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Insider In Full: Maturing renewable energy market balances growth with sustainable pricing

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  • Topics:
    • ESG
    • Rates
    • Renewables
    • Topical Trends

Underwriters in the renewable energy market are striving to maintain underwriting discipline amid an influx of capacity to the sector fuelled by...

Samuel Casey

 

 ...growth opportunities and the increasing importance of ESG initiatives, Insurance Insider understands.

Sources told this publication that rating acceleration in the renewables market had markedly decreased throughout 2021, following a period of substantial correction from the soft market conditions of four years ago.

However, underwriters cautioned that the market could not allow an influx of capacity to derail remediation efforts, and that underwriting profitably would be vital as the industry looks to support the accelerating shift to sustainable energy.

Rates were moving upwards at between 30%-40% last year, but are now understood to be growing between 10%-20%, with sources predicting that pricing would continue to flatten out.

A series of MGAs have entered the sector in the past year, as well as established insurers that see the class as a long-term growth opportunity that can eventually replace income from fossil fuel-based energy business.

“It is disappointing because candidly the market still has some way to go before it resets itself,” one source said.

However, new reinsurance capacity is being offset by a surge in submissions and opportunities for new business from cedants, as the energy transition globally picks up pace.

“There is so much opportunity that if something does not make sense for us you can move onto the next one,” said Brian Tyluki, a senior underwriter at GCube. “You can pick and choose your battles.”

An unusual dynamic is at play in the renewables market, with capacity entering the sector out of a wish to participate in a line of business with huge growth prospects, as well as satisfying ESG agendas.

But with the London and European market only just having achieved profitability in 2020, according to Willis Towers Watson, and some sub-segments still challenged by loss activity, underwriters warned that incoming capacity could forestall further remediation efforts.

“It is frustrating and I hope it does not derail the progress that has been made,” one senior underwriting source said.

But brokers stressed that the growth opportunities in renewables were so substantial that increased capacity was required to support its expansion, with increasingly dire warnings about the impact of climate change hastening global efforts to transition from fossil fuels.

Underwriters also voiced optimism about the growth prospects in the class.

“There is significant investment and significant amounts of premium that will be generated, and if the lessons that have been learnt continue to be consistently applied then it is a massively exciting time,” said offshore energy underwriter at Allianz Global Corporate & Specialty (AGCS) Adam Reed. “It is only going to grow and grow I think.”

According to the International Energy Agency, renewables are expected to account for 70% of 2021’s total $530bn investment in new power generation.

  

 

One broking source said that current discussions with underwriters were like “picking from a menu”, as carriers decided where to target their long-term growth ambitions.

Offshore wind in particular is expected to require substantially more underwriting capacity, and the scale and value of the projects, with limits of up to $1.5bn, is likely to attract traditional players in the offshore oil and gas market, especially as existing oil and gas clients are now investing heavily in renewables.

Lead markets in the renewables sector include Axis, Allianz, Axa, RSA, GCube, and Munich Re.

A maturing market

Various sources said that the renewables market was undergoing a process of development, with the market coming to terms with risks and exposures in the relatively new class of business.

Natural catastrophe exposure in particular has been identified as an area that needs to be addressed, with huge claims having stemmed from wildfires, hailstorms and the Texas freeze.

The severe cat claims hit the market following a period of sustained soft conditions, and have strengthened the resolve of underwriters to push for improved rates over the past three years.

Carriers are introducing natural catastrophe sub-limits and upping deductibles in order to mitigate the risk of catastrophic losses.

Aggregations of solar power in US states such as Texas and California are large, and the assets are particularly vulnerable to catastrophic events, requiring exceptionally careful underwriting.

In addition, renewable assets have resulted in far higher levels of attritional losses than occur in the traditional energy market, which has already resulted in significant adjustment in deductibles in the past year.

There has been a shift away from large line sizes, and where carriers in the past may have covered 100% of smaller risks, now a line of 30% to 40% is more common.

It is understood that Lloyd’s is introducing specific risk codes for the renewables sector, which will shine a light on the true profitability of the renewables as a standalone class.

The renewables market in the past has seen significant fluctuations in capacity, with carriers opportunistically joining the market but leaving when losses mount.

But sources speculated that the current influx of capacity was likely to be more long-lasting, owing to the scale of underwriting opportunities and the ramping up of ESG pressure in the industry.

Supporting the energy transition

On an industry-wide level, the insurance market has demonstrated increasing determination to play a leading role in the global transition away from fossil fuels with a spate of initiatives, reports and committees launching in the past year.

Last month, Lloyd’s published a report detailing the steps it was taking to support a sustainable future, including underwriting new sustainable energy sources, and reducing its exposure to fossil fuels over time.

Campaigners have already pinpointed insurance as an area ripe for targeting, and disruptive protests have been held outside Lloyd’s and company offices.

Whether or not the protests have been a driving force, in recent years there has been a concerted shift away from underwriting the most polluting fossil fuels, namely coal.

Marsh said in a recent report that the traction of ESG initiatives was being reflected in rating momentum of power accounts including coal, which were attracting rate increases in excess of 40%.

Sources speculated that the same impact would eventually start being felt in the oil and gas markets, and that capacity was likely to move towards renewables.

 

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