COMPETITION AND MARKET LANDSCAPE UPDATE - A VIEW FROM LONDON

It's no secret that the renewables insurance market continues to walk a tightrope between supporting the energy transition and maintaining a sustainable business. This was first outlined by GCube’s CEO, Fraser McLachlan, in his Autumn 2022 “Competition and market landscape” update, published when the Ukraine war, and subsequent European energy crisis were making front pages and driving uncertainty and change across the global economy.

Fast forward 8 months and that uncertainty continues to present new risks and drive ever-intensifying competition for business – both of which are combining to impact our insureds, the insurance market, and the way we do business. 

Unfortunately, efforts to re-price the market to keep up with new and ever-evolving risks have been hampered by an acceleration of new entrants shifting capacity into renewables. This has ultimately dampened rating momentum and created further challenges for our insureds looking to find the broadest coverage with the highest quality technical and operational support – at competitive pricing.

To ensure we’re providing our clients and brokers with the best possible services, these developments, along with other important market changes, require closer scrutiny. In this newsletter piece I track some of the recent developments in renewables insurance, discuss how we’re helping our clients and brokers navigate the changing weather, and provide my long-term growth outlook and things to look out for. 
 
New insurance players drive intense competition
 
Today’s new entrants to the renewables insurance market include large oil and gas insurers who are understandably following their existing clients into renewables, as well as larger insurers looking to capture market share and cash in on the longer-term profitability outlook of renewables. 
 
Due to their size, many oil and gas entrants are, however, more focused on the way they are positioning themselves in a world of ESG requirements and reputational risks, rather than pricing coverage correctly and providing the best support possible. As a result of this approach, some naively forget that insurance is a service-based industry. 
 
Commensurately, we believe that new insurance players entering through under-pricing strategies will soon suffer unsustainable losses and leave the market – as we have seen so often in the past, often leaving their insureds in the lurch in the event of a loss. 
 
The relative lack of book size underwritten by these newer entrants also means they don’t have the extensive data or expertise that can be offered by more specialised insurers. This results in inconsistent service and pricing models that conveniently ignore the technical and operational complexity of renewable projects. 
 
Adding to this challenge is the rise of reinsurance costs since Hurricane Ida in the US in 2021 and Ian in 2022, the latter of which was the third costliest hurricane in US history in terms of insurance losses. 
 
Because of those significant losses, the dynamics of the reinsurance market has changed, particularly for those that specialise in writing Nat Cat perils. As result of basic supply and demand, reinsurance is experiencing a hardening of rates as capital reduces, and Nat Cat reinsurance costs - an essential purchase for insurers financial credibility – are now increasing as high as 50%. 
 
Within today’s market environment, GCube is absorbing the majority of these increased costs without passing them on to our customers, partly due to the competitive marketplace, but mainly so that our clients and brokers can continue to enjoy the market-leading services and products we provide.
 
Offshore construction requires underwriting expertise
 
What GCube calls “naive capacity” can be most acutely seen in offshore construction insurance. While new oil and gas underwriters may have some experience in offshore construction, they may not fully appreciate the differences and nuances of renewable energy technologies. They are being attracted by the high premiums that are charged for offshore projects, without considering the potential losses that may arise, or striving to provide the highest quality services to their insureds. 
 
What’s particularly concerning is that offshore construction insurance is a very difficult and uncertain business, which in insurance terms is still in its relative infancy. It requires a high level of technical expertise, risk management and claims handling. One of the major challenges of pricing offshore wind insurance in particular is the lack of historical data and experience in the industry. The offshore wind market is relatively young and still evolving and requires long-term experience to understand how new risks will impact insureds. 
 
Fortunately, GCube has supported renewable energy for 25 years and has played a large role in generating the historical data required to understand these risks. 
 
Bigger turbines will impact new insurance players
 
At the same time, offshore wind turbines are getting bigger and more complex every year, which poses new risks and uncertainties – as outlined in GCube’s most recent market insights report, “Vertical Limit”. Unlike the marine industry, which has centuries of data and knowledge to base its pricing on, the renewables industry has only about 25 years of history which many would deem far too short a period to price the exposure effectively.
 
Many new entrants are now finding it difficult to determine the correct pricing and market cycle in this space. In a hard market for example, insurers would only cover the consequential damage from a design defect, but not the defective part itself. This is a more reasonable and fair allocation of risk between the insurers and the manufacturers. 
 
