North America PowerGen: continued market hardening
North America PowerGen: continued market hardening
Introduction: 2020 recap and 2021 perspective
2020 saw significantly increased rates, offsetting Power Generation (PowerGen) losses. Some carriers made money, some lost money and some essentially broke even for their PowerGen portfolio, although losses from other lines (e.g. D&O, Cyber), together with COVID-19, impacted some companies’ overall PowerGen results. Carriers continue to carefully underwrite their PowerGen risks, often deploying less than their available capacity; their focus remains on risk control, the technology utilized, fuels, management programs, status and age of facilities, etc., which are currently driving underwriter appetite.
Continued concerns remain for attritional losses, some of which have been severe. Additionally, Wildfire exposures continue to impact the PowerGen market, including risks outside of California.
The PowerGen market showed signs of stabilizing in early 2021 before loss activity and other factors upset the market. Most buyers should expect double-digit rate increases in 2021, but at slightly lower levels than they saw in 2020.
Continued market hardening Higher retentions and rates helped the market essentially break even in 2020, offsetting significant loss activity. However, even after three years of significant rate increases, carriers still believe current rates remain unsustainable; losses today are larger than in the past because machines are larger and repair costs higher.
Additionally, 2020 saw increased natural catastrophe activity, including significant Wildfire losses. Carriers continue to take a disciplined approach to underwriting Powergen risks; after unsuccessfully chasing numerous opportunities in 2019 and early 2020, they are only responding to new business opportunities where they believe their efforts will be productive, making it challenging to generate competition to reduce costs. Completing some programs remains an issue but is significantly easier in 2021 than from 2019-2020, as most incumbents offer renewal positions. However, it remains challenging for brokers to deliver renewal terms to buyers in a timely manner, and some renewals continue to go down to the wire.
London capacity has become more competitive, providing a useful means of completing programs. Additionally, Nuclear Electric Insurance Limited (NEIL) has rolled out its own paper (Cedar Hamilton) so that they can write Powergen business on a direct basis, rather than solely behind AEGIS and EIM.
The following events in early 2021 impacted the PowerGen market:
Texas freeze: The February freeze resulted in few power generation losses, but there were significant losses impacting the Energy sector and many PowerGen underwriting teams are connected to the same overall business unit as their companies’ Energy portfolio.Supply chain impact on future losses: PowerGen risks normally carry limited supply chain risk, but underwriters are wary that supply chain challenges may delay repairs, and that spikes in commodity prices could mean higher costs to replace damaged equipment.Major May 2021 loss: an estimated US$100 million PowerGen loss in the US will give underwriters continued reason to push for further rate increases.
On average, Property rate increases were up 20-30% for Q1 2021, as compared to 25-30% or more through 2020. Rates have stabilized in other sectors of the Property and Energy markets, and some PowerGen renewals saw very modest (single digit) rate increases this year. Underwriters believe rate increases need to continue into 2022 and perhaps beyond to reach sustainable levels; given healthy carrier surplus levels and the expected increased competition at current rates and deductible levels, some challenge the fortitude of the market to continue driving rate increases. However, where capacity remains limited (e.g. Coal, Waste to Energy, etc.), it is hard to imagine softening anytime soon. Additionally, many buyers are choosing to moderate rate increases with sub-limit reductions and increased retentions to limit additional premium spend, and carriers are supportive of this approach. Property policies now nearly universally exclude or sub-limit to small levels any direct coverage from Communicable Disease and Computer Virus, often excluding the ensuing loss as well.
In most cases, sufficient capacity now exists to eliminate opportunistic carriers that bound capacity to complete programs at very expensive price levels relative to others in 2020. Buyers and their brokers are also currently striving to regain program concurrency (i.e. similar terms and conditions for all carriers sharing the buyer’s program) that could not be achieved in 2019.
Technology issues and underwriting concerns Certain older steam turbines have design issues that make them virtually uninsurable; furthermore, carriers also continue to encounter problems with the “quick start” aeroderivative/frame machines. Obtaining spare parts and rotors for certain machines is challenging, which is driving up loss costs. An average turbine loss costs significantly more than in past years, due to the limited availability of replacement parts, increased costs for component parts and larger machines; this is partly why carriers are requiring higher deductibles. Clients should ensure that carriers are fully aware of sparing measures in place, such as participating in the OEM’s spare rotor pool, contractual obligations in Long Term Service Agreements (LTSAs) to provide spares within a short time window and at negotiated prices, etc., as these should help underwriters gain some comfort.
