International market roundup: except for China, centralisation continues
International market roundup: except for China, centralisation continues
Beijing
For combined cycle power plants (CCPPs), those with unit capacities greater than 150MW have been excluded from the non-marine reinsurance treaties of most Chinese insurers, with just a few of them obtaining special cover though means of a surplus treaty. There is therefore still a lack of capacity for large CCPPs, and so terms and conditions will generally be following the International market in terms of rating increases.
As most of the larger power plants are state owned companies, following past practice they will self-insure for Advanced Loss of Profits (ALOP) in the construction phase and for Business Interruption (BI) in the operational phase. For this reason, the experience of the Chinese insurers who handle ALOP and BI is not as extensive as that of other International insurers, especially in terms of the claims handling aspect of such policies.
Appetite for non-CIA power business?
For now, just few Chinese insurers, maybe no more than five or so, can provide capacity as a follower for quota share programs or primary layers, with maybe another two or three insurers only being able to write excess layers. But coal fired power plants and large CCPPs with proven technology are currently the focus of their business appetite. Considering that some International reinsurers will no longer provide capacity for coal fired power plants, maybe Chinese insurer capacity could be seen by some buyers as a replacement for any lost capacity.
Dubai and the wider Middle East
Hardening process slows during 2021 2021 was expected to begin at a similar pace to the final quarter of 2020, and rate increases of circa 20% on average were evident for the January 1 renewals. However, this was before the impact of the softer than expected 01/01 treaty renewals had filtered in for those capacity providers that renew their protections over the new year period. Following this renewal date, we have therefore seen a definite slowing down of rate increases in the region, probably ahead of those seen in other broking hubs for regionally domiciled business.
The international markets that are still very much recognized as technical leaders for Power and Utility risks - namely Chubb, Zurich, RSA and Korean Re - are now looking for plus 10%-15% as the norm for “vanilla” renewals (on an as if basis and without loss). In turn, those clients that have suffered a steeper return to “technical” rating over the past few renewal seasons are only benefitting from rises in the 10% range, while those that are not as far along on their “journey to technical rating adequacy” will still be looking at rises in the region of 15%.
Indigenous insurers provide reliable full follow capacity As global market conditions remain to be favourable for underwriters, it is with no surprise that indigenous insurers, such as ADNIC, Africa Re, Al Koot, IGI, Oman Insurance, Kuwait Re, EIC, GIC, MISR, Al Ain Aliya, Elseco and ARMA are still providing very reliable follow capacity for the majority of our regional clients, with a portfolio and/or cross-sell approach bringing about best results.
Introduction of Aspire Furthermore, since the turn of the year the list of indigenous (re)insurance markets has actually increased, following the newest addition of Aspire Underwriting Agency Limited, who has added US$50 million of capacity to the Power and Utilities market, having been given the authority to write business in the sector from April 1 this year.
Aspire has a mandate to write non-Chinese interest business and is targeting mid to high level buffer layers, although they can write low limit “ground up” placements where it makes for more economical utilization of their reasonably modest capacity. Since the hire of Beverley Church (ex-head of Allianz Engineering DIFC) they are now able to lead these layers where it suits their line size to do so.
Arab Orient hires Vamshi Vanama In keeping with the trend of taking advantage of favourable underwriting conditions, Arab Orient has made a recent statement with the hire of Vamshi Vanama, previously head of ADNIC’S International Division in the DIFC. They are expected to begin to deploy their S&P A-rated capacity for internationally domiciled P&U clients, utilizing up to US$40 million (subject to a successful treaty renewal at July 1).
Buyer spending continues to increase Although the market hardening has started to slow down, buyers are still spending more than they have in previous years; often we encourage placement, wordings and (in some cases) full BI reviews, to ensure that buyers are getting the best bang for their buck – thereby avoiding unnecessary over-spending on higher limits and/or wider coverage than may be required.
Larger brokers seen to add value In this period of continued higher spending, there remains a huge emphasis on the value added offered by the larger broking houses, where by excellent service levels and enhanced offerings such as analytics, claims handling, risk management and a slick engineering offering are now more important than ever to keep buyers satisfied.
So the new normal continues - brokers must look to restructure and redesign placements in order to out-perform the current hard market conditions. This approach, coupled with a global marketing strategy to outperform the global market, is actually achievable more often than not. Quite often we find that a mixture of “quota share” and “verticalized” placements provide the best outcome for buyers, helping them keep within their often quite modest budgeting constraints.
