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 2 https://www.chubb.com/bm-en/chubb-bermuda-benchmark-report.html , 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
  • Cyber

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.

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