Power sector faces rising rates and a new risk landscape, says WTW

SINGAPORE, September 8, 2022 – Risk managers in the power sector must tackle an entirely new risk landscape brought about by the Russia-Ukraine conflict, global inflation, the energy transition, and climate change, according to the 2022 Power Market Review from WTW (NASDAQ: WTW).

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.

The Review highlights these and other new challenges for the power sector, which range from the technological to the geopolitical. It considers:

• Ways that modelling can support an industry facing challenges;
• management of physical and transition risks;
• the role of investors in the energy transition;
• directors’ potential liabilities arising from climate change;
• the impact and management of geopolitical crises; and
• the introduction of hydrogen as a fuel for gas turbines.

Power Market Review also considers the current state of the insurance market for power risks. Data and commentary covers areas including:

• Russian impact: Most power insurers have eliminated Russian exposures from their portfolios, and many have reduced or eliminated cover for coal-fired plants and other risks which they deem to emit unacceptable levels of carbon. That has introduced an increased appetite for other power risks.
• Capacity: Total global theoretical insurance capacity for power risks is approximately US$3.5 billion in 2022, with the realistically deployable level in the region of US$1.5 billion. For coal assets the total falls to just $250 million and is significantly less for new coal risks.
• Losses: The frequency of individual losses in excess of US$1 million is trending upwards and reached a three-year high in 2021. Total loss costs are set to equal or exceed total premium income for power risks in 2022, with a dozen losses in excess of US$20 million already reported.
• Rating levels: As a result of rising losses, rating increases of at least 2.5% and up to 20% can be expected in Q3, 2022 for all but a handful of risks with a clean loss record and all assets located in areas of low natural catastrophe risk.

Lyo Foo, Head of Power, Natural Resources Asia, WTW said: “In the first half of 2022, insurers continued to underwrite with caution, but the market is also showing a slightly greater appetite and easing restrictions for clean and good quality business. Stand-alone coal insurance placements continued to experience extreme challenges, with an increasing number of insurers restricted from participating in such placements, regardless of risk quality or loss history. As a result, larger retentions and further rate increases are expected to persist. Insurers are re-aligning underwriting in support of revised ESG policies, further reducing capacity, in some cases earlier than anticipated. With demand for capacity exceeding supply, rates are often considerably higher than expiring policies.

With large Asian economies experiencing a strong rise in electricity demand, the economic realities in Asia mean that a significant reduction of coal consumption will be more challenging than elsewhere. But with the realities of climate change placing new pressures on the insurance market, there is a critical need for power companies to keep up with the pace of insurers and accelerate their energy transition to ensure continuous insurance coverage.

The Climate Transition Pathway framework introduced by WTW will be the long-term solution for our Coal power clients. While we provide guidance to organisations planning their transition to a low-carbon economy, such accredited framework provides insurance companies and financial institutions a consistent approach to identifying business with robust low-carbon transition plans which is in-line with their ESG guidelines.”

About WTW

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