Miami
Cautious capacity deployment Capacity has remained available for Property risks, although insurers are extremely cautious in its deployment; timely preparation of a renewal, in combination with excellent quality information, are key to success. Correct valuations are an absolute priority and a specialized evaluation firm can help to perform this in the most independent and acceptable way for all parties. In addition, analytical tools can help to oversee the total cost of insurance a client bears and can help to revise the required limits, all contributing to make insurance buying more efficient from a client’s perspective.
Focus remains on Nat Cat risk as single digit rises available for the best programs The tendency to decrease line sizes and focus on natural catastrophe limits remains. Machinery Breakdown coverage keeps on being scrutinized, while dams remain a concern for the Latin American market. Renewals for excellent risks are expected to have single digit rate increases; however portfolios with losses or technical complications are still expected to incur double digit rate increases. We are not aware of any major Power claims in the power area in Latin America in 2020 and early 2021; however, some major claims in recent years remain in insurers’ books, with individual program loss histories continuing to be scrutinised.
Brazil market flexibilization In terms of quality of policy wordings, it is important to mention the on-going market flexibilization in Brazil, which will allow an offering of tailor-made wordings in a broader fashion, even though it is expected that its implementation could take some time to become operative.
Market developments
Chubb has moved their underwriting centre for large energy risks from Miami to UK; the Power underwriting for Latin America is still conducted from out of the region and will be led by the recently appointed regional Power & Energy leader, Juan Pablo Gatica.
Recently several new MGAs have entered the market, including Brickell Underwriting Agency, SLU, XS Latam and PerSe.
PICC Reinsurance Company Limited has obtained a license in Argentina.
Singapore
Introduction: rating increases begin to bite The Asia Power market is certainly hardening and starting to reach the rating levels already experienced by both the London market and other markets around the world.
Q4 2020 renewal season saw major rate increases of circa 10-20% on clean non-Coal programmes and up to 300% on Coal and major loss-affected programmes. The first quarter of 2021 continued this trend, with minimal rate increases on non-Coal and loss free programmes ranging from 20-40%. Coal programmes certainly attracted higher increases, with loss making programmes incurring increases of up to 200%.
Q2 2021 saw several large tenders in South East Asia with inceptions in the third quarter. We were slightly shocked by some of the increases quoted by various insurers, as we anticipated rates to flatten out. The reality was different, with rates continuing to harden and key insurers not willing to negotiate on their quoted terms, despite the strong technical arguments presented to them. As a result, we experienced increases of 25-50% on clean programmes and up to 200% on programmes suffering from small to medium size losses.
Furthermore, insurers are no longer willing to offer any long-term deals to buyers, despite trying to achieve pre-agreed increases for the next renewal policy period, which is an indication that rates are expected to harden still further during 2021. Furthermore, insurers are becoming stricter in limiting the credits made available as these are now being limited to brokerage and ceding commissions at best. Where a buyer once enjoyed a Prompt Pay Discount or a No Claims Bonus discount, these are quickly disappearing at renewal.
Insurers are also pushing for engineering and risk & analytics fees to be awarded on an incurred basis, although asking brokers to do more works to their benefit. Besides the classic risk engineering reports, insurers expect clients to conduct earthquake and other catastrophe related analytics as a minimum before assessing a risk for underwriting purposes.
Capacity reduces Overall capacity is shrinking, as a large number of markets are decreasing their capacity on any one risk, while we have also seen a number of insurers withdrawing from the Power sector, such as Navigators Syndicate 1221 Lloyd's, Talbot Risk Services Pte Ltd, AXIS Specialty Limited, SART Underwriting and Emerald Risk Transfer Pty (Ltd).
Although we saw further restrictions on Coal-related risks, surprisingly we have also seen actual market over-subscription for some, especially in South Asia. We strongly believe that one of the reasons for the over-subscription on these Coal programmes is the entry of new capacity from China. The interesting element of this entry is that a number of these insurers do need any Chinese interest to participate on these risks. These insurers include Huatai Property & Casualty Insurance Co., Ltd., China United Property Insurance Company Ltd, Sunshine Property and Casualty Insurance Co., Ltd., China Continent Property & Casualty Insurance Company Ltd. and China Life Property & Casualty Insurance Company Ltd. They are all rated with strong financials and provide a good level of service.
Losses 2020 saw a number of large losses, a record which has extended into 2021, thereby affecting rating levels and tightening of terms of conditions for a number of buyers. We have seen major losses in Laos, Thailand and Malaysia, ranging from small to very large claims for the power companies in question. The main driver cause of these losses has been natural catastrophes, mainly lightning and earthquakes, as well as operational/ maintenance related issues.
