Spring 2021 McGriff Market Update:
Energy & Utilities
As we continue through the second quarter of 2021, we’re now beginning the second renewal cycle during the pandemic and the third or fourth renewal (depending on the class of business) in a hardening market. While unknowns persist on what our new normal will look like and when we will arrive there, insurers have a better grasp now on the effects of the pandemic on their results.
For power and utility clients, the underwriting focus has largely returned to pre-pandemic factors as markets seek to stabilize their books of business.
There will continue to be challenging renewals for certain classes of business [e.g., coal, renewables, and heavy Catastrophe (CAT-exposed accounts)] and certain lines of coverage, such as excess liability. However, for power and utility clients, the pace of hardening in the market overall is slowing.
Due to the natural weather patterns in the U.S., we don’t usually see the effects of large weather events in the first half of the year that we see in the second half. That was not the case this year with the Texas winter storms, which created havoc for both insureds and insurers. Karen Clark & Co., a catastrophe modeling agency, has estimated insured losses to be in the range of $18 billion from those February storms. Disclosure 1
The overall impact on the property market from power/utility insureds will be relatively small compared with potential liabilities. Hundreds of lawsuits have been filed against the Electric Reliability Council of Texas (ERCOT), independent power producers, and Texas utilities that could trigger both liability and D&O policies. These claims will be litigated contentiously, and the final impact will not be known for some time.
After significant hurricane and wildfire seasons in 2020, insurers are closely monitoring projections for 2021 and will likely be reactionary (in terms of pricing and capacity) to any significant development in activity. After below-average precipitation and temperatures in March for the western United States, the National Significant Wildland Fire Potential Outlook projects “above normal significant fire potential” for several parts of the country in the West.
The National Oceanic and Atmospheric Administration (NOAA) will release its hurricane outlook in late May, but other agencies are already predicting an above-average year. Due to the uptick in recent activity, NOAA adjusted its seasonal averages to capture a shorter period of time, which better reflects the current climate, NOAA officials say. The average Atlantic hurricane season includes 14 named storms, seven hurricanes, and three major hurricanes, according to NOAA. The 2020 hurricane season saw 30 named storms, 12 U.S. landfalls and six major hurricanes.
The effects of the pandemic are still prevalent in our daily lives, though the underwriting impact has largely tempered for power and utility insureds. “COVID-19 exclusions” and other pandemic exclusions appear to be here to stay for the property and liability markets, though pricing increases are closely tied to non-pandemic factors facing our industry.
Social inflation remains the hottest buzzword in the liability space as markets reckon with a higher frequency of severe losses. According to a 2021 Chubb Bermuda report Disclosure 2 , loss costs have increased by 50% over the past decade. The excess casualty market for power and utilities has seen nearly $100 million in capacity exit the market since the start of 2020 due to poor results. Until there is a significant entrance of new capacity, insurance buyers are likely to continue to face pricing pressure.
Since most power markets no longer offer California wildfire coverage, attention has now shifted to surrounding states. Insureds in western states should be proactive in sharing fire mitigation and vegetation management efforts with their liability insurers in order to avoid sub-limits and exclusions for wildfire.
AEGIS continues to look for rate increases into 2021 and has communicated a target of 15% on clean accounts for the year. In response to the wildfire exposure of their membership, AEGIS developed a scale to add a wildfire premium load to the existing exposure rating. The scale ranges from $350,000 (lower wildfire risk) to $1 million (high wildfire risk). For insureds that have incurred wildfire losses in the past 20 years, AEGIS will utilize an experience rating in lieu of the sliding scale. There have been no recent changes to AEGIS capacity, though the company has seen a significant increase in members purchasing limits above $35 million.
Similarly to AEGIS, EIM remains more stable than the commercial excess liability market. After reviewing their California wildfire position in 2020, EIM put seven additional states under the microscope due to challenges in their reinsurance. The insurer will look to sublimit wildfire coverage to $75 million in Washington, Oregon, Nevada, Arizona, New Mexico, Texas and Alaska. Wildfire cover in these states will carry an embedded charge but will not be broken out in the same method AEGIS is using. EIM will require additional underwriting information for insureds with exposures in these states, so proactive renewal planning is important.
As of April, NEIL had the ability to write directly through their new Bermuda operation, Cedar Hamilton. NEIL plans to follow the EIM wildfire sub-limits on a percentage basis. For example, if EIM provides a $100 million limit with a $75 million wildfire sublimit, NEIL will sublimit their wildfire to 75% of the total limit provided.
