The Renewable Energy insurance market is complex, fragmented, dynamic, evolving and global; it’s also accommodated within many different product lines. This means that it’s an opaque market to analyse, albeit that the one thing that everyone is agreed on is that it’s moving in line with the broader Property & Casualty (P&C) market. By all accounts, this market seems to have lost money in 2017, 2018 and 2019 and has since been the subject of intense scrutiny, review and technical adjustment throughout 2020 – a process that will continue to some degree in 2021.
This adjustment has enabled a re-evaluation of the importance of cost, availability and appropriateness of insurance to many insurance buyers, their corporate boards, lenders and other stakeholders. Often long-held relationships, insurance buying strategies, modelling predictions and mandated minimum levels of cover have been challenged, particularly relating to maximum deductibles. The technical adjustment, which buyers have had to endure over the past review period, has been unprecedented in the Renewable Energy market, with a desire from buyers to remove volatility and predict forwards market movements that may impact the commercial availability of insurance cover with greater understanding and certainty. This in turn is driving its relevant positioning in boardroom agendas before any normality returns to the market.
The Renewable Energy market is complex, as it traverses the fortunes and prevailing appetites in the:
We reported last year that a number of Renewable Energy insurers had closed their speciality functions, for example Pioneer and CNA, while others had exited regional underwriting and brought capacity deployment back to London from some regions, for example RSA exiting underwriting from Continental Europe and AIG drawing authority back to London on a “hub and spoke” basis.
Often insurer managements have refused to continue carrying the weight of portfolio underperformance, electing to deploy hard market underwriting strategies. The forward projection from insurers in 2019 was a movement from a buyers’ to a sellers’ market, with the underwriting climate in 2020/21 being highly influenced by how much of a “delta” it was possible to close between the market’s desired position and that which was commercially supportable in the preceding year. The size of the “delta” was also heavily influenced by both the sector performance and the type of Natural Catastrophe (Nat Cat) season experienced during the review period.
During this period the market was in turmoil, hesitantly trying to understand its own appetite through a forensic lens, reviewing its existing portfolio and creating and deploying technical measures to achieve the desired adjustment. Would their rate increases, limitation of policy terms and the imposition of a COVID-19 limitation clause be sufficient to positively adjust their portfolios without jeopardising their more profitable, attractive client and broker relationships? Or, as the “bad apples” were identified, would it be a case of “throwing the baby out with the bathwater”, leading to a reduced portfolio and insufficient premium income?
In last year’s Review we also discussed capacity shedding, as clients’ “sole capacity” relationships evaporated, given insurers’ increased pressure for portfolio and risk diversification. We gazed into the crystal ball as the ripple effect of the London market’s harsh rhetoric that “enough was enough” resonated through other markets, with the threat of becoming a global reality. With increases of 20-40% widely anticipated towards the end of 2019, the outlook for 2020 was empowering for markets, but bleak for buyers; unfortunately in hindsight these predictions are now the reality.
Now in January 2021, the burning question in insurance buyers’ minds is this: is the “technical adjustment” complete? Despite the market achieving overall profitability in 2020, unfortunately we must advise that there is still hardship to endure, while the market is becoming less volatile and more predictable as it settles into a rhythm and model in which it believes it is more comfortable. This is why we are not predicting a softening of the market for 2021/22; instead, we recognise that there is a fundamental shift in underwriting philosophies emerging, which is likely to be the single most influential factor in the next few years - a shift which is likely to stay, regardless of future market results.
Now we will consider which predications have come true, where the market is now and the outlook for 2021 and beyond.
The degree of underwriting submission data which is required for insurers to complete their review, assessment and acceptance of a programme at buyer-acceptable terms has increased exponentially during this period. It is the underwriter’s role to assess and make informed decisions regarding the different risk profiles presented by various buyers and their and projects. Insurers are therefore positioning themselves for a longer-term “flight to quality’’ to sustain a good underwriting performance through increased diligence and assessment.