Larger H- and J- class machines are both expensive and prototypical. Although carriers didn’t pay any significant losses in 2020 involving these machines, it is possible that some events did occur with OEMs picking up the tab under warranty. Given the large size and cost of these units, when losses involving these large machines do occur, repair costs will dwarf the costs of older combustion turbines. Consequently deductibles remain significant, even after a given machine has been deemed proven (when several units in its fleet achieved 8,000 hours of satisfactory operating history, and satisfactorily reached a scheduled hot gas path inspection). Traditional gas turbine (GT) deductibles of US$1 million (or US$1.5 million for problematic units) are insufficient for these larger machines, and that is not expected to change as the units mature; some carriers continue to require deductibles of US$10 million for Physical Damage and 120 days for Business Interruption for these units.
Warranties are not all-encompassing, and carriers do not fully understand the protection that warranties provide prior to a loss. Warranties universally provide coverage for the defective part; some warranties also provide coverage for downstream damage, others do not. Some warranties provide limited coverage for consequential loss, but most don’t. For carriers to properly credit warranty provisions, they would need to better understand these provisions; OEMs often will not allow clients to share this information, and warranties are individually negotiated and not available to carriers. Ideally, carriers would like to have a full understanding of what the warranty provides so they can underwrite based on the appropriate protection level provided. Without that, carriers establish deductible levels which are not based on warranty provisions (or lender requirements) but based on expected losses and their engineering evaluations.
Carriers seek to work with clients that have implemented well-established “fixes” (upgrades). Underwriters continue to be 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. In some cases, the terms offered do not meet lender agreement requirements, requiring clients to renegotiate these agreements. Where upgrades are not in place, clients must show strong maintenance practices, online vibration monitoring and compliance with OEM guidance to secure broader coverage and more favorable rating. Insurers also favorably view continuous remote monitoring and diagnostics by OEMs or experienced owner operators since monitored units have shown improved reliability.
Focus on reported values Property underwriters are focusing on the insurable values reported, as some clients are not updating their values – several losses have shown that the values reported were below the actual replacement cost. Where clients have not adjusted values to their satisfaction, underwriters will either adjust them on behalf of the buyer or increase the rate they use against the values reported by the amount they believe the values should have been increased to. Some carriers are taking additional steps, such as applying margin clauses and even coinsurance restrictions. Furthermore, it should be noted that several financial pundits are now suggesting impending inflation, which could further increase future property values.
ESG initiatives continue Completing Coal placements remains challenging, but the carriers that wrote Coal business in 2020 generally continued to do so into 2021, albeit at relatively higher rate increases than for the overall PowerGen market. There is little market appetite for older, single-site coal plants, so these clients need to maintain strong partnerships with their existing carriers and address any identified risk control concerns. Indeed, carriers have withdrawn their capacity on certain risks where these issues have not been addressed to their satisfaction.
The push towards ESG initiatives extends beyond insurance and coal; the investment community, led by Blackrock’s Larry Fink, are suggesting that climate risk is investment risk, trumpeting the merits of companies focusing on a sustainable future. President Joe Biden targets 100% clean energy in the US by 2035, a 180 degree turn from his predecessor, while activists have forced board members who will push for clean energy investment on ExxonMobil. All of this leads to renewable energy playing a much larger role in the future of power generation.
Renewables grows Renewable Energy (Renewables) has been included in many utility portfolios for years but comprised a relatively insignificant part of the overall portfolio and has not been given much attention by underwriters. As Renewables projects become a larger component of their clients’ overall risk, traditional PowerGen carriers are doing their best to learn how to better understand and underwrite Renewables risks. Carriers can also write Renewables on a stand-alone basis, either by partnering with Renewables insurers such as PERse, AXIS and GCube, or on their own.
Renewables has a very different risk profile than PowerGen, particularly with respect to extreme weather events involving wildfire, wind and hail. Both wind and gas turbines use gearboxes; however, specific concerns for Renewables include hail damage to solar panels and wind turbine blade issues that are completely different from those normally seen in baseload conventional power. Wildfire exposure to utility scale solar farms is another difference, as are older battery storage facilities. Traditional carriers are working hard to understand the Renewables portfolio better, but some still have a steep learning curve ahead of them. Specific wordings that are not present on Utility forms are being added to address carriers’ exposure to serial loss, microfracture events and vegetation management among other exposures, while limits and deductibles for convective storm/hail cover are also being introduced.
Losses associated with extreme weather events have driven rate increases for Renewables to higher levels than for Powergen, particularly for projects located with catastrophe exposure or involving troublesome technology or reliability issues for carriers. In hindsight, Renewables risks were poorly underwritten with broad coverage, unsustainably low rates and deductibles and inadequate consideration of extreme weather events. That’s changing now, with terms, rates and deductibles becoming more sustainable. However, the expected continued influx of new Renewables capacity could ultimately make the market competitive once again, particularly if projects designed to a higher level of resilience mitigate future catastrophe losses.
