing ourselves to revisit our way of working would not have happened without the pandemic. It is only partly that remote working is more efficient, and technical work, that’s where that has now been proven to be the case. We can still see this transition going on with clients, brokers and indeed ourselves, and we’ve all ensured that the administrative work behind market-facing people is being conducted efficiently. However, we all still have a few more steps to take in that regard as related to systems and the IT landscape.
CW Do you think it’s also possible to build relationships virtually, through the new technology?
FI If I look at the way we as insurers, brokers and clients work together, that just isn’t simply limited to dollars and cents, and terms and conditions. When we engage with clients and meet with them face to face, there is an ongoing dialogue with them and our broker partners that enables collaboration to find solutions. Without that social interaction the market would become a transactional, tender-driven business environment which might not always be to the benefit of our clients. Sometimes clients need the benefit of their broker’s insurer relationships to find markets willing to support unique and complex risks.
EC What are your views on travel – do you think you will see clients coming over to London to present their risk to you as they used to? How often do you think this needs to happen?
FI It will depend on the business relationship and financial justification. Where we might have travelled to meet a relatively domestic, single product line client pre-pandemic, that might not continue to happen in the future; there will be more scrutiny over expenses and more importantly sustainability. But with the complexity of some of our products and solutions travel is not only still needed, it’s crucial; we must ensure that our clients understand our service portfolio, as well as all the complex components of, for example, an international insurance programme.
CW Do you feel you have been able to maintain your key client and broker relationships during the pandemic?
FI I’d say yes, but with a side note - I know broker partners who I have been working with quite well from the years that I have been conducting business in the office, but you can’t really build new relationships through virtual means. Virtual sessions and meetings are content driven, not social – unless you are able to add a social dimension to them, it’s just about content. You can’t have a proper coffee catch-up over a video call; we tried that during the first three months of the pandemic, but for us these sessions dried out very quickly. So when we return to our offices, I can see social interaction starting up again quite rapidly. One of the variables here is the extent to which clients will be able to come to London. We have got some clients who have been very happy to come and see us on a regular basis pre-pandemic, and it will be interesting to see the extent to which their companies will continue to allow them to come over. It may put the onus on us as brokers and underwriters to travel a little bit more.
EC Given the onset of the energy transition, what changes in the power mix is Zurich forecasting during the next five years? What areas of the portfolio are you most likely to focus on?
FI Most clients will by now have seen our various press releases; Zurich has been an early adapter of the (unfriend) coal strategy that we implemented in 2018 and we have been actively working towards an environmental strategy which includes supporting clients in their transition. The mix of generation is something that has attracted plenty of different views in terms of how quickly and in what way that will change. The power industry is developing new technologies such as hydrogen; there currently a lot of excitement in the insurance markets on how to meet the insurance needs for these innovations. I can’t of course tell you what we are going to see in 2050, but we can all be fairly certain that coal and gas will be phased out to make way for renewable sources of energy.
So we are going to adapt and facilitate these trends in the best way that we can. For us, it’s all about working with our engineers and with our clients, having a dialogue and ensuring that wherever there are new opportunities, we already have the technical understanding with which to support our customers. We want to be seen as an insurer that has a strong focus on the environment.
CW So you want to be an early adopter of new technology? Other insurers might prefer to take a more cautious role, waiting for the technology to become more proven.
FI Actually, I don’t think that the one excludes the other. Yes, we want to be innovative, we want to drive the business, but we want to do so carefully and safely. It will depend largely on market conditions. Take hydrogen, for example – if there are a few smaller insurers that are not approaching the new technology very technically, then Zurich would be unlikely to support new technologies on broad conditions. But if instead we are able to sit down with our clients and review these developments carefully, and tailor solutions around our findings, then yes, we would be very much open to driving that market.
CW If say a thermal coal fired power station company could demonstrate that it is applying new technology to its operations to significantly reduce its CO2 emissions, do you think companies such as Zurich will be open to taking such a company on, while excluding others?
FI At the moment our strategy has been to set a clear base to monitor and review different technologies to assess suitability and our environmental committee revisits these standards to keep up with technological developments. It’s obviously relevant for us to have a clear understanding of how the technology will produce the results that are aligned with achieving carbon-neutral generation. At this stage, we are in ongoing dialogue with clients on clean coal or carbon storage technology, and we aim to integrate technical advancement in to an evolving environmental strategy for a sustainable power industry.
