As predicted in the 2020 Power Market Review, challenging market conditions have continued into 2021 for International Liability programmes. However, while the overarching message of a firming market environment remains consistent, there are subtle nuances behind what is driving the overall position.
For example, while on the one hand elements of the marketplace have relented, various factors, including a developing ESG landscape, a continued run of poor underwriting results and a prolonged remote working environment have all contributed to the sustainment of rate increases for the class as a whole.
As a sector, Power generally remains “within appetite” for International Liability insurers, and this reality has helped to alleviate some of the tougher characteristics of the market. Coal and bushfire-exposed programmes aside, well managed and presented Power risks have benefited from access to more insurance capital than other sectors, thereby enabling Power buyers to enjoy aspects of naturally occurring market competitiveness. Nevertheless, hard market conditions continue to have a bearing on the ability of buyers to incorporate the breadth of ‘softer’ market coverages and extensions that were once available; for example, EMF (Electromagnetic Fields) extensions are now more heavily scrutinised than they have been in previous years.
Moreover, while there are some signs of hard market conditions beginning to ease, the temporary closure of the Lloyd's of London building due to the pandemic and the enforced remote working environment has had a curbing effect on any benefits that such easing may have brought. Most Power placements require extensive negotiations, and the reduced ability to hold face to face conversations with underwriters has presented the ideal opportunity for insurers to insist on rate increases and refuse policy extensions that may have otherwise been negotiable.
Notwithstanding the imposed virtual way of working, certain coverage requirements – such as cyber and communicable disease exclusions – have become unavoidable and the implementation of new novel clauses, such as climate change exclusions, has become increasingly common. Insurers have also sought to review structural aspects of placements, such as increasing deductibles, particularly where expiring policies enjoyed nil, or very low, attachment points.
Another noteworthy factor has been the significant increase in requests for insurers to quote risks (largely driven by more extensive remarketing exercises as insurers increase prices, reduce capacity and change underwriting appetite), with some Lloyd’s syndicates indicating an increase of up to double the amount seen the previous year. Consequently, aside from the resulting longer turnaround times, insurers have been able to be selective about the risks that they participate in, which in turn has propagated higher rates and further premium increases.
In terms of capacity, the total realistically available for Power risks has remained relatively static at around the US$1 billion mark, although access to such a limit is heavily contingent on the risk profile being insured. For example, restrictions to underwriting appetites surrounding Coal has meant that the limits available for heavy Coal exposures can be a fraction of this amount. Equally, a poor loss record or broad policy wording can also lead to significant limitations on capacity availability. Markedly, there is a notable difference in the amount of capacity typically deployed by insurers for risks on which they are already incumbent compared to non-incumbent risks. This is most likely a result of the overarching underwriting prudence that has been exacted by insurers over recent renewal seasons, meaning that, in effect, only those buyers who have historically purchased the highest limits available are able to unlock the full capacity available in the market.
The capacity available for heavily coal-exposed risks is even more limited for those buyers who have hitherto not purchased significant limits, given the Lloyd’s drive for its syndicates to not provide any new insurance cover for thermal coal-fired power plants from 1st January 2022 (a directive that some managing agents have implemented early). Notwithstanding this, in the main it is the non-Lloyd’s markets that remain more likely to apply Coal-related criteria to underwriting guidelines, often in the form of qualified exposure thresholds.
In the midst of the intensifying Coal focus, the value of a clear and compelling ESG strategy is critical in maximising available capacity, as its articulation has become a prerequisite for obtaining capacity from various insurers. Where buyers are unable to meet this criterion, the lack of capacity available can significantly reduce the ability to arbitrage competing quotes, particularly on programmes requiring larger limits.
Despite a small number of new entrants to the market injecting further appetite for Power risks generally, the narrative for market conditions remains framed within the poor underwriting results for Casualty as an overall line of business. As per the recently published Lloyd’s results, Casualty as a class reported another loss-making year, with a Combined Operating Ratio in excess of 110%.
In terms of what this means for programme rates, the reality remains segmented; primary policies, which naturally carry more premium, are typically still tending to see more measured increases than excess policies. This is not only the product of excess layers being more likely to fall short of minimum rates, but also the result of primary policies being more scrupulously underwritten over the past decade, leading to more technical and thought-out pricing amongst primary policies overall.
Consequently, buyers may expect primary layers that do not require exposure-related adjustments to see premium increases in the high single-digit to low double-digit range, whereas excess layers are still tending to be subject to rate increases in at least the 15% to 30% bracket, if not greater, particularly if ‘replacement’ capacity is required (as this capacity can sometimes come at a far greater price), underlining the palpable difference in pricing that exists between rates obtainable from incumbent insurers and those available from new markets.
The divergence between primary and excess layer rating is largely due to a continued drive from markets to ‘correct’ excess layer pricing that is deemed to be ‘under-priced’ from an adequacy perspective and a key contributor to the undesirable Combined Operating Ratio for the class of business a whole.
Where the difference between limit required and capacity available is close, some programmes are being subjected to elements of opportunistic pricing from the market, whereby technical rates are inflated on the grounds that capacity is required and therefore still likely to be purchased. In some instances, insurers have even sought to apply a ‘more for more’ (i.e. diseconomies of scale) mantra whereby additional capacity comes at an increased cost.
Such pricing is more common for policyholders with heavy exposures to the coal sector, as increasing internal ESG directives restrict markets’ willingness, or at times ability, to provide meaningful indemnity limits, thereby creating a delta of missing capacity that is vulnerable to opportunistic and inflated pricing.
Overall the rating environment remains technical and focused on rate increases, with negotiations normally geared towards how moderated any increase can be rather than whether reductions can be achieved. Ultimately this a symptom of the current market environment and the lack of over-lined placements compared to prior years.
Looking forward, buyers should expect more rate increases and careful deployment of capacity, albeit on a more measured scale, while buyers of coal-exposed programmes in particular should prepare for increasing intensity around ESG requirements, possible further retrenchment in capacity and increasing upward pressure on rates as a result of any such capacity restrictions.
However, the apparently unrelenting conditions do not mean that buyers are unable to maximise the value of the deals available in the market. Buyers can seek to achieve this in several ways, including:
In the 2020 Power Market Review we advised that it would take more than six months or so of a ‘hardened’ market for conditions to settle, and this has proved correct. However, despite the turbulence of the past year there are some signs of relief as the market approaches its landing strip. Having said that, buyers will need to ensure that their Power risks are handled by brokers with the specialist knowledge and experience required to navigate this complex marketplace in order to capitalise on its evolving dynamics.
Matt Clissitt is Deputy Head of Liability, Natural Resources, Willis Towers Watson London. Matthew.Clissitt@WillisTowersWatson.com
