Most readers will be familiar with the concept of the traditional insurance market “cycle": favourable loss records and extensive competition leads to lower rates and wider, more benign terms and conditions *In the insurance market. This then *lead to a period of unprofitability, followed by a period of market withdrawals from in the sector, leading to reduced capacity and higher pricing; this in turn leads to profitable insurer trading conditions, which then encourage new entrants to the market to provide more competition, and rates begin to decline again. Managing this insurance market “cycle” as expediently as possible has been a key risk management driver over the years.
The problem for risk managers in the power sector is that the traditional property insurance market cycle seems to have ground to a halt, rather like a fairground cab at the top of a big dipper. For several years now, the sector has experienced hardening market conditions; despite this, the prospects for significant fresh competition entering the market to kick-start the next phase of the cycle seem to be as remote as ever. Once again this year, we have to report rating increases as being the norm in this market, but are there any signs at all that better times are on the horizon for customers?
The power market has already gone through a phase of hardening and rate correction over the past two years. Towards the end of 2022, there were signs that the Power portfolio was returning to profitability, with flat terms and, in some cases, actual rate reductions becoming possible. However, deteriorating loss ratios and increased *cost basis (especially reinsurance treaty costs) have put the brakes on any softening; instead, we are seeing a renewed push for rate increases from the market. In particular, insurers’ focus on Nat Cat exposure risks is intensifying as the frequency and severity of such events around the world and insurers’ own experience continue to deteriorate. For example, Cyclone Gabrielle in New Zealand in February 2023 led to several losses on the New Zealand portfolio, while reinsurance treaty costs have increased significantly, notably again for Nat Cat protection.
There is no doubt that despite the overall gloomy prognosis for customers, there are some positive factors that continue to limit the extent of the hardening market conditions. Let’s take a closer look at both the positive and negative factors affecting this market to determine what customers can expect for the remainder of 2023 and beyond. We have outlined these factors in our “kitchen scales” graphic in Figure 1 overleaf; we will take each of these factors in turn, starting with the positive ones.
As we intimated last year, insurers have had the benefit of a stronger premium flow from the significantly increased values being declared this year. While the conflict in Ukraine and the resulting inflationary pressures around the world have certainly contributed to these increased values, there is no doubt that there has been a marked escalation in them over the last 12 months, with some Business Interruption (BI) values in particular showing as much as a 100% increase — well above average inflation rates. It is also important to note that BI values are more heavily weighted by insurers when calculating rates than the corresponding property values. Indeed, these have been increasing by a much lower average of 10%, a figure much more in line with global inflation rates.
This dynamic has enabled brokers to negotiate more moderate actual rating increases than in recent years, as the increased premium volume from the revised values has enabled brokers to attract more competition for most programmes than at this stage last year. Moreover, following another poor year for the North American Power portfolio, we are seeing more London market insurers seeking to diversify their books and looking to write more international business.
Historically, Lloyd’s Power Syndicates have been heavily weighted towards the US, but more are now expressing an interest in reviewing the international portfolio.
Furthermore, customers have often had the option not to purchase business interruption on a gross profit basis, instead many have elected simply to buy debt service only, alternatively, on the basis of fixed operating and maintenance (O&M) costs only. The strategy has also enabled a number of customers to mitigate the effects of the current hard market conditions.
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|Property: lack of competitive pressures continues to drive hard market conditions