CW So you see Zurich’s approach maybe being reviewed in the future, maybe in light of new technological developments?
FI As long as the technology allows the company to better its carbon footprint, then this would always be something we would gladly discuss. That’s where we will show flexibility; we will support clients that are in an ongoing transition where they have clearly defined the timelines for that transition. So if we can support our clients then obviously, we will.
EC As long as clients can come to the market with a clear message, with the right data, then will the market listen to them?
FI Yes, we need clients to commit to transition plans backed with proper investment. In the past it has been quite easy to suggest certain changes in the future, but if we as underwriters cannot see this formalised in a submission it is going to be very difficult for us to justify actively supporting companies or assets that are not aligned with our commitment to the environment.
CW What part does ESG play in your underwriting process? Do you have to “tick boxes” if you are considering a new client or even a renewal?
FI To a point, yes, it is obviously monitored on a higher level, where we are looking at total figures rather than detailed data for each client. However, we are now developing the technology to be able to see what impact a single submission could have on those figures. So it will become more and more relevant within the underwriting process to see how much an individual submission can affect general global ESG scores.
CW Has the quality of underwriting data submitted by clients improved over the last five years or so? How much more work needs to be done in this area?
FI As far as I can see, the overall quality hasn’t really changed. The focus is still very much on technical information and engineering capabilities, both by our brokers and ourselves - but the same gaps are still there. We are getting better information on revenue models and the cover that our clients need, for example in terms of Third Party, BI and CBI exposures, and our engineers are gaining better insight from claims reports and live scenarios. We keep going back to the word dialogue; getting more time in with clients and engineers would help us all, especially now we can conduct virtual meetings. During the pandemic we all stuck to the usual format, but we need to find new ways of receiving more tailored underwriting information. It’s more relevant to the client than ever as the market is in a correction, so the more detail we have on the relevant risk factors, the more we can tailor our pricing to reflect the reality on site.
CW How have the virtual surveys compared to the real surveys involving site visits? Has there been any loss of quality?
FI I wouldn’t say loss of quality as such, but there is critical level of information that we are not seeing. We are only seeing the risk from a general management perspective; we are seeing the protocols, the formal processes that are described and discussed in these formal meetings, but there is always so much more to be seen by actually walking through a plant. Ask any engineer what they feel is the best way to understand the situation on site – it’s by walking around, speaking with people involved in the actual operations. That is something that we have missed with these virtual sessions; ideally, I would prefer to have traditional surveys performed as soon as we can. However, virtual surveys are a good alternative and indeed the only one that we have at the moment.
EC Have you found the client virtual “roadshows” to be effective in terms of meeting the people, and getting the opportunity to ask questions, even if remotely? Or has the lack of human interaction limited their value during the pandemic?
FI In the format currently being applied, we do indeed get a presentation, we get technical information, we get financial information about the company, but we might want to revisit how those meetings are going to be conducted in the future. In my view and indeed some of my peers, it’s not necessarily the most effective format for going into detailed technical questions - usually when the roadshows are staged, insurers have not had the time to go through the initial technical information in the underwriting submission. What I try to do myself, and what I think brokers appreciate, is rather than asking questions and getting clients to give us their interpretation of what the market needs, is to ask what they want to achieve with the renewal, what their intentions are, where they see issues and problems and where there is a need for solutions. These meetings are one of the few opportunities that we have to get that feedback straight from our clients.
EC Is there such a thing as an overload of data?
FI Yes, there can be, usually if we want information from a specific contract then we will end up receiving the entire document, maybe 180 pages or so which is typical of a PPA contract. That might not be necessary, but we can’t always demand that our brokers and clients detail exactly those points that we need - that’s a matter of choice. We would much prefer too much information over too little.
EC To what extent is there still a wide variation in the quality of data provided?
FI It’s more about the broker in question and their clients rather than any regional or business differences in quality. We have some clients that are not very keen to provide a lot of information, and if brokers are not pushing for that, then this will impact the quality of the submission. But with the market hardening, clients and brokers across the board are acknowledging the importance of quality data to get the best results from the market.