Those buyers who have solid long-term partnerships, as well as performing programmes that offer a good degree of insurer transparency, will experience less of a chill wind in 2021 than those whose strategy remains to visit the market at every opportunity to buy capacity, thereby keeping their market relationships transient. Most insurers are seeing an exponential increase in enquiries, fuelled by disgruntled buyers seeking to acquire and harness any potential programme improvements through broad, unfocused marketing exercises. Those buyers with whom insurers want to work will experience a very different response, perhaps even with a similar risk to those with whom insurers have less traction and understanding of their commercial operations, risk/insurance philosophy and procurement strategy.
In general terms, all buyers involved in the Renewable Energy sector over the last review period would have experienced rate increases of between 10-40% (more commonly 10-25%):
It is also worth acknowledging that technology type and insurer experience continue to play an important factor in influencing appetite and price. The market is still spooked by its historical relationship with Anaerobic Digesters, Energy from Waste and some Biomass programmes. While Battery Energy Storage Systems are rapidly evolving, appetite for such schemes remains mixed, together with any commitment to concentrated solar power and hydro construction schemes.
In contrast, the market is becoming increasingly comfortable with the technological developments associated with the upscaling of wind technology and bi-facial panels on solar systems. This is especially the case where manufacturing defects can still be transferred to original equipment manufacturer warranties, where deductible levels are sufficient and where the current more attractive premium rates continue to prevail.
In 2020, we did not see the same degree of capacity closure that we experienced in 2019. With the advent of more attractive terms following the “technical adjustment”, the adjustment level is now being highly influenced by the perceived level of unknown risk or hazard associated with newer, less proven technologies; where that level of unknown risk is lower, there is now a substantially increased interest in the sector.
Utilising intelligence gathered over the last 5-10 years through Managing General Agent (MGA) participation, underwriters are dusting down speculative historical business plans written years ago and presenting them to Chief Underwriting Officers with recommendations for serious consideration. Many underwriters now feel that market dynamics are unlikely to be more attractive than at present; now is the perfect time, they feel, to enter the Renewable Energy market and secure a share of this rapidly developing sector.
However, market positioning is no longer centred around the “vanity” of sector control; instead, it is now more about opportunistically capturing commercially attractive terms following a solid technical understanding, and then about retaining good clients, risks and portfolios.
For the Onshore market in 2019, the “new kids on the block” were Albus & Aviva, who with good timing - and no legacy – should have been able to capitalise on the upwards trend in rates and continue underwriting with strong growth and performance. Unfortunately, Albus has moved into run-off, with no authority for new and renewal risks from 1 January 2021, following a change in appetite from Argenta as a key capacity provider. At the time of writing, some of the Albus team were promisingly rising from the ashes with new MGA opportunities at Castel. Sompo & Markel entered the market in 2020 with dedicated Renewable Energy teams, while Berkshire Hathaway, Risk Point, Travellers (PerSe with new International MGA) and Africa Specialty Risks have all moved to strengthen their focus and positions. Meanwhile RSA, Axis and GCube, with perhaps over US$400 million in Gross Written Premium (GWP) and a combined strength in excess of 50 dedicated Renewal Energy underwriters and strong lead capacity, have taken the brunt of the responsibility for understanding, defining and driving the current market adjustment. While they may have the largest legacy, they also have the most to gain by a hardening market. At the same time Munich Re, Swiss Re, AGCS, Scor and AIG, who have been responding to the broader well-documented market position, have also increased their interest in the Renewable Energy sector in many areas. This increased market appetite has resulted from stronger internal ESG directives, a natural decline in the number of conventional power project opportunities and the increased scale, complexity and attractive industry environment of the new, green technology. Added to these factors have been insurers’ more regular achievement of minimum retained premiums, while further interest has also been generated from historical ‘’brown and black’’ conventional Power market capacity providers.
