Soft market for power and offshore energy – two broker reports

Two broker reports out this week each point the way to soft pricing in overlapping segments of the energy insurance markets, with competitive pricing, ample capacity, and carriers chasing business, despite a lively underlying risk environment.

After enduring years of hard-market conditions, the re/insurance property and business interruption market cycles are starting to turn according to WTW’s Power Market Review.

Low level attritional losses remain a constant in the power sector, the broker said, while the absence of larger losses in 2023 and 2024 is expected to lead to more competitive pricing in property and business interruption.

The international liability market has also stabilised with a small uptick in capacity and softer market conditions, the broker said, leading to greater competition and downward pressure on rates.

“Making strides in a softening market will demand renewed focus on getting valuations right, investing in risk engineering for ageing assets, and managing supply chain volatility through contingency plans,” said Rupert Mackenzie, head of global natural resources, WTW.

Key takeaways from WTW’s review included:

• Demands on the power sector are gathering momentum as global electrification grows exponentially. To keep up, the lifespans of power assets are being extended. Companies will need to provide re/insurers with a maintenance strategy that includes clear modifications to accommodate for ageing assets.
• Growing appetite for greener portfolios in liability, but evolving technologies carry inherent risks: the distinction between proven versus unproven technologies remains. Increasing reliance on weather-dependent sources of power requires more flexible grids and optimising operating systems.
• Transmission system operators are being challenged by transition as the existing centralised and large-scale power grid shifts to a solar, wind, and hydroelectric heavy power grid. Potential for transmission bottlenecks is growing, with generation assets now located further from load centres and in new regions with limited transmission infrastructure.
• Placements containing coal and/or wildfire exposure continue to face greater scrutiny, as do those with significant US exposure. Thermal will continue to be at the core of the base load supply strategy for most countries.

Mackenzie said: “Re/insurers will need to lean into power companies’ specialist knowledge of operations and technologies to really understand their risks and find solutions that are commercially reasonable.

“Power companies are encouraged to present their risks with transparency, to help re/insurance markets understand the technologies and risk controls to right-size the cover.

“With the market approaching a new phase, the value of getting this approach right is essential to take full advantage of opportunities. The better the market understands the client’s business, the more accurate and flexible the solutions can be,” he added.

Chasing capacity

Meanwhile there is a long-term soft market forecast for offshore renewables and infrastructure, according to broking firm NARDAC.

The broker reported that $3bn of London market insurance capacity is chasing a declining number of construction ready projects.

Despite continuing claims, and increased costs, premiums remain comparatively low for offshore energy and infrastructure, the specialist intermediary warned.

Premiums for offshore renewable energy and infrastructure projects are set to remain low for the next two to three years, NARDAC said, prolonging a soft market that began to emerge in 2023.

Yet claims for the sector continue to occur – most notably for cable damage, the broker warned.

Inflationary pressures have also steadily increased in recent years, increasing the cost of repairs or replacement parts, with claims costs rising as a result.

From its research, however, NARDAC found that despite the high frequency and growing severity of claims, neither have yet had a significant bearing on market capacity. Moreover, rates and deductibles have not risen in line with increased sums insured, and insurers’ costs.

NARDAC sought appetite and capacity information from 18 major insurers in the London market, asking them to share the amount of underwriting capital offered for offshore technologies and which offshore assets they would support – ranging from interconnectors, grid connections, fixed and floating offshore wind, to wave and tidal projects.

Large line sizes

Data secured by NARDAC showed mean capacity available per project stands at $164m, while modal average stands at $200m, suggesting underwriters within the market are willing to insure significant portions of project risk.

Similarly, the line sizes that lead insurers are willing to write remains substantial – ranging from 12.5% to 20%, with a modal line of 15%, the broker said.

Taken together, the data suggests that London markets have considerable capital to deploy in supporting projects.

Equally, 94% of all insurers surveyed would offer capacity to interconnector projects and fixed offshore wind projects, while 89% of insurers would offer capacity for grid connection developments and 84% would be willing to support floating offshore wind projects.

Wave and tidal energy projects, conversely, saw only 56% support.

Critically, however, with a slowdown forecast in offshore wind project development up to 2027, insurance capacity is over supplied to the market, keeping premiums low and extending soft market conditions.

While anonymised by underwriter, a third of London market offshore capacity surveyed was made up of ‘new’ insurers from traditional energy underwriters looking for opportunities outside declining oil and gas, or making commitments to supporting the energy transition.

“Offshore wind has been softening for over a year now,” said Rob Bates, partner, NARDAC, who led the research.

“Our data indicates that with the slowdown in offshore wind projects globally, and huge underwriter interest, London underwriting capacity has been forced into competing on price – and on coverage too – to secure lines on placements,” he said.

This trend is set to continue and perhaps even accelerate in the coming months, Bates observed.

“As long as the London market continues to chase the high premiums these policies can generate, this sector will be a buyers’ market,” he continued.

Not sustainable

“Insurance buyers and intermediaries should note, however, that this situation is not sustainable,” Bates warned.

“In the short term, when claims come in - and it is ‘when’, not ‘if’ - insurers will respond through tougher terms and conditions, so that any developers hit by multiple claims can expect to have to carry higher deductibles and pricing in future.

“Insurance is very reactive, and longer term, we anticipate a market correction as project build-out for European projects ramps up towards the end of the decade, tightening the supply of underwriting capital,” he added.