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Q1 2022

Regional updates

Rate increases continued across the board in the first quarter, but were generally lower than increases experienced during the last quarter of 2021.
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By John Cooper , 

Global Chief Client Officer, Energy & Power, Marsh Specialty

05/04/2022 · 6 min read

North America

Rate increases continued across the board in the first quarter, but were generally lower than increases experienced during the last quarter of 2021. Navigating currently available risk transfer options, while creating new solutions, continues to be a challenge. Competition remains in the market and underwriters are proactively requesting opportunities on new and expanded business.

Overriding industry challenges for North American clients include inflationary pressure on interest rates, heightened focus on energy security, loss activity concerns for Battery Energy Storage Systems (BESS) exposures, wildfire risk transfer, and negative trends on losses and loss values. Supply chain issues impacting business interruption values, coupled with soft NatCat concerns (excluding wildfire and severe connective storms) are still causing havoc on property rating models.

The impact of each challenge varies by line of coverage. Proactive, constructive discussions are key to negotiating movement on rate, premium, terms, and exposures to obtain reasonable, manageable placement outcomes in a market attempting to readjust.

Higher hazard classes of business, particularly traditional energy exposures, exhibit a continued push for engineering detail on assets, detail on exposures involving PFAS, transitions from coal, and hybrid return-to-work protocols (for workers’ compensation and auto classes). 

Competition from new capacity launched in the European and Bermuda markets will increase pressure on North American domestic markets. The rate of shrinking capacity in the first quarter is less than trends noted in the last several quarters. An increasing number of markets are open to incrementally adding small limits on a case-by-case basis, as a response to competitive pressure and aggressive growth targets.

Interest in renewable energy risks continues to grow, noted by shifts in capacity and adjusted appetites for both property and casualty lines. To further support this appetite shift, Marsh Specialty launched a North American-based portfolio program during the quarter. This facility offers a solution for small-scale, individual renewable energy exposures not otherwise addressed appropriately by current market pricing or terms and conditions.

Options to transfer risk from insured to self-insured (including captives) are more prevalent in renewal conversations. Many companies fatigued with continued increases, including those with long-standing relationships with insurers, find they can self-insure more efficiently by transferring the exposure and premium from the carriers.

Pacific

The Australian insurance market has once again been hit by significant NatCat events in the first quarter, with insured losses from the Queensland and New South Wales floods expected to exceed AUD2 billion. While claims have largely been driven from residential, and small-to-medium consumer businesses, the financial implications are likely to weigh heavily on the profitability of insurers in the region. This may potentially slow the recovery of the insurance market, which had shown signs of moderating in the last quarter of 2021.

The first quarter for energy and power related accounts in the Pacific is generally slow, with the largest concentration of renewal activity in the second and third quarters of the year. However, year-to-date renewal results have reflected the continued improvement in market conditions, with most clients seeing low to moderate increases in the range of 5%-10%. The general consensus from most insurers is that pricing has reached pricing adequacy levels, and insurers are content to maintain premium levels for well performing accounts.

There are signs of new capital entering the market, all looking to establish offices in Australia. Some existing markets that had previously stepped away from large, complex risks, have indicated renewed interest. While these markets are unlikely to lead business, the additional capital will help alleviate some of the capacity pressures within the region. AIG’s announcement to gradually phase out of existing coal-fired business provides some clarity for established power plant operators in Australia.

Inflationary pressures and the resulting impact on the validity of declared values, as well as understanding clients’ ESG or energy transition plans, are the main themes resonating with most insurers. Almost all insurers want to understand what measures are being taken to ensure that the values being declared are adequate. This may be viewed as insurers trying to find ways to supplement declining premium increases. While this may be partially true, for operators having the right values ensures that limits and sub limits are adequate and appropriate. Similarly, insurers want to understand how clients are approaching ESG within their business. While this is yet to impact clients in terms of securing capacity or pricing, it appears inevitable that this is where the market is heading.

For renewable energy, the first quarter has continued the positive trajectory from 2021. There are significant volumes of wind, solar, and BESS projects either being executed or in the pipeline. The Australian market is gaining more confidence in its ability to underwrite these projects, with steadily increasing competition beginning to impact rating. For existing business, the first quarter has seen mostly flat to low single-digit increases. Hydrogen is an emerging technology locally, with several small-scale projects being developed. It will take some time for markets to gain scale of knowledge and experience; for now, markets are pricing in this uncertainty around their risks and exposures.

Asia

Upstream insurance markets in Asia continue to remain resilient — to date, we have not seen any post-sanction market ramifications, although several insurers have announced plans to withdraw from Myanmar. Underwriters are instead looking optimistically to potential growth factors in light of the oil price uplift, and an expected increase in drilling activity across the region.

Activity in the offshore construction segment has increased, although harder market conditions continue, with increased insurer focus on subcontractor quality, marine warranty surveyor requirements, and projects where the subsea works reflect a notable percentage of the overall project value.

There has been no significant change in the underwriting approach over the last quarter for operational risks.

There has been an expected shift from hard to more stable market conditions in the downstream sector, and we expect this trend to continue. Market capacity is increasing, and several markets have offered competing terms in an attempt to ensure favorable account signings. The focus on business interruption continues as inflation concerns impact asset valuation, and underwriters are expecting the sums insured of programs to be adjusted accordingly.

In the power sector (excluding coal-fired plants), operational markets continue to exercise underwriting discipline. However, we are seeing indications of an improved marketplace for clients, with greater flexibility in pricing and capacity on quality plants with good claims records. The situation for coal-related placements, especially newly commissioned coal plants, is extremely challenging. The dynamic has been highlighted with AIG’s recent commitment to phase out its participation in coal-related business. This reduction in capacity will further impact both pricing and limits for insureds.

In the renewable energy sector, capacity, coverage, and pricing continue to be challenging for both offshore and onshore placements. This is mainly due to concerns about NatCat exposures that have seen markets experience losses. However, renewable energy holds great potential for new market entrants to emerge, and any new capacity will aid in de-risking the energy transition for stakeholders in Asia.

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