It is also worth acknowledging that while the concept of a quota share market is not dead, the current market is forcing many placements to be completed on a blended basis, with differing pricing and sub-limits for differing capacity interests. This is a deviation from what we have traditionally seen, with an established, experienced market leader setting terms which are then followed by supporting capacity. The need for supporting markers to set their own terms for their own interests clearly demonstrates the variable appetites and increased time and pressure on achieving whole placements.
The Offshore market in 2020 has perhaps experienced its greatest change for a decade. With the advent of new project opportunities outside the North Sea, the promise of sustained sector growth in Asia, North America (and indeed globally) has attracted much attention. Offshore technology continues to evolve, with 6-9.5 WTG’s deployments being commonplace, with up to 13MW now being a strong consideration in the delivery of larger utility scale schemes designed to reduce costs through upscaling. As a result, the capacity limitations of achieving comfort in higher natural catastrophe exposed locations such as Asia and North America has necessitated access to a much wider pool of supporting capacity.
With many larger Offshore Wind projects, acquiring capacity is now a truly global exercise; this is particularly the case for those projects exposed to Nat Cat risks which command attractive premiums, (regularly in excess of $10 million) which are required to secure the minimum level of cover demanded by international investors. While new capacity is being attracted by today’s relatively attractive Renewables rates and substantial slip premiums, this portfolio also provides an opportunity to address internal ESG objectives while at the same time staying close to market developments in this increasingly relevant portfolio.
There continues to remain a scarcity of leading capacity for offshore projects. Codan and Swiss Re remain the patriarchs of the industry, while Canopius, which previously provided solid industry leading expertise, is now considering its position while its previous underwriting team regroup at their new home at MGA Oilfield Insurance Agencies. Both Allianz and Munich Re have a strong ability to lead, while GCube has the ambition to lead in 2021 with the hire of new talent and change of ownership to Tokio Marine HCC in 2020. AXIS are increasingly considering offshore projects, depending on project attractiveness.
The market is also experiencing a continued strengthening of underwriting expertise. AXIS, GCube, Scor, Travelers, Markel, Gard and the Norwegian Hull Club all now have dedicated Renewables teams, new underwriters or enhanced capacity/market positions. This has increased the pressure on other offshore markets throughout 2020/21, as there is now an opportunity for brokers to access fresh or increased capacity provided by these insurers. Furthermore, we believe that leading insurer technical engineering and claims fees will increasingly become commonplace, as those maintaining a technical resource seek to be recognised for the additional value and technical workload that they provide. This is not only the case with regard to their technical engineering assessment of the risks but often their level of involvement with complex claims as well.
However, while this industry continues to evolve rapidly, developers, owners and operators of these projects will still require the continued support of the established technical leaders. This is essential to support the development to commercialise new technology such as floating offshore wind or the new 13MW wind turbines.
In addition, we have seen the following claims trends materialise during 2020:
As we move into 2021, we would predict that the sector will become increasingly supported by the upstream oil and gas market, as well as the mutual Oil Insurance Limited (OIL) over the next five years, as traditional upstream oil & gas companies become involved in delivering projects within this sector and seek to rely on their usual insurance partners.
However, only insurers that have learned the lessons of the past, that have good memories and that can offer solid technical in-house support with a wide appreciation of the risks involved are likely to survive to reap the benefit of the longer-term opportunities. New nascent market capacity, attracted by the relatively high premium opportunities or under pressure to blindly follow existing clients into a new sector, should be very wary. The market is very sensitive - when rates are high, there is often a good reason for it. Global supporting capacity will therefore be closely watching which leading markets will be able to demonstrate the experience and self-belief to help the market navigate the terms and conditions which take into account the industry’s loss record, while at the same time striking the right commercial balance in responding to buyers’ demands and needs.
The shift in the London and International markets’ position and influence has taken 12-18 months to create a new global reality. In 2020 we experienced a substantial increase in global trading activity; this has arisen as a direct consequence of the capacity tightening in the global markets, less attractive rates and more restrictive terms and conditions. This has all resulted in an exponential increase in available deal flow, as buyers and brokers have sought to find more economically acceptable homes for their programmes.
