Q4 2021

Regional Updates

Upstream insurance markets in Asia remain stable. While there were not any significant capacity withdrawals in the region over the last quarter, several Chinese-based markets started to withdraw from the sector, apart from where there are Chinese interests involved.

Asia

Operational programs saw no significant changes in underwriting approach, and rating movement remains in the range of 5% to 10% for programs with a minimum five-year clean loss record. Lead market options remained limited for contractor accounts. Hard market conditions also remained in the offshore construction sector, with increases in rates and deductibles, especially for subsea works. While we have not seen a change in capacity over the last quarter, focus remains on the sub-contractor quality and claims records.

The downstream market in Asia continued to stabilise, with overcapacity on placements now more common as underwriters seek to maintain their expiring shares and avoid signing pressures. Markets are now willing to be more flexible, particularly on loss free accounts, and, although rare, long-term agreements are being considered on a case-by-case basis.

Business interruption (BI) remains a focus and updated valuations are being increasingly sought to redress the reduced activity in this area over the last two years, coupled with expected value escalation concerns. However, underwriter loss ratios remain on the low side with no significant deterioration. While we have yet to see rate reductions in the Asia underwriting market, we may see movement in this direction in the next quarter. Regional underwriters are also cognisant of rate reductions in other market hubs, and will aim to ensure that their market share is not undermined.

A similar situation exists in the power sector. While premium increases are still being applied, a greater degree of flexibility is being shown for coverage terms and pricing on clean loss accounts. This is in line with the tapering effect that we have been reporting over the last two quarters, as markets seek to protect their top line following two years of significant rate increases. In contrast, accounts that have had poor loss records are still being heavily penalised with marked rate increases coupled with upwards adjustment on both property and BI deductibles.

Coal-related placements continued to experience minimum 30% rate increases, even for insureds with clean loss histories. Further rate escalation is expected as capacity continues to be squeezed from the sector, due to a number of recent Asia Pacific claims in the last quarter estimated at about USD350 million to USD500 million.

Pacific

The energy and power industry in Australia and New Zealand continues to face challenging insurance market conditions, particularly those insureds that have experienced losses and/or those with high natural catastrophe exposures. Despite these difficult conditions, the market steadied and increases stabilised over the final quarter for most clients.

The oil and gas sector continues to lead the recovery of the market, due to the relatively benign loss experience in the sector globally. While there is not an over supplied capacity, it now appears that markets are positioning themselves to take advantage for growth and recovery. This pursuit of market share should generate a continued level of competition and stability.

The region’s power sector has suffered one of its worst underwriting performances in recent years due to two significant losses. The value of these two incidents is likely to exceed gross written premiums (GWP) by a significant margin. This will force insurers to reassess their portfolios for 2022, and likely add pressure for rates increases.

The focus on energy transition and a decrease in capacity for coal-related placements will continue to impact pricing throughout 2022. Although pricing appears to have reached an apex, many clients in this sector have started seeking alternative risk transfer solutions rather than continuing to pay unsustainable insurance costs.

Positively, the capacity once allocated to thermal power generation has made its way into the renewable energy sector. The rush of new markets into this sector has generated an oversupply of capacity as insurers seek to gain market share. This has increased competition, and projects that once required global insurance market participation can be comfortably placed in Australia or New Zealand markets.

Policy coverage and conditions will continue to be areas of focus for insurers in 2022. It is likely that policy clauses and language will tighten, particularly the removal of non-physical damage coverage, contingent BI coverage restrictions. This will affect insured perils, geographical radius limits, and reduced indemnity periods, as well as a continued restriction of communicable disease clauses, and limitations to cyber coverage.

Middle East and Africa

The ongoing transformation taking place in Saudi Arabia continues to be pivotal to the Middle East region’s development. The aggressive goals of Saudi Arabia’s Vision 2030 in terms of diversifying the economy away from oil continue to accelerate investments from the Public Investment Fund (PIF) across a broad cross section of industries including leisure and hospitality, agriculture, and renewable energy. As part of Saudi Arabia’s commitment to be net zero by 2060, the PIF and private sector partnerships will seek to invest to achieve installed capacity of 58 gigawatts of renewable energy, mostly solar PV by 2030. The pace of change here should not be underestimated.

In other parts of the Middle East, smaller scale transformations are taking place through continued divestments and privatisations. This process of raising capital is fuelling international investment outside of the Middle East, with much focused on the African continent — especially in the power and mining sectors — where Middle East national industries are seeking to diversify geographically.

