Over the last three years, the global Power Construction insurance market has undergone a drastic change, transitioning firmly out of a very soft market. The previous fifteen years of insurance premium reductions and broadening coverage made way for restructured and regularly challenged policy coverage, together with increased rates and deductibles/excesses as insurers sought to alleviate their exposures. Moving through 2021 and looking ahead to 2022, we see little impactful change in this transition; having said that, we do anticipate a mitigation of this acceleration of rate increases, with some softening of rates and increased levels of deductibles/excesses, particularly for differentiated client risks.
While its full extent is not yet known, the COVID-19 pandemic and continuing natural catastrophe losses have accelerated the market’s transition. Insurers’ behaviour has suggested that conditions will remain in transition through 2021, as the global market assesses the impact on its Power Construction portfolio. Many insurers are requesting to impose COVID-19/pandemic exclusions, often as a direct result of treaty restrictions and regardless of whether a real exposure is expected.
Natural catastrophe losses continue to impact this portfolio; in addition to overall retention and rate increases, they have created capacity shortfalls in natural catastrophe-exposed regions such as windstorms in the Caribbean and the Gulf of Mexico. Treaty restrictions are resulting in the imposition of natural catastrophe loss limits in response to accumulated loss portfolios rather than specific losses.
Globally, we have seen the trend of carriers restructuring and centralising underwriting authority, along with a reduction in active participation and capacity provision in the key regions of Dubai, Miami, Singapore and, for domestic risks, Australia. Even domestic markets that were previously considered strong, such as in South Africa, Turkey, Germany and Brazil, have showed signs of reduced capacity. Insurers began to show a significant change in underwriting appetite and approach during 2020, noticeably evidenced by the emergence of Global Line of Business Chief Underwriting Offices. Product line underwriters have showed more hesitation in agreeing new opportunities without referral to senior management, engineers or both. This referral trend continued into the first quarter of 2021 and it seems clear that losses in 2018/2019 and the beginning of 2020 caused many insurers to evaluate their guidelines on projects and in regions that could be exposed to major perils.
The 2021 reinsurance treaty renewals produced a further shake up in capacity and, in particular, increases in rate targets and a reduction in natural catastrophe limits. The global PML capacity is estimated to be between US$3.8 to US$4.0 billion for the best risks. It should be noted that insurers are not using their full capacity for the vast majority of risks, but only using a percentage of their “best risk” capacity, thereby reducing the global capacity available by a considerable margin.
With insurer capacity reducing at the same time as project sizes are increasing, there is potentially a serious problem on the horizon. This is highlighted in the Power sector, where high project values and high loss levels are resulting in a cautious approach being generally taken by insurers. This is leading to capacity-driven placements, with a corresponding impact on coverage and premium, and/or first-loss limit placement at MPL or MFL levels, which do not incorporate full reinstatement values.
The trend towards centralisation for example, with a number of LatAm insurers centralising underwriting authority towards Europe, is also impacting and has manifested in a restricted number of lead underwriters for projects. There has also been notable movement, with fewer leadership options, within Lloyd’s; while there have been no new Lloyd’s withdrawals, the Construction Consortium that represented a viable alternative to the major company market leaders was heavily affected and will now only lead risks for small to medium-sized projects.
However we have seen a limited amount of new capital, with not only new entrants to the Power Construction insurance market but also existing insurers returning to the sector; capacity is now being provided by the likes of Axa XL, Berkshire Hathaway, Castel, Hollard’s Mirabilis and Tokio Marine . The Chinese insurance market has once again emerged as a major player in Construction; this development initially originated from the extensive funding and construction activities of Chinese contractors in many parts of the world, especially in Asia and Africa, although this capacity is greatly reduced where there is no Chinese interest. Conversely however, if a project has Chinese involvement, the capacity that can be obtained from this market can be significant.
We continue to see current market conditions impact rates, deductible levels and coverage terms; these impacts are particularly acute in natural catastrophe-exposed areas. Projects involving tunnels, dams, coal, wet risk, long construction periods (over five years), prototypical technology and high DSU limits are receiving careful consideration from underwriters and are likely to be faced with restricted cover. Cover is significantly restricted for hydro projects, following high profile claims impacting the insurance market, while capacity for new coal power projects continues to dwindle as insurers step away from this sector. We are also seeing less willingness to accept the first year of operational cover within the construction policy. It is additionally worth noting the challenges that projects with losses are facing for period extensions, with insurers seeking higher premiums, deductibles and other changes to terms and conditions.
Through 2020 rates increased on average by 10% to 15% across the Power Construction insurance market globally, although higher increases were seen for risks in natural catastrophe-exposed areas and where underwriters had concerns over supply chain and risk management. Deductibles also increased, often by 20% to 30% for the critical areas of technology risks, commissioning and natural perils. Markets such as Latin America, which had trailed the global rate increases of the last few years, are now experiencing the same pressures as markets in other regions and conditions in this market are now catching up with those of the London and European markets, particularly in reinsurance-driven local markets.
As a result of the transitioning market dynamics, insurers are imposing stricter coverage conditions; indeed, they are now more aligned with those seen as standard for many years, rather than the wider/higher sub-limit extensions negotiated in the previous soft market. Each risk is considered on its own merits and pricing is being influenced by type of project and geography.
With all market cycles, changes in terms become a gradual process. To address adverse claims experience, insurers use three main levers: premium levels, deductible levels and coverage. Since the market has started to become less commercial, premium rates have risen by significant levels, deductibles have increased (depending upon the type of risk) and coverage has been restricted, especially with relevant conditions that insurers feel they are vulnerable to in the event of a claim.
One of the key areas where this has become manifest is in relation to Defects cover (i.e. design, faulty workmanship or defects in materials); fundamentally, the emphasis is now on a far stricter approach in terms of providing post-completion risks during the Maintenance, Warranty or Defects Liability period. The widest form of Defect cover (commonly LEG 3 or DE5) will continue to be hard to obtain and will only be provided where the information and technical details demonstrate a compelling and justifiable reason for this level of cover.
Recognising the challenges outlined above and the “two-tier” marketplace which we are seeing becoming a reality, insurance buyers in this sector must take a considered and strategic approach to ensuring that they secure the optimal risk transfer programme for their risks. There is no doubt that while construction premium levels will ultimately plateau, the quest for the perfect cover designed and tailored for each project should continue.
The presentation of high-quality underwriting information remains paramount to enable brokers to secure optimal insurance terms and coverage for their clients (especially for those developing new projects) as underwriters consider the commonality of claims causes and financiers continue to require the insurance market to play a meaningful part in risk transfer. Two critical focus areas are the demonstration of risk management best practices and in-depth natural catastrophe modelling; buyers who can differentiate their risks in this regard are being rewarded with differentiated terms.
Factors such as insurer restructuring, increased centralisation, limitations in line size and leading insurer appetite emphasise the importance of a clear and targeted global marketing strategy for risks. Major projects should approach the market cognisant of these factors and with a coordinated strategy which anticipates the best global access points and careful selection of lead markets.
To conclude on a more positive note, in addition to some new entrants, major insurers in the Power Construction insurance market such as AIG, Allianz, Axa XL, Axis, Generali, Munich Re, SCOR and Swiss Re have confirmed their continuing commitment to provide coverage and capacity with continued investment and development in the key sectors such as Power on a global basis.
The slowing of the rate of hardening thus far in 2021 and the differentiated approach to client risks may be a foreshadowing of a marketplace that is beginning the stabilization process - albeit that there is some way to go.
Bill Creedon is Global Head of Construction, Willis Towers Watson.