Bermuda and London markets remain the most viable options for coverage and pricing beyond the mutuals. However, about 25% of the Excess Liability capacity for utilities has evaporated in the past year due to markets reducing capacity or exiting the space entirely. While the exits from the space have slowed in 2021, markets continue to look to reduce their line size. Markets are pushing for significant pricing increases (20%+) on smaller line sizes and extreme pricing increases (40%+) in order to maintain expiring limits.
While California wildfire is a key contributor, significant losses related to gas leaks/explosions, pollution, and Auto Liability have decimated results in the excess liability market. Replacing lost capacity will prove difficult due to a lack of new entrants willing to insure midstream, utilities at competitive terms, and a smaller pool of markets willing to attach below $200 million. This has made it more difficult to achieve limits greater than $650 million, however it can be done with careful planning and a willingness to pay much higher rates to complete the tower. The hardening of the excess liability market is slowing but remains the hardest we’ve seen in decades:
- Markets will seek 20% to 100% rate increases on renewals
- 50%+ rate increases for non-traditional capacity in excess of $650 million
- Markets willing to walk away from accounts if desired increases are not achieved
- Continued evaluation of minimum rates/premium
- Continued evaluation of minimum attachments
- Sub-limits or exclusions for California wildfire
- Cyber and pollution coverage restrictions
- Communicable disease and COVID-19 exclusions
- Key exposures of concern:
- Wildfire & Vegetation Management
- Gas Pipelines
- Coal-Fired Generation & Ash Ponds
For the near future, utility clients should not use the past as an indicator for budgeting or retention/limit strategy as we enter a “new normal” in the excess capacity space. Detailed submissions, advanced marketing timelines, and frequent communication with incumbent markets will be imperative to mitigate the challenges associated with the current hard markets.
The hardening of the property market began in 2019, accelerated through 2020, and has sustained momentum so far in 2021. Severe weather (as noted earlier with hurricane and wildfire activity) has played a factor but is not the sole cause. Despite one or two renewal cycles of pricing corrections, many markets have still not been able to achieve sustainable results. 2021 has not seen capacity exit like the previous year, an encouraging sign, but the message from the markets is that many fear their books could still be closed if results are not consistently improving. Key areas of concern for power/utility/midstream property insurance include:
- Coal generation: As part of the “Unfriend Coal” movement, many markets are unwilling to insure standalone coal, new coal or fleets with high concentration of coal
- Technology concerns related to LMS100, 7FA, HA, and others
- New and emerging technologies: GE 9FB, HA Stage 1 bucket, battery storage, fuel cells
- Cyber: London and most U.S. insurers are only providing limited resultant damage coverage for the perils of fire, explosion and machinery breakdown; may come with additional AP to maintain
- Pandemic-related challenges in the supply chain, such as obtaining spare parts and performing routine maintenance/inspections
- Communicable Disease and COVID-19 Exclusions
- CAT-exposed risks
- Wind and solar
Renewable insurers face a challenging time as losses for operational and construction risks have outpaced premium increases. In response, several markets have pulled capacity from MGAs as they review their position to offer capacity directly to renewable clients. While there can be benefits to having multiple markets participate on a placement, capacity restrictions have made it uncommon for markets to insure 100% of a program, which leads to more programs with differing terms and conditions.
AEGIS has hired an experienced renewables team that will look to increase their participation in the renewables space. Soft-Cat, including hail, lightning, tornado and now wildfire, is a key factor in the losses and is commonly receiving the same scrutiny as traditional Cat perils with higher deductibles and lower sublimits. Along with industry partners, McGriff Energy will be offering a series of educational opportunities for renewable owners and developers to explore the mitigation opportunities for Soft-Cat perils.
The industry mutuals (AEGIS, EIM, NEIL) continue to lead or support many property programs for the utility/power/midstream space. The mutual structure has allowed a more conservative approach compared with the commercial market. Results are bolstered by lower expense ratios and a lack of pressure to deliver profitability to shareholders. AEGIS will be introducing their new property form this summer. US Domestic Markets, Lloyd’s markets and other foreign insurers continue to offer meaningful capacity to the traditional power/utility/space, but few markets remain that can challenge the industry mutuals as a market leader.
The information, analyses, opinions and/or recommendations contained herein relating to the impact or the potential impact of coronavirus/COVID-19 on insurance coverage or any insurance policy is not a legal opinion, warranty or guarantee, and should not be relied upon as such. This communication is intended for informational use only. As insurance agents or brokers, we do not have the authority to render legal advice or to make coverage decisions, and you should submit all claims to your insurance carrier for evaluation. Given the on-going and constantly changing situation with respect to the coronavirus/COVID-19 pandemic, this communication does not necessarily reflect the latest information regarding recently-enacted, pending or proposed legislation or guidance that could override, alter or otherwise affect existing insurance coverage. At your discretion, please consult with an attorney at your own expense for specific advice in this regard.
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