The profile of the insurance landscape in the region continues on a positive trend from a buyer’s perspective, with appetite and capacity deployment growing from the international markets as well as regional carriers and managing general agents.

The pace of change in the downstream energy and conventional power sectors has been particularly noticeable as the increased appetite has levelled the rates out to a flat benchmark. In some instances, buyers are able to obtain lower like-for-like premium costs through pushing out differential terms and layering strategies. Further, we have seen a willingness from markets to consider loss sensitive or risk quality discounts, as well as growing appetite for long-term deals for clients considered to be “core.” For upstream risks, the relative global stability is reflected regionally — albeit still dominated by a limited number of credible lead markets in the region. The market for renewable energy is showing signs of modest growth with regional carriers in particular demonstrating a willingness to ensure this is part of their treaty protections going forward.

United Kingdom

As 2021 drew to a close, the UK based energy and power insurers could be reasonably satisfied with how the year progressed. The rating environment generally remained positive throughout, and the natural catastrophe events that resulted in estimated insured losses exceeding USD100 billion had a relatively minor impact on markets. Profitability for the portfolio is assured for most carriers and notably so for some, particularly in the downstream sector.

Against this background, it is no surprise that we are seeing risk appetite grow in the London market, with capacity increasing for 2022 to capitalise on continued favorable underwriting conditions. Managing general agents are finding it easy to expand into new sectors with support from capital providers keen to generate strong returns in a low interest rate environment. We have also seen strong growth in the new “full follow” insurance vehicles, where underwriting is done by algorithms, after a very positive first year in meeting performance targets.

As we look forward, we anticipate the impact of new capacity will drive a more competitive trading environment with differential terms and conditions largely being eliminated on renewals and more options being available to clients. Additional competition returning from regional markets should add to the pressure on incumbent insurers to provide more favourable terms, although the underwriting authority for many of the global energy and power insurers remains centred from London.

However, the outlook is not equally positive for all insurance buyers. The recent discussions at COP26 highlighted the urgency of addressing greenhouse gas emissions in the energy industry. Insurers’ responses have been immediate with announcements of a timetable for withdrawal of insurance support from certain sectors. This effective reduction of capacity in these sectors will result in reduced competition. Indeed, we are already seeing markets in London decline to renew accounts on broad ESG concerns and clients should put strong emphasis on their ESG approach as part of renewal submissions for all classes.

Many London markets have also highlighted the opportunity that the energy transition will bring. While in the past some were criticised for a slow response to support the renewable energy industry, there is an increasing appetite from insurers to enter this class today. This has resulted in the strongest battle for talent we have seen in the industry for a number of years, as all participants build teams capable of servicing this sector. With these increased underwriting capabilities, we expect to see the introduction of new facilities and new product development. There should be some positive outcomes for clients as the London market repositions to achieve the same relevance for the transitioning energy investors as it has for the traditional energy sectors.

North America

The market continued to stabilise in the fourth quarter on the strength of rate increases experienced throughout 2021, with most regional underwriters reporting on or ahead of their targets. Indeed, for many in the sector attention has already turned to 2022 in anticipation of heightened competition for both risk and, quite noticeably, talent. At the product level, while property pressures are abating, casualty lines continue to prove challenging for even the most committed underwriters as both frequency and severity of losses continue to climb.

At the end of 2021, the record will likely demonstrate that while challenging for many, it was the year that entrants exceeded exits, and tier one underwriting capital began to emerge in force, with large multinational commercials and regional industry mutuals recommitting to the energy and power sectors. Rates are now supporting not only improved performance and expanded appetites, but in the case of the mutuals as healthy distributions have been announced for payment in the coming year.

Looking ahead to 2022, new commercial entrants are anticipated, but we also expect to see expansion of appetites, reversing localised trends that have made optimising the utilisation of available capacity challenging, even for those with the most attractive project and portfolio profiles. In 2021 industry mutuals delivered on the promise of expanded support for their member companies, dampening volatility and absorbing market share; a trend which will likely continue. While supply-side view is now favorable for insureds, it will nonetheless be absolutely critical for insureds to continue to position themselves aggressively as demand too is projected to increase. In particular for renewable energy where both energy and power sub-sectors increasingly compete and the pipeline for proven and less-proven technologies is equally robust. New wind, solar, battery storage, carbon capture, biofuels, and hydrogen projects will all compete for this expanded specialty risk capital, alongside existing established energy and power risks. Competition for catastrophic risk capital in particular will only continue to increase as footprints associated with distributed energy technologies expand.

Regional Updates