Despite Claims, Utilities’ Insurance Market Still Softening

Insurance rates in the power sector are expected to soften further in 2010, despite the existence of many of the conditions that would normally presage a hardening market, according to the latest Power Market Review from Willis.

Foremost among these conditions is the steady stream of losses associated with generating equipment. Insurers continue to be beset with attritional machinery breakdown claims, especially for combined cycle gas turbine failures, while “mega claims” (defined as a claim of more than $100 million) seem to be an established feature of the power sector. Over a 10-year period ending in 2008, such claims accounted for only 3 percent of the total number of losses, but 43 percent ($4.2 billion) of total loss value.

The “mega claim” trend continued in 2009, the report noted, with a catastrophic turbine failure at the Sayano-Shushenskaya hydroelectric power station in Russia, followed earlier this year by the explosion at the Kleen Energy combined cycle plant under construction in Connecticut. If 2010 follows the pattern of the last decade, Willis says another mega claim can be expected before year’s end.

“In the absence of major natural catastrophes, loss levels were significantly lower in 2009 than in prior years. However, insurers were presented with additional volumes of machinery breakdown losses, particularly involving gas turbine technology, plus a number of less predictable loss events,” said Graham Knight, managing director of the Willis Utilities Practice Group. “This may have caused some underwriters to incur an underwriting loss on their power book in 2009, notwithstanding the healthier position of much of the rest of the market.”

Despite this loss trend, a hard market failed to materialize in 2009 and soft market conditions persisted through the first half of 2010. Surplus capacity and reduced customer demand, attributable to the global recession, have largely prevented underwriters from increasing rates to the level that many feel is merited, according to the report. Willis predicts that absent any market-turning events, power sector insurance rates will continue to ease.

Other findings from the Willis Power Market Update include:

• Recent events in the Gulf of Mexico are strengthening the case for alternative, “clean” energy resources.
• Global property market capacity for power risks is at an 8-year high of $4 billion.
• Renewable energy represents the fastest growing source of power generation worldwide. The size of the wind market has grown from 60 gigawatts to 130 gigawatts between 2005 and 2010. The solar market currently stands at 10,000 megawatts. In 2008, wind power (onshore) in Spain generated more electricity than coal for the first time.