There is no doubt that the Downstream Energy & Power, Construction and Property insurance markets lost money for their supporters in 2017 and 2018. Natural Catastrophe (Nat Cat) losses were a substantial contributor; however, there were many other market-renowned incidents. The Renewable Energy market was not immune to the general direction of the Property market and has suffered its own industry specific issues. In summary, 2019 was an even more challenging year for the dedicated London & International Renewable Energy market teams and their colleagues in the Marine, Construction, Operational Power and Property markets seeking to either gain a foothold or build out their traction in the rapidly evolving industry sector, with a measured and profitable business model.
2019 saw a market in turmoil, capacity jostling, hesitantly trying to understand its own appetite, where its efficient frontier lies in the struggle to reduce combined loss ratios and return to a position of delivering profitability. The stringent measures placed on last year’s business plans by the Lloyd’s of London “Decile 10’’ initiative are starting to take effect - but at what cost to the premium volume and reputation of the markets?
Incremental underwriting improvements are helpful and seen as positive; however, these pale into insignificance if you are unlucky enough to sustain a market reportable single loss. Without the right portfolio protections in place, losing the whole year’s underwriting revenue through a single loss incident is a realistic proposition. The shift in climate change patterns and increasingly unpredictable natural catastrophe events (windstorm, earthquake, bushfires) is making several underwriters return to the drawing board to reassess their perception of maximum potential losses and accordingly the rate on line for projects which were previously considered to be marginally exposed.
This year we have experienced extensive individual capacity shedding. There are now only a few underwriters who feel confident in being the sole capacity provider for clients in all lines of business, often waving goodbye to profitable and long held sole supplier relationships to ensure their books risks are diversified and Chief Underwriting Officers appeased.
It is estimated that the key London and European dedicated Renewable Energy markets could easily deploy capacity to support single site projects with a value up to US$4 billion. The capacity is there, but at what price, at what terms, for what technology and for which location?
It is also true that whilst the technical complexity of ‘’getting it right’’ has increased, this is taking more time, consideration and resources, with the diminishing panel of leaders recognizing this by often charging lead underwriter fees. This is a marked shift from wrapping renewable energy projects into a property portfolio; it’s also true that, after positive conclusions from the protracted technical and engineering due diligence, leading insurers’ confidence in their commitment to the portfolio is reducing. Where historically 40-60% lead lines were once available, these are now shrinking to 20-30%, creating long walks around the market and increased costs for the broking community.
It would therefore appear the days of a consummate Lloyd’s broker arriving on spec with a new risk requiring binding on a Friday afternoon, without agreed leader terms, are gone. If the project risk is in a location exposed to Nat Cat risk it could take several days to run the projects through the insurers’ technical Nat Cat pricing and aggregation models. Any exposure to Nat Cat will substantially diminish the available capacity and single site projects in excess of US$1 billion will be very challenged in the future, requiring a global mix of capacity.
Unfortunately, there have been a number of market casualties this year:
In contrast, the prevailing conditions are ripe for new capacity entrants who are not encumbered with latent under-pricing and claims. Aviva has made a splash back into the market, Albus Underwriting (as a specialist Renewable MGA) have started converting risks and Travelers are making a steady return to leading capacity. The positive market conditions, coupled with more limited capacity, is steadily attracting renewed interest from agile syndicates and traditional company markets with a large appetite for well-managed technical and engineering risks.
Whilst the Construction market globally has experienced substantial constriction, the Renewable market’s appetite for new construction risks with unproven technology, larger turbines (contractor negligence and technology provider oversight issues), battery energy storage, offshore wind, wave and tidal, energy from waste and concentrated solar thermal projects have been bearing the brunt of this constriction. There is also a widespread acknowledgement of the challenges of working in new or developing territories where contractors have limited experience. So choice of contractor, Original Equipment Manufacturer, length and quality of warranties and respect for the Owner’s risk management philosophy are equally paramount factors contributing to the increasing focus on deductible level and quality of contract certain wordings with appropriate sub-limits.
It is noticeable that the London market’s influence around the world has taken perhaps 12 months to be received as a global reality. However, their acknowledgment that “enough is enough” by drawing a line in the sand and a mandated desire to return to profitability - or be closed - is resonating through the quota share markets. The key to continued success will be in knowing their clients and distribution channels and correctly anticipating the right balance in a measured return to profitability, whilst still writing business, supporting their client partnerships and leading the industry with complex challenges as the renewable energy continues to evolve.
This will need to be achieved through better understanding of technical risks and the ability to cede capacity to developmental projects where a close learning relationship can be established with partner clients and brokers. A short-sighted approach and “get rich quick” business plans will no doubt see opportunities being strengthened and realized elsewhere with a broad devaluation of London’s influential role.
Steve Munday is Head of Renewables, GB at Willis Towers Watson, London.