COVID-19 has resulted in global remote working platforms and longer hours online, with the consequent increase in e-mail traffic suggesting opportunities of not-to-be-missed deals. While insurers have been inundated with this exponential increase in e-traffic, the result has been that the time required to get a deal home has trebled; insurers’ conversion rates have therefore reduced proportionately, which naturally has been of some concern for them.
This increased activity has often justified many lengthy benchmarking results and conclusions; the associated activity and results have been counter-intuitive to delivering what it really takes to satisfy insurers and how to achieve beneficial results in the current seller’s market. The concepts of persuading insurers to understand their clients, to create and maintain key relationships and of supporting their justification of material differentiation regarding professionalism and quality, has been a challenge for all clients and brokers alike. As we enter 2021, we anticipate a more focused technical approach; this can only be achieved by bridging the relationship gap between buyers and insurers, both leading and supporting.
This approach needs to be delivered over a longer lead period to achieve the best possible results for buyers. Initial placement discussions often need to commence at least six months prior to financial close or renewal; only this approach will create the most advantageous environment needed for a true understanding of a buyer’s requirements, to show why insurers should differentiate in their favour and why they should form a positive assessment of the buyer’s programme in what will continue to be a seller’s market.
Increasingly we are finding that key buyers, especially those with the financial muscle to do so, are considering revised self-insurance versus risk transfer strategies in response to the continuing market hardening. There is no doubt that year on year rating increases, looking back to 10-40% and now forward to potentially 10-20% on existing programmes with clean loss records, will bring insurance spending under renewed scrutiny from buyer management.
Increases of this magnitude may prove to be unsustainable from a buyer perspective; many Renewable Energy companies are therefore increasingly likely to revert to analytical tools to determine optimal risk retention levels. This might be achieved through increasing deductible transfer to contractor parties or internal risk transfer purchasing strategies. It is clear that buyers are becoming more confident in their ability to self-insure through aggregate self-insured/loss retention funds.
It seems somewhat ironic that major renewable energy IPP portfolios and power & utility company assets, whose business is frequently the most attractive in the market due to the significant premium income on offer, are now responding to the ever-hardening insurance market conditions by opting to buy less cover. These companies are often highly favoured by insurers; buyers with the confidence, management and conviction to remove less complex high frequency low severity losses increasingly meet with insurers’ approval, due to them being comfortable about being more readily positioned to respond to their medium-high severity, low frequency incidents. This understanding of where to position the “efficient frontier” of risk transfer can only be achieved through an analytical review of existing retention levels, claims triangulations and premium spends.
This trend will only be of comfort to Renewable Energy insurers if smaller frequency losses are removed; if not, insurers will be concerned that a programme with increased retentions instigated by buyers might accelerate good business disappearing from their portfolios. They will always be reliant on this business to fund their medium-higher severity less frequent claims; there is no doubt that the threat of further self-insurance measures by key buyers may cause the market to think twice before insisting on further punitive rating increases.
As reported, appetite and capacity has traditionally resided with dedicated Renewable Energy underwriters being part of specialist, often multi-disciplined teams, benefiting from a focus and understanding of the constantly shifting technology and evolving risk landscape. However, with the advent of renewed interest from Downstream composite insurers, the dynamics shaping the Renewable Energy market are increasingly intertwined with the prevailing conditions in the Downstream Power and Construction markets.
In our Energy Market Review in April1 and also in our October 2020 Update2, we reported that this market had been going through the most challenging period from a buyer perspective for nearly 20 years. The loss record, at least until very recently, has been nothing short of disastrous; realistic capacity levels had declined for the third successive year and buyers have been experiencing significant rating increases, regardless of individual risk profiles and long-term market relationships. In October 2020 we reported that the balance of power in the market still remained firmly in favour of insurers, determined to drive rates upwards to achieve technical levels that will deliver a profitable portfolio in the long term. We reported that in 2020 there had been no further withdrawals from the Downstream market; capacity was stabilising after two years of reductions, with a much-improved loss record and we tentatively considered that the market was making a return to profitability.