However, today, there are cases where new insurers are offering broad coverage with high limits of LEG 3 coverage (where both the consequential damage and the defective part itself are covered) for offshore turbines that haven’t even been fully developed or manufactured yet. 
 
This is risky and imprudent for new insurers, as they are exposing themselves to unknown and potentially huge losses. It also unfortunately demonstrates how competitive and irrational offshore wind insurance can be.
 
Nat Cat risks require re-pricing efforts
 
While insureds in the offshore space face the challenges of an insurance market in its relative infancy, the problem is compounded in the onshore market where increased exposure to Nat Cat, such as wildfire, hail and tornados, is creating further challenges. 
 
Nat Cat events can cause severe damage to onshore renewable projects, especially in areas like California and Texas, where episodes of extreme weather are more frequent and intense. We’ve just been notified of a new wildfire loss in the US which is likely to be one of the costliest incidents that the onshore market has seen to date. 
 
GCube, fortunately, is limiting its exposure through careful attention to insured’s vegetation management plans and other risk mitigation measures, which is helping them navigate the ever-changing and ever-increasing wildfire risk across the world. Again, “naive capacity” does not necessarily understand these risks and does not apply the necessary restrictions or pricing – an approach that remains unsustainable and exacerbates market cycle. 
 
Manufacturers must honour warranties 
 
Apart from natural catastrophes, we’re also continuing to see the usual mechanical breakdown losses, such as gearbox failures and cable faults. These have not changed much in terms of frequency or severity. However, they are often picked up by the clients' deductibles, which have increased over time, playing a part in the sustainability of the experienced risk carriers. Therefore, the main drivers of large losses for onshore renewable insurance are weather-related events that are hard to predict and prevent.
 
As many of you understand, there’s also the problem with financial difficulties facing wind turbine manufacturers, which are struggling to honour their warranties and are pushing back on paying for breakdown losses, making it difficult for us to manage our exposure and subsequently continue to provide the best service in this space. 
 
We are seeing more pushback from the manufacturers than ever before, and while we’re still unsure of how this will develop in the future, it’s become a matter of high interest for GCube. The basis of which the breakdown exposure is underwritten on is changing to the detriment of insurers because of manufacturers push back on warranty type issues. 
 
Contractors’ experience is improving
 
On a positive note, there have been improvements in the renewables sector that have reduced some of the risks and losses for insurers. 
 
One of them is the improvement in contractors' experience, knowledge and skills in installing renewable equipment, both on and offshore wind and solar. This has reduced the frequency of human error losses, which have been a major source of claims in the past. 
 
Another improvement is the advancement of the technology and the quality of the solar panels, which have become more reliable and efficient over time. However, this is not fool proof, and it depends on the correct operator maintenance to mitigate issues and equipment failure. 
 
We’re constantly working with our insureds on this, and we’re looking at ways in which we can better support our insureds that continue to make progress in these areas.
 
GCube remains in a strong position
 
GCube remains in a strong position to weather today’s changing market conditions. We have a large and established book of business that allows us to be selective and disciplined in our underwriting and pricing, as well as support our clients in the best way possible to navigate today’s changing risk landscape. 
 
We also find ourselves in the fortunate position of not being under pressure to grow our top line at the expense of our bottom line. Instead, we continue to be focused on following and supporting our existing clients, who are growing at great speed across a diverse spread of geographical locations. We are also looking for new opportunities where the market conditions are favourable, and where the risks are becoming more manageable. Local markets have matured as a result of poor performance off the back of a lack of exposure understanding. 
 
We’re seeing growth opportunities in various parts of the world, such as the US, Australia, South Africa and Asia, where there is high demand for electricity and a push for green energy. We are also interested in Latin America, where we have been traditionally conservative due to Nat Cat exposure, but where we are now seeing more sensible terms and conditions coming from the local market. 
 
We expect to increase our share of these market in the next 12 to 24 months.
 
As we look to what the future holds, we expect the market to harden in the next few years, as there will be significant losses both on and offshore that will drive some insurance players out and reduce willing capacity. This is a natural market cycle that happens in every class of business across the insurance industry.
 
Ultimately, we’re confident that we will be able to take advantage of this situation, as we’ve been around for longer than anyone else in the business, have one of the most robust reinsurance programmes, and are providing the highest quality of service – based on our fundamental values of knowledge, experience, and integrity. 

By Olly Litterick, Head of London Market Underwriting, GCube Insurance