Posted in News on 08 Oct 2019
In the context of continued poor underwriting results, important withdrawals of capacity, economic pressures, climate change, increased cyber exposure and geopolitical & regulatory uncertainty, the ‘hardening’ of the Power market is gathering pace, with a more considered approach to underwriting returning.
In the article that follows, you will see the Alesco Power team’s views on the current state of play and why we are well placed to navigate our clients through these uncertain times.
The last few months has seen a continuation of unfavorable developments for buyers as the Power Generation market continues to transition and harden, with most (re)insurers in London and global hubs achieving premium increases and restricted coverage. This follows a similar trend in the first half of 2019 which is in stark contrast to previous consecutive years of rate reduction despite the power market experiencing significant losses in both size and frequency.
At Lloyd’s, power generation as a class of business has come under intense scrutiny from the corporation following its poor underwriting performance, resulting in a number of syndicates being placed under substantial pressure to improve the profitability of their book. Last year’s Lloyd’s performance review highlighted Power Generation as one of the worst performing lines of business within the market. The fallout has led to markets walking away from renewal business - as well as new business - if they are not achieving the rate increases that they are mandated to require and a number of the Lloyd’s major power players are happy to trim their portfolios. The recent closure of Axis’ power book further highlights the distressed state of the London power market.
Furthermore, a number of Lloyd’s syndicates have either hit or are close to their annual premium limit, which has meant underwriters are looking to reduce their deployed capacity by decreasing their line sizes which is in conjunction with a wider shift in underwriting strategy from premium growth to risk selection. MGAs can still prove to be competitive in comparison to Lloyd’s, especially where non Lloyd’s capacity is their backing.
International markets out of the Dubai International Financial Centre (DIFC) are mostly following London/international markets with regards to rate increases, with some exceptions. The same would apply for the Miami and Singapore regional hubs, perhaps with the latter slightly less rigidly. The “retreat from coal” has continued to see the European insurance and reinsurance giants divest from coal and adopt a more ‘climate aware’ underwriting approach which is in line with a reduction of the global pipeline for proposed coal capacity. In the US, we have seen little indication that the US carriers will follow suit but it would be wrong to assume this will remain the case long-term; markets such as AIG, FM Global and AEGIS continue to insure coal based risks, but complications arise when these are placed outside of a shared portfolio of non-coal assets. There is still substantial domestic North American capacity available albeit natural catastrophe peril exposure, loss experience and coal-fired generation can cause this to drop off. We are however seeing US domestic insurers reduce line sizes, particularly AIG who are writing less 100% shares on accounts. This is creating opportunities for London market if they are willing to take them.
In a wider context, reinsurance capital has continued to grow in 2019 to an estimated total of over USD600bn, a rise of around 2-3%. This is despite the combined ratio increasing around 1% for the main global reinsurers. This deterioration in combined ratio has been offset somewhat by strong investment returns in the first part of 2019 - a nice break for reinsurers, but one which is not expected to endure against a backdrop of potential global recession. The majority of new reinsurance capacity from alternative capital providers has been via large Insurance Linked Securities (ILS) funds as alternative capital has become more selective and cautious. Given the perceived strength of the reinsurance market and the lack of serious Natural Catastrophe (NATCAT) losses in the first half of 2019, it is certainly possible that the hardening market will be short lived. That said, Hurricane Dorian has proven how quickly NATCAT losses can arise through their ferocity and unpredictability. A relatively benign first half of the year in terms of NATCAT does not mean that reinsurers are home and dry.
Looking forward, the Lloyd’s insurance market may have to soften their underwriting methodology to retain market share due to competition with global insurance hubs. It should be noted that despite reinsurance capital growing theoretically, several major market leaders have reduced their appetite to deploy as much per risk on many specialty classes, which is a major factor in the hardening conditions in specialty lines with traditionally high limit requirements.
Alesco continues to be creative and flexible in securing competitive terms and conditions in the global market; an approach which has enabled our team to continue to grow aggressively in a market place which should be prohibitive to growth. Get in touch if you want to hear more about market conditions and how these might impact you, or your clients’ business.
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.
CONDITIONS AND LIMITATIONS
This information is not intended to constitute any form of opinion or specific guidance and recipients should not infer any opinion or specific guidance from its content. Recipients should not rely exclusively on the information contained in the bulletin and should make decisions based on a full consideration of all available information. We make no warranties, express or implied, as to the accuracy, reliability or correctness of the information provided. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide and exclude liability for the statistical content to fullest extent permitted by law.