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ENERGY & POWER NEWSLETTER

Overview of the Insurance Market Q1 2021

Insurance market update for energy and power companies.
Power station, Combined heat power plant at night, Large combined cycle power plant.

29/04/2021

State of the Market Overview

Insurance markets, like most commodity markets, are cyclical. The commodity in the insurance market is an insurer’s capacity to underwrite risk, and the limits they place on those risks.

Like all cyclical markets, pricing is driven by supply and demand - supply being insurers’ capacity, and demand being the limits of insurance companies want. Limited capacity leads to higher pricing, and additional capacity forces competition leading to lower pricing. At a certain point in a downward rating environment, insurers cut-back capacity or withdraw, enabling remaining participants to increase prices, which over time attracts new capacity. And the cycle repeats.

Clearly, this is an overly simplistic description of the insurance market cycle which is actually influenced by various complex, external factors, that impact available capacity and drive demand. Capital flowed to insurance markets following the financial crisis of 2007-08, because of record low interest rates and poor investment returns from financial markets. This increase in supply led to a softening of insurance markets across the board. For nearly a decade premium levels (rates) reduced year-on-year, and terms and conditions improved in buyers’ favour.

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April 2021 Energy & Power Newsletter considering the insurance trends over the last quarter.

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While capacity in the insurance markets has remained relatively steady over the last few years, overall loss levels in many sectors have gradually led to capacity withdrawals and the onset of a hardening market. This is characterised by premium increases year-on-year, tightening of terms and conditions, and in some cases, increases in deductibles, in insurers’ favour.

Sectors where overall premium values are not sufficient to cover the actual or prevailing losses, have seen year-on-year double-digit increases to “correct” the insurers’ book. However, despite this hardening market, rate increases in certain sectors, such as downstream property insurance, are decelerating as capacity levels stabilize. New entrants are returning to other sectors where demand is increasing however, at the same time some insureds are exploring alternative risk strategies such as self-insurance or the use of captives and mutuals. Typical of a hardening market, there are more restrictive terms and conditions for certain perils, such as lower sub-limits or absolute exclusions. Cyber exclusions in particular have gained traction with insurers, and unsurprisingly, the pandemic has led to the introduction of communicable disease exclusions on virtually all policies.

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“Marsh Pty Ltd (ABN 86 004 651 512, AFSL 238983) (“Marsh”) arrange this insurance and is not the insurer. The Discretionary Trust Arrangement is issued by the Trustee, JLT Group Services Pty Ltd (ABN 26 004 485 214, AFSL 417964) (“JGS”). JGS is part of the Marsh group of companies. Any advice in relation to the Discretionary Trust Arrangement is provided by JLT Risk Solutions Pty Ltd (ABN 69 009 098 864, AFSL 226827) which is a related entity of Marsh. The cover provided by the Discretionary Trust Arrangement is subject to the Trustee’s discretion and/or the relevant policy terms, conditions and exclusions. This website contains general information, does not take into account your individual objectives, financial situation or needs and may not suit your personal circumstances. For full details of the terms, conditions and limitations of the covers and before making any decision about whether to acquire a product, refer to the specific policy wordings and/or Product Disclosure Statements available from JLT Risk Solutions on request. Full information can be found in the JLT Risk Solutions Financial Services Guide.”