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ENERGY & POWER NEWSLETTER

Regional Market Trends Q1 2021

Update on energy market trends in Asia and the Middle East.

29/04/2021 · 5 minute read

Middle East

The Middle East market continues to follow global market trends where we see clear signs of increased appetite, especially in the downstream and power sectors. This is reducing market volatility in some areas where the pace of market increases are slowing in modest increments. These changes are not happening organically, and renewal planning needs early engagement with a much more detailed requirement for premium and claims data.

The shifting strategies of global insurers, which has defined the recent period of change in the Middle East market, have had both expected and unexpected consequences. With fewer international markets in the region for upstream, downstream and power business, there is a greater need for regional clients to partner with London and European insurers— a trend we identified in the January 2021 edition. However, there has also been a growing appetite from a handful of leading insurers in Asia to secure a portfolio in the Middle East. This is positive for clients seeking to expand the global market participation for their programs.

An unexpected, but positive, outcome of some international carriers withdrawing from the region, is the availability of talent that domestic markets can use to strengthen their underwriting teams. The growing talent in many of the international arms of the local cedants, as well as the managing general agents (MGAs), has improved their capabilities across energy, power and construction.

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Asia

The first quarter of 2021 has seen a continuation of the market trends and conditions that existed in Asia towards the end of 2020.

In the upstream market, underwriters are maintaining their discipline and focus on portfolio profitability. However, they are also showing an increased willingness to retain existing accounts, which reflects the reduced activity across the industry. In an effort to reduce acquisition costs, renewal accounts are seeing rate increases alongside offers of prompt payment discounts and renewal incentive bonuses.

While offshore construction rates have increased significantly in recent years, appetite remains for new projects, especially where the estimated contract values (ECVs) are in excess of US$1 billion. However, there is a high level of scrutiny of the terms, and anything that veers away from the ‘market standard’ may require a global broking strategy to ensure that the required levels of capacity are available. Smaller projects, and those that are purely subsea focused, continue to incur higher rates and more restrictive conditions, reflecting the level of attritional losses seen in prior years.

The downstream market in Asia tends to react more slowly than the London market, and the hard market cycle regionally is continuing, influenced by the losses incurred during 2020. The market also remains slow, hampered by continuing work from home requirements. Allowing longer lead times to manage renewal negotiations remains important, in order to secure the most commercial terms available. On a positive note, the quantum of rate increases is starting to reduce, particularly for accounts with good loss and claims history. To date there have been no major regional losses in the downstream market in 2021, which would seem to favour a continuation of the downward rating trend.

In the power sector, insurers continue to seek rate increases for all renewals, with few exceptions. Insureds that have suffered losses, or who are exiting long term agreements, are often experiencing significant price rises. Coal-fired power risks, particularly those combined with NatCat exposures, are continuing to face significant capacity challenges. Some smaller, complex power risks, such as waste-to-energy plants or run-of-river hydro, are also challenged, with a general lack of market appetite resulting in limited capacity. Conversely, on programs where rates have moved to insurers’ levels of price adequacy, there has been moderation in the level of increases, with no changes to other terms and conditions.

The claims trend from 2020 has continued into the first quarter with further losses in the power sector, involving several large machinery breakdown claims. While not yet fully materialized, these losses are sure to again focus insurers’ attention on risk quality and risk management.

An interesting fact which is representative of market conditions in Asia, is that almost all power placements have remained with their current lead insurers. Rarely have new insurers assumed the lead role, and often this has been necessary as the previous lead insurer has withdrawn from the power sector or is unable to continue to offer capacity due to a change in underwriting guidelines. This illustrates the continued focus by most power insurers on bottom line profitability rather than revenue growth.

Domestic markets in Asia remain competitive compared to international reinsurance markets, particularly for power or renewable energy risks that can be written within their local treaties. In some domestic markets, like Vietnam, Taiwan, and Korea, local insurers are having to fully assume power risks, as international reinsurers are unable to meet the competitive terms available locally. It is uncertain if this situation is sustainable over the longer term, particularly when the low power sector premium pools locally are impacted by losses.

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