The long period of soft and competitive insurance market conditions, characterised by an excess of (Re)Insurance capital and an emphases on meeting premium growth targets, has finally and abruptly come to an end.
The intention of this paper by Willis Towers Watson is to address the issues currently prevailing in the international insurance market with specific reference to property insurance placements on REIPPPP projects in South Africa and utility-scale projects elsewhere in Africa, such as Construction All Risks and Operational All Risks, including Delay in Start-Up and Business Interruption.
Faced with deteriorating loss ratios, the renewable energy insurance market is focusing on profitability rather than premium growth and dramatic upswing in insurance pricing, coupled with higher ‘self-retention’ levels being forced onto the buyers of insurance, is now very much a reality. This fundamental shift in market dynamics is something buyers must become accustomed to over the next 12 to 24 months.
Following two consecutive years 3(2017/2018) of catastrophic underwriting losses, (Re)Insurers around the world are now focusing on profitability rather than premium growth. Some major (Re)Insurers are either withdrawing completely from underwriting high and complex risks that have continuously generated adverse loss ratios over the years, or have substantially reduced their participation, which makes the insurance placements on these risks a major challenge due the market capacity reduction and a general lack of risk appetite.
The characteristics and hallmarks of a hard insurance market are as follows:
• Decreased capacity particularly on the high and complex risks
• More expensive reinsurance costs passed on to the buyers of insurance
• Fresh and new competition is hard to find
• Buyers are forced to accept much higher ‘self-retention’ levels in the form of deductibles
• Loss limits, as opposed to full value insurance, are the order of the day generally based on Estimated Probable Loss (EPL) or Estimated Maximum Loss (EML) assessments
• Right sizing of (Re)Insurers’ retention level in industry sectors that have produced continual adverse loss ratios
• Placement process takes a lot longer, particularly on the high and complex risks
• Closer scrutiny by (Re)Insurers on claims submitted
• Risk assessment surveys are essential and (Re)Insurers expect robust loss prevention and risk mitigation plans to be in place
Noting the above, buyers of insurance need to develop their own strategies to alleviate the effects and impact of a hard insurance market on their projects and operations.
How long will hard market conditions prevail?
To a large extent the global property insurance market is influenced by natural catastrophe events and should 2019 to end 2020 prove to be as disastrous as 2017 to 2018, this will result in a much worse and prolonged situation. However, it is anticipated that the pricing increases should become more predictable by the end of Q2 2020 as most of the re-underwriting should have been completed.
Mitigation measures and recommendations
To alleviate the effects and impact of an unprecedented hard and uncompromising insurance property market it is strongly recommended that the buyers of insurance:
• Start the insurance placement process much earlier as it is now taking substantially longer than before to reach a satisfactory placement conclusion (at least 120 days before renewal).
• Engage with professional insurance advisers much earlier than before with a view to developing comprehensive underwriting submissions with all pertinent risk information for underwriters’ review.
• Undertake own risk assessment survey well before the renewal and placement of the insurances, preferably with the assistance of adequately skilled independent professional risk engineers.
• Ensure that robust and comprehensive risk improvement/mitigation plans are in place and properly implemented with stated timelines well before the insurance renewal date.
• Ensure budgets for the forthcoming period of insurance make due allowances for anticipated increased insurance costs, self-retention costs (deductibles) and risk improvement/ mitigation costs likely to be incurred.
• Inform the Lenders via the Facility Agent and LIA of expected non-compliance issues with specific reference to the requirements stipulated in the FA/ CTA well in advance and keep them fully informed leading up the final placement of the required insurances; i.e. it is essential to manage Lenders expectations to avoid last-minute issues relating to non-compliance.
• Establish long-term strategies with selected (Re)Insurers rather than ‘chop and change’ on a regular basis.
• Secure seamless Owner/Principal Controlled Insurance Programmes (OCIP/PCIP) on new utility-scale projects in future, covering all the phases of a project (including the first 12 months of operations) with a view to ‘locking in the terms’ in the event of the insurance market hardening even further over the next 24 months.
Final consideration and key takeaway
The hard market conditions are expected to prevail throughout 2020, and likely well into 2021, and buyers of insurance (with the assistance of their technical and insurance advisers) need to start the process leading up to renewal of the insurances much earlier than before. Underwriting submissions to the insurance market need to demonstrate a very firm commitment to reduction and mitigation of risks wherever feasibly possible. ESI
About the author
Chris Nivison, Renewable Energy Specialist at Willis Towers Watson, has over the past eight years focused on the renewables sector and played an active role on a considerable number of REIPPPP projects over the past four bidding rounds, acting as both Lenders’ Insurance Adviser and Project Owners’ Insurance Adviser.