Still struggling for profitability: a Power underwriter’s view of the market

As the loss record for power risks continues to deteriorate, we asked Rokstone’s Ian Green (IG) to speak to us about some of the key drivers that he is seeing in the power market in the second half of 2023. Ian is Head of Power at Rokstone and is one of the most experienced power underwriters currently operating in the London market. Asking the questions were Declan Cleary, Broker, Power and Utilities, Natural Resources, WTW London (DC), and Carlos Wilkinson, GB Head of Power & Utilities, Natural Resources, WTW London (CW). The following is an edited transcript of their conversation.

DC: Ian, In general terms, how profitable do you think the Power portfolio is now across the global insurance markets? Have the premium increases imposed over the last few years enabled insurers to attain technical rating adequacy?

IG: Given where we are in the underwriting cycle, a stage which is supposed to be near the top of a market which only recently ended a decade and a half of sliding rates and/or terms, I think profitability has barely been restored. Perhaps it’s more apparent in London where smaller, more specialist units, particularly Lloyd’s syndicates, tend to be assessed more on annual results in a sector that experiences both attrition and severity? I’m not sure other markets see such a wide spread of worldwide risk. Furthermore, local markets write this class into general property portfolios and do not necessarily have the quantity of risk to be able to spot individual issues or generate sufficient statistics to be able to accurately price and/or term individual risk. It can be a major challenge for technical underwriters writing a portfolio in this class.

DC: So in the London market, can this be seen in the different attitudes between Lloyd’s and the company markets?

IG: Smaller company insurers, operating with technical expertise, are exposed to the same issue as Lloyd’s syndicates; more focus on annual results and more difficulty spreading results across portfolios and time. I would also argue that this is most apparent in the purchase of reinsurance treaty where multi-nationals have significant economies of scale. It is easier in small operations where the whole chain of decision-making and authority is shorter and closer “to the sharp end” to see market dynamics and feel results closer to real time.

CW: In terms of those London players who you believe know their books in detail, what do you think their mood is like at the moment?

IG: I would say there is undoubtedly concern at the levels of pricing/terms, particularly because recently the sector has seen a number of additional challenges, some brand new and some returning to prominence. Not necessarily in any order, I would include:

Physical Damage (PD) deductibles: these have not moved with inflation, and in many instances, a “typical” deductible for a specific item of equipment is largely unchanged in two decades. For example, a “typical” US$1 million deductible on an F-class turbine was the same US$1 million in the early 2000’s. You don’t need me to explain that rates would need to be increased to maintain a level return.

Business Interruption (BI) deductibles: these are almost always set as a number of days, so the same dynamic doesn’t apply here. However, there has been huge volatility in certain power markets/grids leading to large increases in sums insured and resulting in a number of disproportionately large claims. The challenge is to keep in tune with the rapid change in dynamics in many different markets using rating models are not evolved to properly deal with these.

Valuation of assets: this is a constant issue but is certainly a “hot” one at the moment. Perhaps because it has been somewhat neglected in the past few years with more pressing challenges, but also because inflation of labour and material has taken off. Insurers are seeing this in many, but not all claims. Most large and/or complex equipment is homogeneously priced independent of its operating territory, although this is not always the case with some materials and particularly labour, where there can be very different costs and inflation rates depending on territory.

Supply chain issues: this is possibly the biggest short-term challenge. All of our insureds are exposed to this to some degree. Many report that delivery times for large items of equipment have doubled. This also extends to repairs, refurbishments, maintenance, etc. While in many cases there can be some level of expedition in a loss scenario, this issue increases not only the BI but the PD quantum of a loss. The largest items of equipment tend to have the least opportunity to expedite and, of course, have a larger BI quantum attached to them. This is a frightening scale of change.

Humans: particularly in territories that are seeing the most rapid transition to less carbon-intensive generation and grids, there is a shrinking pool of experienced staff, despite efforts to expedite or create speciality training. Training for a career path to be a senior operator or manager at a large thermal facility has long been an unattractive choice for young and mid-career staff! But with rapid, large-scale deployment of renewables, particularly wind, there are shortages of qualified technicians and engineers in these areas too.

DC: Do most insurers have a set rule of thumb, such as the BI rate should be a multiplier of the PD rate?

IG: Unlike many general property placements which carry a rate against the total sum insured, for many years, power underwriters have used BI multipliers to attempt to more accurately price BI coverage, and I think there are some rules of thumb out there. Whether these are entirely accurate is another matter.

DC: Having worked at a number of shops in your career and ones that are quite different in approach, you will have seen a number of rating approaches first-hand.

IG: Yes, without mentioning names, I’ve seen some very different approaches to “pricing/rating” models and systems and had the opportunity to see first-hand how many different underwriters, including myself, use them in the real world.

I’m experienced enough (just) to have used the Fire Offices’ Committee rating on UK risks, which for many trades (but not power) had a level of data collection and rating sophistication that would surprise many younger underwriters.

As an overview, I would say that at first glance, rating our class should be relatively easy compared to many, including general property, because of the high level of homogeneity of the risk types we write: there are only a few styles of plants and very similar equipment, steam plants, gas turbines, hydros, etc., all using very similar or identical ancillary equipment and grid systems.

However, a large part of our exposure is machinery breakdown, a world where small differences and details can create very different outcomes.

By “pricing/rating” I really mean the whole deal”, i.e., pricing, deductibles, limits, and terms.

The basis of any rating model is historic data collection and its statistical analysis. The first challenge for all heavy industry is that for much of it, there are barely enough units of insurance to achieve statistical validity. In power, I would say that the homogeneity I have mentioned gives us an advantage in this area, but insurers need to be insuring or having oversight of a good portion of the world’s power plants to achieve this.

Accurate fine-tuning of this becomes more difficult as small variables between ostensibly similar plants and equipment rapidly reduce the applicable pool of statistics. For example, two “identical” size CCGT’s using the same major equipment or the same age in similar locations can have wildly different underwriting exposures depending on many factors, from historical operation regimes to upgrades to turbines, maintenance, etc., etc. a long list. Although there is not much variation on the face of it in our business, when you get down to the details, there is significant critical variety between different models, operating regimes, and so on.

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