WTW calls for recalculation of power risks as values soar

Insurance buyers from the power sector can expect rate increases of between 2.5% and 20% for third-quarter renewals as insurers struggle to balance the books against rising losses, says WTW. But the broker adds that buyers will see the upward rating curve flatten this year, with rises “well down” on 2021, despite softening “still some way off”. Publishing its 2022 Power Market Update, WTW says power sector insurers are unlikely to turn a profit in 2022, with a dozen claims of more than $20m each already this year. The number of individual losses costing more than $1m reached a three-year high in 2021, and total loss costs for full-year 2022 are on course to match or exceed total premium income for power risks, the broker says. “Because of the losses sustained over the last two years or so, most insurers are still running their power portfolios at an underwriting loss,” the report explains. Writing in the report, Graham Knight, WTW’s global head of natural resources, calls for better valuations of asset and business interruption risks, which he says are the root cause of swings between hard and soft markets. “Our message to the industry on this topic is quite simple: it is vital that a more transparent understanding of how insured values are calculated is communicated from buyer to broker to insurer. When this is achieved, buyers will see greater price stability. Better valuations will reduce the likelihood of repeating the large price swings between hard- and soft-market conditions that we’ve experienced so often in the past,” Knight says. Higher values have been driven by global inflation and the war in Ukraine, WTW says. The impact of volatility in the power wholesale market on business interruption (BI) costs must be understood to properly recalculate values, the brokers adds. “Geopolitics have never been such a major factor for the power sector and the insurance market. We are currently in the midst of a truly global energy crisis, the likes of which we have not experienced before,” it says. WTW says one of its power clients in the northern hemisphere recently declared BI values for this winter four times higher than the same period last year. While this means risk managers will be buying more insurance, higher premium from revised BI values could take the pressure off rates. “Increased BI values eventually should mean more expensive losses. But for the moment, they are helping insurers to meet existing premium income targets and thereby easing the pressure on percentage rating increases,” WTW says. The current hard market for power risks, which has seen rate increases for the past three years, is underscored by market losses and a limited pool of leading insurers, WTW says. “Although there are signs that the following market is generally more willing to follow these leaders’ terms than last year, this in itself provides insufficient momentum to reverse the overall upwards market trend,” the report states. But it adds that an increase in appetite for power risks from following insurers has helped to flatten rate increases. WTW says the Russia-Ukraine conflict, global inflation, the transition to green energy and climate change have collided to change the risk profile for the power sector. “As power insurance prices continue to rise, risk managers must juggle these risks while ensuring that they have determined current, correct and sufficient asset and business interruption valuations against the backdrop of rampant global inflation, a challenge which some have not yet faced over the course of their careers,” WTW says. “The role of the risk manager in today’s turbulent economic and political climate has never been more critical. Not all the risks facing the industry can be fully mitigated, absorbed or transferred, but it will be those companies that do so to the optimum extent that will be best positioned to survive the challenges ahead,” the report adds. Although total insurance capacity for power risks stands at about $3.5bn this year, WTW says a more realistic amount deployed for the sector sits at about $1.5bn, while capacity for coal assets falls to $250m and even less for new coal risks.

WTW calls for recalculation of power risks as values soar

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