Regional Market Trends Q2 2021

Asia

The second quarter of 2021 was one of the most active policy renewal periods in Asia. The renewals during this period saw more stabilized results, characterised by a more consistent approach to capacity deployment from markets. Although rate increases still occurred, there was more consistency in the approach by insurers on the scale of increase and the terms needed. The period of insurers attempting to return terms to what they perceived to be acceptable levels is nearing an end, and insurers are now focused on consolidating their positions.

New capital entered the power insurance market, and while not hugely significant in terms of overall size, the extra capacity assisted in levelling costs for clients by removing the need to use opportunistic capital.

The power construction market remained challenging, with many projects requiring extensions due to delays in completion. These delays were largely a result of the COVID-19 pandemic, which interrupted supply chains, both in terms of materials and labor. Insurers, too, have found themselves in a difficult position, having to offer extensions for a line of business that they have either chosen to exit, or where their underwriting or ESG guidelines have materially changed. Many insureds continue to experience significant period extension premiums, driven by the current circumstances and an inability to source alternative capacity.

The renewable energy sector is still running hot, particularly in countries where incentives are being offered to develop new projects. The most active countries include Vietnam, Taiwan, and Japan, with a significant volume of new projects coming to market, including offshore, nearshore, and onshore wind, as well as solar and battery storage. Interest in gas-to-power and hydrogen projects is increasing as developers look at alternatives fuel sources for their energy transition. Though they are at their initial developmental phase, interest in these technologies indicates the emergence of a key investment sector for the insurance markets in the coming years.

Middle East & Africa

Following the global trend, there are clear signs of a plateau to challenging market conditions from both international and regional carriers in the Middle East. Many placements are being completed at significantly lower rate increases and moderate oversubscription.

The market has continued to show resilience in terms of local capacity and is proving to be a key contributor to wholesale placements internationally. While a few lead international markets have withdrawn, the regional insurers have continued to adapt and consolidate, with strong contributions to non-Middle East placements in recent months. Local carriers are keen to maintain their position, with a noticeable shift towards further flexibility of terms and conditions, in order to balance budget expectations in an increasingly competitive marketplace.

The influence of MGAs is becoming an important factor in the region, with several continuing to grow and thrive on the back of positive results in 2020. This trend is likely to continue as certain MGAs now retain large capacities and are becoming relevant drivers of global capacity expansion in the energy and power sector.

There is renewed interest in captive solutions from both national oil companies and privately owned corporations based in Dubai, Abu Dhabi, and Saudi Arabia. Traditionally, organizations with capital intensive assets, that require high levels of insurance capacity, are most impacted when the market is challenging. Despite the improving conditions, policy terms continued to tighten and rates remained at an all-time high, leading these types of operators to seek alternative means of risk transfer. Most captive buyers hold strong balance sheets, which allows the captive to access the parent capital in the event of a single large loss during the coverage period.

United Kingdom

The UK hosted the G7 meeting in June, and climate change was a key agenda item. The pledge to provide USD100 billion per annum in climate change assistance to poorer countries was reaffirmed, along with a pledge to end the funding of coal-fired generation. These are positive signs of support for energy transition, and there is no doubt that the UK government sees the insurance industry as having an important role. Marsh was pleased to participate in a recent discussion with the Financial Conduct Authority (FCA), the financial services regulator, about the changes we are seeing in how our clients and insurance markets are addressing the broad ESG issues. Marsh supports its clients as they progress towards a responsible energy transition.

Against this background, it’s unsurprising that over the last year some London insurance markets have signalled their intent to reduce underwriting of carbon intensive industries. Increasingly, capital is being directed towards developing new and diversified ESG products, and additional capacity is being made available to underwrite renewable energy and ESG “friendly” projects. There is a growing appetite from the upstream energy market looking to diversify into offshore wind, which will add significant capacity, improve competition, and may limit the price increases being sought by traditional markets for these risks.

In fact, London continues to be an attractive environment for capital raising in the insurance sector and the establishment of underwriting platforms. Newly established insurers have attracted further underwriting talent as they selectively grow the number of classes in which they want to operate as a leader. At the other end of the spectrum, there is growth in the number of algorithmic-based underwriting vehicles. This enables carriers to have separate lead and follow capacity, which may be a more efficient model in the subscription market.

While capital is flowing towards energy transition initiatives, there is continuing interest in the mature oil and gas sector. Some of the oil majors are divesting of their older North Sea operations as they reposition their asset bases to energy transition. These assets have a strong attraction to new entrants, also often backed by private equity vehicles, which are then looking for broader insurance protection for their business. This will often include tax protection products and surety solutions, which would not have had traction with the former owners.