Posted in News on 16 Jan 2020
In our last Power Market update, we highlighted the ending of soft market conditions for buyers. Hard market symptoms gathered pace in the latter stages of 2019 and the 1/1 renewal season, with (re)insurers no longer generally looking to grow their top line, and frequently reducing the size of their shares, driving hard on Natural Catastrophe sublimits and retentions.
Many soft market extensions are being cut back, notably reining in on cyber coverages. There are different opinions on whether we are technically in a ‘hard’ market phase but what is clear is that as we enter 2020, buyers and their brokers have a very different market to navigate with a substantial shift in conditions and dynamics.
The last quarter of 2019 saw many Lloyd’s syndicates hitting their income targets well in advance of year end. This is largely attributable to the rate increases applied across the year, in conjunction with restricted income targets for Power Generation business written by Lloyd’s syndicates. Some syndicates have been able to bypass this hurdle by switching to their company stamp, but in general but most syndicates exhausted their capacity well in advance of 31st December which is likely to contribute to the hardening market in 2020. Alex Priestley at leading power syndicate Lancashire writes:
‘Underwriters are not enjoying a new utopia, but rather fighting for survival as significant large losses continue to hit the marketplace as a result of both new claims and through deterioration in prior years’ of account. Looking forward in 2020, buyers should expect capacity providers to continue to be highly risk selective, looking to narrow coverages and exposures further with a sustained drive for improved rates in the pursuit of profitability.’
In 2019 London saw a dramatic increase in US business coming to market. The initial flurry at the start of 2019 continued to increase throughout the year, with US opportunities arriving in London for either the first time - or at least for the first time in a number of years. In spite of a large proportion of business being significantly underpriced due to consecutive years of rate cuts, London has benefited substantially from the US domestic giants cutting their line size across their portfolios.
AIG, FM Global, Travelers, Munich Re, Swiss Re and Zurich have all scaled back their majority shares on placements by as much as 50% and as such, have created opportunity for London and international markets to participate. There remains a glut of capacity in North America, although the domestic carriers are finally scaling back to address poor performance in the Power Generation sector. Natural Catastrophe peril exposure, poor loss history and coal-fired generation  are added layers of complexity that have further dampened the domestic market’s appetite and mood for this class of business.
There is little doubt that the reinsurance renewal season at 1/1 also fueled insurers’ bullish sentiment for increased rates in Q4. It is important to consider the 1/1 treaty and retrocessional renewals, as they will influence the market’s rating on the upfront placements - at least for the first half of 2020. Throughout December, reinsurers predicted an end to the “U-shaped” pricing phenomenon with a stable retro market and increasing primary rates . Initial reports of the reinsurance season suggests that the retrocessional property cat business showed, ‘signs of stress’ at 1/1, with eye-watering rate increases requiring significant restructuring of programmes. Early indications suggest that the retro market has experienced exorbitant increases but ample global reinsurance capacity due to a slowing growth of Insurance-Linked Securities (ILS) capacity has left many treaty reinsurers with disappointing increases. The reinsurance heavyweights such as Munich Re and Swiss Re are likely to have enjoyed greater rate movement due to their capital exposure to primary layers whereas Lloyd’s typically writes much more Excess of Loss (XOL) business .
The Dubai International Finance Centre (DIFC) and regional market in the Middle East is still largely following suit with the London/international carriers with pricing, especially on accounts with loss experience. However there remains arguably more flexibility despite a reduction in overall capacity across the region, with notable exits from the market from the likes of Swiss Re CorSo. African markets remain the most competitive of all with some recent renewals renewing flat - which is at odds with the rest of the global insurance hubs.
In Asia, the power market continues to harden but still not at the same rate as the North American and European markets. Asian carriers are pushing rates harder for hydros (especially large civils based projects) and coal-fired generation due to loss experience and limited capacity. The unexpected exit of Asia Capital Re from the market, an important player regionally, may be a sign of further contraction to come. Buyers in Asia have long enjoyed the fruits of the soft market conditions over recent years and many from Japan, South Korea and China have less dependency on international capacity, with substantial treaties absorbing much of the exposure.
What does this all mean for the market in 2020?
Restructuring of programmes is now commonplace, with many vertical placements to mitigate the impact of the hardening market conditions (carriers on separate slips with their own differing terms.) The placement process is taking longer due to incumbent carriers reducing their shares and lead markets delaying the quoting stage to try to drive up their price. Road-shows, recent engineering reports and demonstrating the client’s commitment to continual improvement to risk management are crucial to avoiding the worst of the tough market conditions. Many markets will not consider new business if recent engineering reports are unavailable. Similarly, underwriters will naturally favour those clients with a strong ‘story’ (i.e. good or minimal loss history, evidence of proactive and robust risk management strategies, an executive team that is transparent about their approach to risk, and those that view the market as a strategic partner) that they can present to upper management on how they can justify writing new business in the absence of previous budgetary pressures. Buyers can also consider reducing the size of the limit they buy to help keep down the premium level and/or to retain more of the risk themselves, but many carriers are still mandated to drive rates to cover their losses.
Alesco remains agile and creative in our marketing to secure the most competitive terms as possible for our clients in a turbulent market place. It remains to be seen how the market will develop over 2020 but with events such as the ongoing Australian bush fires (with losses already expected to be close to AUD 700m), geopolitical unrest and continued operational losses, the immediate future unfortunately looks like a continuation of uncertainty. Get in touch if you want to hear more about market conditions and how these might impact you, or your clients’ business.
Alesco’s expertise in the construction and operational phases of Power Generation projects will ensure that we are always able to provide our partners with valuable advice given our collective years of experience in advising clients and transacting on their behalf. If you have any questions or would like to discuss any of the topics raised in the article above, then please do not hesitate but to get in contact with anyone in our dedicated Power Generation team.
FOR MORE INFORMATION, PLEASE CONTACT
Matthew Savitt | Partner
Most Company markets are now under considerable pressure not to write coal fired risks so there has been a significant withdrawal in capacity which is consequently driving up the rates. When this is combined with NAT CAT exposure and poor loss history, the prospects for buyers is bleak.
Alesco is a specialist insurance and risk management business located in the heart of the City of London. Founded in 2008 by a team of experienced professionals, we provide a wide range of risk-management services and insurance solutions which are fundamental for protecting organisations. We work closely with underwriters in the London markets, in key global insurance centres, and with local broking partners in 150 countries.