EC Are the OEM companies and other technology suppliers providing the market with sufficient data?
FI Our clients’ contractual obligations impact not only the coverage provided but also the consequences of a significant number of losses; in such cases, it is vital for us to have clear information on where we are able to subrogate. Making sure that we understand this ahead of committing to a contract is also something that will also help us tailor our pricing. One of today’s market challenges is that current broker manuscript wordings have set a very broad standard, which might not be necessary for all clients. Because we understand that brokers don’t want to put their clients in a position where they could reduce cover, all of us need to sit down and have that conversation to make sure that we can effectively remove certain contractual third party exposures while at the same time making sure that we tailor the coverage to suit the individual client’s needs. This will ensure that in case of a loss, the client will still be indemnified, but we have full understanding of subrogation rights or contractual price loadings on repairs. Without full transparency on our client’s contractual position, no one is going to be able to move; the client won’t be able to revisit their contractual obligation with their OEM which was set in a different phase in the market cycle, and those responsible for insurance purchasing are not always in a position to influence the terms set between our clients and their suppliers and contractors. These challenges mean starting early is wise and making sure we set clear understanding between the stakeholders.
CW We have found that sometimes there is little understanding of the implications of inclusions within the contracts and contractual obligations by owners in respect of the OEMs or the O&M contractors. Many of them have become too dependent on their lawyers, who are not insurance experts either.
FI Exactly, and let’s be fair on all sides, it’s a matter of complacency by all of us to a point. We have had certain conditions in place for years, and no one really has had the time or the need to really go into questioning some of the parameters. The argument that we still sometime hear is that we have used this market wording for years, but that should not be a reason to block a discussion to improve consistency and reduce ambiguity.
EC As we move further into 2021, what leeway does Zurich have to become more flexible in terms of rating increases compared to 12 months ago? Or are clients looking at a compound of further rate increases this year on top of 2020’s increases?
FI Obviously we can’t speak for our peers and competitors, but our position has never been to simply charge blanket rate adjustments, for the sake of market developments. We look at all each portfolio in its own right; on a portfolio management level, this starts by considering our global power results across a period of 5 to 10 years and measuring patterns and segments to achieve clarity on where we need to steer our underwriting appetite. During the long soft cycle, we were unable to ensure resilience and consistency for our clients. Clearly, the aim is to produce a profit; by monitoring and analysing our portfolio, we are able to ascertain what type of premium levels we need across our portfolio in order to achieve that. Our rate corrections have been based on our own claim patterns and general premium levels across Zurich’s Power portfolio, and we then do a deep dive into specific sub-industries to ensure a consistent approach that allows us to provide customer centric services.
With the recent rate corrections, Zurich Power has tried to focus on terms and conditions rather than just pricing. This includes claims insights to ensure underwriters are better aware of where the limits of the coverage should be in the sometimes ambiguous manuscript wordings, and that our pricing standards technically allow us to absorb losses without the risk of reducing capacity or losing market appetite. Our approach to the market corrections has basically been
about a key number of contract variables and levers that we can pull, and the simplest lever is premium.
If clients don’t want to revisit coverage, and insist on an “as is” programme, then this is the only lever we have. If a client has gone through a long soft cycle, and has managed to secure relatively broad coverage, that could mean that the rate adjustments over the last two years haven’t been enough to retain our support. However for other clients I think we have shown that we can consider alternatives to rate if we feel that that the premium is in line with where we need it to be or, for example, they are willing to take higher retention or assure us of certain restrictions with their suppliers and other contractual and coverage improvements. That is why a deeper conversation is so crucial between all stakeholders.
EC Looking at your current portfolio, how far away are you in general terms from what you would deem to be the “technical” rate?
FI It’s hard to say because of the variety of risks within our portfolio. Loss patterns have shifted with the pandemic; these include delayed maintenance, challenges with the OEMs not being able to replace parts within the recommended timeframes and various production issues for certain “fleets” of equipment units/parts, and those obviously impact us. At the moment, substantial impact potential in our Power portfolio can be an equipment unit “fleet” issue. Without acting swiftly and coming to a consolidated market position, this issue has a high chance of spiralling out of control, leading to further rate/term corrections.