If, on adjustment, 2020’s current Downstream loss total of just over US$1 billion is maintained, this would represent the lowest total in 21 years; even if we adopt a conservative approach and add on not only the additional $300 million that we believe to be outstanding from our market conversations, but also a further amount to cover any further Gulf of Mexico windstorm losses. It is still positioning to be the lowest total for five years; bar the exceptionally benign year of 2015, it would have been the lowest for ten years. Downstream insurers have suffered losses in excess of US$4 billion for three successive years, so buyers still found them to be in a determined mood throughout the January 1 2021 renewal season.
However, the unprecedent growth of renewable and low carbon energy, the increased focus on climate change, the acceleration of the energy transition, increased internal ESG obligations, the noted historical challenges in the balance of the Downstream sector and increased, more attractive terms and conditions for renewable energy are no doubt all having a positive impact on the broader Downstream engagement with the opportunities offered by the renewable energy sector.
Renewable Energy and Downstream insurers will all be keeping a close eye on the level of impact felt post January 1 2021 by their reinsurance treaty renewals; most of these programmes will have just been renewed at the time of publication of this article and the implications will be felt throughout 2021.
A further factor which will ensure that this market will continue to harden is the continuing determination of the Lloyd’s Performance Management Directorate (PMD) and overall insurance company management across the globe that 2020’s underwriting result will not prove to be a “flash in the pan” and that future rating levels will be able to absorb future losses.
As we mentioned earlier, this is the first time that many insurers are likely to have recorded an underwriting profit for five years. It therefore seems logical that insurers who had scaled back their lines as the market began to harden are now likely to want to increase written lines on profitable business, thereby increasing overall realistic market capacity.
From our conversations in the market, we are already receiving signs from some major insurers that this may be the case in 2021. It should be stressed that this development in itself would not increase “theoretical” market capacity, as increasing their lines to this extent is still possible within the capacity levels insurers can already offer. But should the “fear of missing out” - particularly in the ‘’green revolution” - drive Downstream markets to consider a more significant involvement in the increasingly attractive Renewable Energy market, it would clearly have the effect of increasing the overall “realistic” capacity available to buyers, rather than it being restricted to a few specialty players.
Furthermore, the growing interest of Chinese insurers in taking a larger share of non-Chinese business (albeit on a net retained basis at present) should ultimately provide further competition to the existing market.
Despite these more promising results in all parts of the Renewable Energy and Downstream markets, conditions will remain uncomfortable from a buyer perspective and we do not anticipate any immediate softening. Having said that, we do predict a levelling after the 2020 adjustment, especially for the most sought-after business. 2020 has certainly been a hard market, although not to the point where buyers are unable to secure the cover they require to protect their assets properly and provide bankable comfort to attract the essential finance to continue to fuel the growth in this sector. There is still plenty of capital to be accessed, with the potential for more supporting capacity to follow the existing leaders, although as we mentioned earlier these leaders have been scaling back in recent months.
Insurers are therefore still generally insisting on rating increases and, subject to the end of 2020 reinsurance market positioning, we would anticipate increases in the region of 10-15%, while less attractive business or those programmes carrying claims reserves will attract increases considerably in excess of this amount.
To conclude, there are six ways in which buyers can mitigate the worst effects of the current hard market:
Steven Munday is Head of Renewable Energy, Natural Resources, Willis Towers Watson GB. Steven.Munday@WillisTowersWatson.com
1 https://willistowerswatson.turtl.co/story/energy-market-review-2020/ 2 https://www.willistowerswatson.com/en-GB/Insights/2020/10/energy-market-review-update-october-2020