The fact that renewable energy has mainly only been available when the wind is blowing and the sun shining creates challenges, as baseload capacity needs to be available on demand. Battery storage has helped provide stopgap demand power, but batteries are expensive and provide power for limited time windows. To completely transition to renewable energy will require baseload renewable energy. Nuclear and Hydro provide baseload clean power, but Hydro availability is limited and shrinking1 while Nuclear is unlikely to be widely adapted, given safety concerns. Many believe Green Hydrogen will be utilized to deliver baseload clean power in the future, with the hydrogen generated from wind and solar generation. Combustion turbines can be built or retrofitted to burn hydrogen rather than natural gas to provide clean, baseload power. However, this technology is thought to be several years away leaving Lithium Ion batteries to meet most demand storage needs for the rest of the decade.
The impact of COVID-19
Getting closer to back to normal COVID-19 has impacted the US PowerGen industry in many ways:
Demand for power has reduced, reducing prices in many sectors
Staffing has been limited to key operating personnel
Scheduled maintenance has reduced and/or delayed beyond established norms
Carrying out maintenance or acquiring and installing replacement parts has been more challenging
In overall terms however, however, the industry has managed the pandemic well, and companies have got closer to “business as usual” as employees and contractors were vaccinated in early 2021. Consequently there has been an increased likelihood of loss, and a potential delay in identifying and responding to any loss events that have occurred.
The impact on PowerGen Property programs With offices closed, client meetings, carrier engineering visits and claims updates continue to proceed virtually. Many insurance inspections were conducted virtually instead of in person, and this trend continues in some areas where travel is challenging, or COVID-19 remains rampant. While most insurance transactions were mainly seamless in a remote environment, insurance business deals involve personal relationships; closing the deal can therefore be more effective in person. Underwriters and brokers alike report suffering from “COVID-fatigue”, with some longing to return to the office.
There have been limited Property claims in the insurance marketplace related to COVID-19; indeed, other than the modest coverage provided in some policies for Communicable Disease, Event Cancellation, etc., US Property carriers have not paid any significant COVID-related claims from a Power industry perspective.
Key carriers
AIG
Allianz
Associated Electric & Gas Insurance Services (AEGIS)
Energy Insurance Mutual (EIM)
FM Global
HDI
Munich Re
SCOR
Swiss Re
Zurich
AEGIS offered increased line sizes for over 50% of their property policies in 2020 while in contrast, many others reduced capacity. More capacity is now available, but AEGIS is typically being asked not to reduce their offered lines, and in some cases asked to further increase their participation. FM continues to predominately offer 100% of capacity needs for buyers who are aligned with their engineering philosophy. AIG continues to lead programs and provide engineering as a quota-share player and is now offering more capacity as well. Zurich, Munich Re, StarrTech and Swiss Re continue to offer significant capacity. No new US capacity has yet entered the sector, although NEIL now offers capacity on their own paper instead of as a reinsurance behind EIM and AEGIS. Additionally, new London syndicates are competitively writing power business. Ample capacity remains available to complete property programs, but clients continue to have limited options and less leverage than they had before 2019.
Conclusion: another year of more expensive insurance
Renewal planning As was the case last year, significant time, effort and planning are needed in negotiating Property renewals than in years past. Carriers continue to receive a significant submission flow and are consciously filtering opportunities where they believe they will be most productive. Buyers need to continue to demonstrate to carriers that their risk is one that they will want to insure and provide more information to carriers in marketing their program. Market submissions should be provided early including the following details:
Comprehensive Property Damage and Business Interruption values with detailed worksheets as appropriate
Evidence of the buyer’s dedication to protecting and maintaining their sites and equipment by sharing management programs, maintenance budgets, safety metrics, etc.
An update for insurers on the buyer’s business, including a discussion of the company culture and safety philosophy
Loss details and steps taken to minimize the likelihood of recurrence
Detailed responses to all insurer engineering recommendations, reflecting:
All outstanding human element recommendations completed or resolved, with status reflected and completion dates (or target dates) noted
A “Risk Improvement Plan”, prioritizing which capital improvements will be addressed and completed, and when
Explanation of next steps and status, including quote requests, and potential alternative solutions under consideration
Buyers should virtually meet with insurers once underwriters have received their submission. The marketing effort should be global: Bermuda, London and Asia, as well as wholesale markets and facultative reinsurers.
