Power sector faces rising rates and a new risk landscape – WTW

Risk managers in the power sector must tackle an entirely new risk landscape brought about by the Russia-Ukraine conflict, global inflation, the energy transition, and climate change, according to WTW.

In its 2022 power market review, WTW says that as power insurance prices continue to rise, risk managers must juggle these risks while ensuring that they have determined current, correct, and sufficient asset and business interruption valuations against the backdrop of rising global inflation, a challenge on a scale some have not yet faced during their careers.

The challenges for the sector range from the technological to the geopolitical says WTW, and include the management of physical and transition risks, ways that modelling can support the risk process, directors’ potential liabilities arising from climate change, and the introduction of hydrogen as a fuel for gas turbines.

WTW’s power market review also considers the current state of the insurance market for power risks. It found that most power insurers have eliminated Russian exposures from their portfolios, and many have reduced or eliminated cover for coal-fired plants and other risks which they deem to emit unacceptable levels of carbon. That has introduced an increased appetite for other power risks.

It also details that total global theoretical insurance capacity for power risks is approximately US$3.5bn in 2022, with the realistically deployable level in the region of US$1.5bn. For coal assets the total falls to just US$250m and is significantly less for new coal risks.

The frequency of individual losses in excess of US$1m is trending upwards and reached a three-year high in 2021. Total loss costs are set to equal or exceed total premium income for power risks in 2022, with a dozen losses in excess of US$20m already reported.

Graham Knight, global head of natural resources at WTW, said: “One issue above all is of immediate concern to our clients is 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 added: “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.”

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