Risk managers in the power sector must navigate a new risk landscape brought about by the Russia-Ukraine conflict, global inflation, the energy transition, and climate change, according to the 2022 Power Market Review from WTW.
With power insurance prices continuing to rise, risk managers must balance these risks while ensuring that they have determined correct asset and business interruption valuations against the backdrop of global inflation.
This is a challenge which WTW notes many risk managers have not yet faced over the course of their careers.
The Review highlights these, and other new challenges for the power sector, which range from the technological to the geopolitical. It also considers the current state of the insurance market for power risks.
WTW observes that most power insurers have eliminated Russian exposures from their portfolios. Many have reduced or eliminated cover for coal-fired plants and other risks they deem to emit unacceptable levels of carbon.
The Market Review suggests the total global theoretical insurance capacity for power risks is approximately $3.5bn in 2022, with a realistically deployable level in the region of $1.5bn. For coal assets, the total falls to $250m and is significantly less for new coal risks.
The frequency of individual losses of more than $1m is trending upwards and has reached a three-year high in 2021, says WTW.
Total loss costs are set to equal or exceed total premium income for power risks in 2022, with a dozen losses of more than $20m already reported.
As a result of rising losses, rating increases of at least 2.5% and up to 20% can be expected in Q3 of 2022 states WTW, for all but a handful of risks with a clean loss record and all assets located in areas of low natural catastrophe risk.
Graham Knight, WTW’s Global Head of Natural Resources, said, “One issue above all is of immediate concern to our clients: determining correct asset and business interruption values.”
“Our message to the industry on this topic is quite simple: it is vital that a more transparent understanding of how insured values are calculated is communicated from buyer to broker to insurer.”
“When this is achieved, buyers will see greater price stability. Better valuations will reduce the likelihood of repeating the large price swings between hard-and soft market conditions that we’ve experienced so often in the past.”
Knight continued, “in the meantime, power insurance markets continue to harden still further, for two fundamental reasons. First, the sector still suffers from a disappointing loss record.”
“Second, the pool of leading insurers remains relatively limited compared to previous underwriting eras. The following market is generally more willing to accept their terms, but momentum is insufficient to reverse the market’s overall upwards rating trend.”