Still a profitable portfolio Despite these losses, we believe that the market was generally profitable in 2020 compared to previous years. It is very difficult to assess the actual quantum of profitability, as several claims are still under investigation by both insurers and loss adjusters. One common theme with insurers dealing with losses is that they are pushing hard to reject some claims and/or restrict recovery based on the terms and conditions of the policy. Clients and brokers continue to push hard on loss recovery, and we do expect more claims to go into arbitration in the future.
Insurers tighten terms and conditions The major changes of terms and conditions in 2021 compared to the previous year are as follows:
As a result of the hardening market, the Automatic Extension of Insurance Period clause is no longer granted by reinsurers; instead, insurers are expecting the extension terms to be improved.
Prompt Payment discounts and No Claim Bonus agreements have become extremely difficult to obtain from insurers, as these incentives are perceived by them as the by-product of soft market.
Regarding the BI extension – Prevention of Access clause, reinsurers have strictly amended this to coverage “due to Physical Damage only”; this is as a result of the controversial non-Physical Damage claims submitted due to COVID-19.
Suppliers and Customers sub-limits have been revised downwards, as a result of Contingent Business Interruption management due to COVID-19.
The Communicable Diseases Exclusion has been continued to be imposed on policies, in order to make sure that both direct and indirect losses caused by COVID-19 are excluded.
The Cash Before Cover and SRCC exclusions are strictly being applied in Myanmar, resulting from the current political unrest.
Strikes, Riots and Civil Commotion, which used to be covered under the client’s All Risks policy, has now been widely excluded by insurers as a result of various developments, including the Thailand strike against the government, the Hong Kong protests and Black Lives Matter demonstrations.
Market developments/underwriter movements These include the following developments:
Swiss Re Asia has re-launched, with a brand-new underwriting team in place
Etiqa has now expanded to accept MEA programmes out of their Singapore office
AIG has now focused their Southeast Asia business, channeling it through their Singapore office
There has been a tightening of capacity for Thailand & Philippines business, due to Nat Cat aggregation issues, especially for insurers such as Kuwait Re, Malaysian Re and China Re
Trust’s Malaysia office has shut down, with business moving to their Bahrain office
Emerald Thailand has entered into run-off as of January 2021
Sinosafe China can no longer participate in International Fac inward business as of January 2021
Poorna Chandra from Trust Re has joined Asian Re in Bangkok to focus on Natural Resources - their rating may be challenging for some buyers, but rated and acceptable fronting security is available
Outlook for 2021/22: Myanmar particularly affected The outlook for 2021 remains uncertain, as some parts of Asia remain in lockdown or are going into to lockdown because of COVID-19. This is certainly affecting maintenance and overhaul schedules, which may ultimately lead to increased likelihood of losses.
Insurers will continue to push hard for rate increases and accessing additional capacity will remain a struggle, especially for Coal and loss-affected programmes perceived as low quality. One area of attention is Myanmar, where a large number of operators are unable to grant overseas access to specialist maintenance teams for any maintenance/repair works, besides the current COVID-19 restrictions. This is due to the recent escalation of the political situation in Myanmar and is affecting capacity, as several markets have withdrawn from writing existing and/or new Myanmar based risks, regardless of the original domicile country of the Client.
For Myanmar programmes, we are also seeing insurers enforce “Cash Before Cover” clauses whereby payment is to be made within seven working days of the risk being bound. Insurers are being serious about applying these clauses, as Notices of Cancellation “ab initio” are currently being triggered. We expect the situation to further deteriorate in Myanmar from a capacity and rating perspective, as completing a placement on any risk is proving to be challenging, be it IAR, TPL, Cargo or Political Violence cover.
Conclusion: begin the renewal process early Risk intermediaries in Asia continue to work hard with power companies by the using their latest risk & analytics tools to ensure that they procure their insurances in calculated way by managing their cost of risk through purchasing the right limits and retention levels.
Our recommendation is to start the placement/renewal process early, ideally six months prior to inception, to allow for the risk engineering survey and other risk & analytics reviews to be completed. The market approach needs to be managed carefully, as insurers are not willing to quote more than three months in advance of the inception date at best. Brokers should ensure that the underwriting submission is complete, with all checks on premium payments etc. completed to ensure that insurers prioritize complete client submissions over those where their files are not complete.
Lyo Foo is Associate Director – Broking, Willis Towers Watson Singapore.
