The London Market is seeing a particularly strong appetite for renewable energy, but for insurers looking to jump on the bandwagon one expert has some words of caution.
As the renewables industry, and its technology, develop at a fast pace insurers could see a significant rise in attritional losses, according to Peter Fitzsimmons, head of onshore renewable energy at Axis Insurance. The development and rollout of gigantic 5 megawatt wind turbines, for example, is not without its challenges.
“Our whole industry has historically been one that experiences a fair amount of attritional losses. Those attritional losses are suddenly going to become significant when turbines of that size are having the losses we would have seen on 2 or 2.5 megawatt machines five years ago,” Fitzsimmons said.
“I’m not sure we have adjusted our terms enough to be able to withstand that at this stage. It’s a very significant change and exposure we’re all going to be seeing from this year onwards.”
Fitzsimmons was speaking as part of an Intelligent Insurer discussion about the London Market, which looked at market conditions, carriers reducing their catastrophe exposure, and the prospect of new business in certain lines.
His fellow panel members were Paul Cumberland, executive director at Howden Markets; and Scott Bailey, managing director, cyber, at Markel International; with Claire Churchard, deputy editor of Intelligent Insurer, as moderator.
The London Market’s strong growth appetite for renewable energy is being driven by environmental, social, and corporate governance (ESG) requirements and the scale of growth in the renewable energy industry itself, Fitzsimmons said.
“Companies need to be seen to be doing the right thing, whether that’s a standalone or to offset other classes of business they might be writing. Therefore they are opening their doors to these types of risk.”
The renewable energy industry has enjoyed double-digit growth year on year for the past decade, he said, which is expected to continue.
“That’s certainly put the premium pool and scale of the industry into something that’s more serious than it was when we started 12 years ago.”
But, he said, the sustainability of this growth and appetite will be “an interesting one in the next year or two” because there is a shortage of expertise and leadership.
“People are opening their doors to this industry and saying: ‘yes, we’ll look at it and review it’, but there’s a limited number of markets saying: ‘yes, we’re going to make something of this, we’re going to hire a team and have people dedicated to this’.
“Until that changes this is sustainable and we need that growth in London to keep London able to handle everything that comes in. For me it’s been a huge positive to see that growth come back to the industry, having seen people pull out a little,” he said.
“We need that growth in London to keep London able to handle everything that comes in.”
Peter Fitzsimmons, Axis Insurance
Growth potential
Howden’s March 2022 London Market Appetite Survey confirmed a very strong appetite score for renewable energy, yet it was registering a very modest anticipated rate increase for 2022 at around 6 percent, according to Cumberland.
“Renewable energy is a growth area, it’s an industry of the future. That’s been underscored by the war in Ukraine. We have to wean ourselves off fossil fuels, particularly those supplied from Russia, so markets want to set themselves up to be in this space ready for the future,” he said.
“There is a bit of ‘green-washing’ going on. It’s rather convenient to brush up your ESG credentials by saying you’re heavily into renewable energy at the same time,” Cumberland suggested.
But the gap between anticipated rate increase and the appetite was very interesting, he added. “If all the markets are going to realise their ambitions in this space then there’s going to have to be a lot of new business flowing into the new market to feed that appetite, and it remains to be seen whether that will happen.”
Fitzsimmons said that by the end of 2022, the London Market, and renewables specifically, will be a very different place.
“We’ve got inflation and supply chain issues affecting not just us, but everyone in the world.
“Renewables as an industry is moving very quickly. We have turbines two to three times larger than they were just five years ago. And that’s being driven by improved efficiencies and economies of scale for people buying these turbines.
“But for us that means that the total insured value is going up, so the premium is reduced but the claims are increasing,” he explained.
Insurers in this line have seen an increase in the cost of shipping to get a replacement part to site, increased business interruption exposure because each turbine is bigger, and larger and multiple cranes need to be hired to get on to the site.
“There’s going to have to be a lot of new business flowing into the new market to feed that appetite.”
Paul Cumberland, Howden Markets
Fitzsimmons said that the impact of these developments goes on but the market is to see that only now because the 5 megawatt plus turbines are now coming out of construction, and the very early ones are coming out of their warranty period.
Commenting on the “very significant change and exposure” the market will see starting from this year onwards, Fitzsimmons said: “It’s going to be interesting if you’re just starting out in the sector to work out what’s going on. You will not have that historical claims analysis to be able to understand what this is going to turn into and how to adapt to it.
“In addition to that, as things change and grow, all the technology is evolving. There’s nothing new, so everything is signed off, but there are design errors or tweaks in designs that are made and the insurance industry seems to be picking up the bill for most of those,” he added.
Design changes could include adding carbon fibre to blades on the wind turbines which makes them lighter and easier to transport and cheaper to make, but a little bit more susceptible to lightning, he explained.
Insurers need to stay very close to the industry and its developers and analyse the new technology that comes out before it’s as established as the other renewable technologies Axis Insurance covers, Fitzsimmons added.
“That’s where London puts itself out and above the regional markets. We have a global reach and a global platform. Whenever we travel to see our clients outside London, the first things they ask us are: ‘What’s happening? What claims are you seeing? What are we seeing about this new technology? Is there anything I should worry about?’
“And with that global footprint we’re able to address those questions,” he concluded.
For more discussion on the Howden report click here
For more on this London Market panel discussion click here our companion feature with a focus on cyber
To view the full interview click here
Image from Shutterstock / IR Stone