EC As the hardening market conditions continue into another year, how has your portfolio performed in the last 12 months in terms of profitability?
FI I can confirm that Zurich’s Power results have been far more stable than what we have experienced in the past throughout the softest phase of the cycle. I took over this portfolio back in 2017, and since then critical mass and balanced spread have been key drivers of our strategy. This has allowed us to develop a much more stable portfolio. With the right foundation set we expect a profitable year in 2021, unless another major issue or natural catastrophe loss emerges. Even so, rates are often below what we need and the coverage too wide.
Of course, I can’t speak for others in my peer group – we have seen heavily increased natural catastrophe activity and large losses recently, and if there is one thing that the Power market has not been well prepared for it has been the impact of the current level of large and catastrophic losses. The rates have only just been sufficient to pay for mid-level breakdown and attritional losses that we experienced; however, if we add large losses, it explains the historic unprofitability of the portfolio.
So this a good time for us to sit down with clients and brokers and decide together what it is that they need and agree the client’s top three priorities. Then we can re-tailor these programmes to fit their requirements in the best way possible. Zurich is actively aiming to find a balanced compromise as all have similar interests, and I would have thought most clients will want to ensure that the markets that they depend on will still be there when they need them most.
EC Do you think that deductibles are now generally where they need to be or are they still below target?
FI There are two ways of looking at that. On the one hand we can identify the range where we feel that normal loss expectancy, including regular maintenance issues, sits - this is not where insurance carriers should be involved. We work closely with our specialised engineers to review average lead times and labour costs for relatively minor repairs. The ambiguities in current policy wordings are enabling gradual maintenance issues to be put forward as claims. The intention is to respond swiftly and efficiently when clients are impacted substantially – that is surely why they buy insurance, not, say, for a 500,000-dollar net payment for minor damage to a transformer. So if clients are keen to keep repair costs as low as possible, then yes, they can argue they want low deductibles, but in the long term how much will this serve clients? Because at the end of the day, high attritional loss loadings will translate to increased rates.
EC So you are still seeing an element of dollar swapping in the Power market because deductibles are too low?
FI Yes, we are still seeing this, not so much for large-scale companies but if we take Renewables as an example - a sector which sees lender-driven projects and regional investment - that’s where you will see more dollar swapping. We can understand that smaller companies don’t have the cashflow to fund smaller losses, but a balance needs to be found here. One of the reasons why the biomass sub segment across Europe has been so challenging is mostly because of aspects like that. If insurers keep paying for certain patterns of attritional losses, rates need to extend to very high level to allow for the required margin for actual PML or an EML level events. Without market consensus, which needs all stakeholders to support a sub-segment in the insurance market, we run the risk of certain technologies becoming uninsurable.
CW Do you think that the Power market is sufficiently innovative? Does it need to be to remain relevant to the Power industry?
FI If you are talking about innovation from an insurance perspective, that is exactly what we are going through now. We have moved to a more virtual space using automation, because clients deserve efficiency. They want us to be quicker when it comes to claims responses because we are still quite a traditional market in that sense. When it comes to Power specifically, I would re-emphasize the point of insurers being adaptable to the developments in the industry. That’s key, because we need to be able to act quickly when new developments arise. If we all just sit there being cautious when new technology emerges over the course of a few years and sit it out, waiting to see how it works, that won’t be what the clients need; this is where we need to be innovative. Maybe it is more a factor of refining existing products, and continuously improve on the foundations that we have; innovation may be just a question of tailoring.
CW So you are drawing a distinction between innovation and flexibility?
FI Indeed. And if we created a new hydrogen product for example, it would be a refinement of the traditional coverage format that we have all known for many years, but specifically tailored to comprise the specific account needs. As long as we have the data to allow us to respond to a given issue, then we will - that is what the London market has always been about.
CW Fabio, thank you very much for your time.
Fabio Iacono is Head of Power CI UK at Zurich Insurance Company Ltd. fabio.iacono@zurich.com
Carlos Wilkinson is Head of Power & Utilities, Natural Resources, Willis Towers Watson London. carlos.wilkinson@WillisTowersWatson.com
Ed Cooper is Associate Director, Natural Resources, Willis Towers Watson London. ed.cooper@WillisTowersWatson.com
