Power

In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for power.

Key developments in 2020

In a (alpha-numeric) word: 'COVID-19'.  

Although it is too early to quantify the extent of COVID-19's impact on power generation claims, it is likely that the pandemic has negatively affected both the likelihood of claims arising in respect of power generation facilities and the resultant quantum of those claims.

The increased risk of loss arises, in part, as a result of limitations on the physical attendance of operational personnel. COVID-19 has created resourcing challenges that pose a risk to the safe operation and maintenance of power generation facilities. In addition to the prospect of increased sick-leave due the virus, operators are also faced with personnel in quarantine, self-isolation, and lockdown. Facilities are also more at risk of going into lay-up (due to personnel shortages, supply chain issues, fall in demand, and/or government restrictions) and will therefore be faced with the increased risks associated with reactivation – particularly in circumstances where adequate/normal maintenance has not been possible. 

As concerns the quantum of these claims, the primary contributor to the likely increase in cost is delay. The restrictions on movement that have arisen in response to COVID-19 have made it challenging to get surveyors, adjusters, experts, and repair personnel on site promptly following a loss. Whereas previously a response team could be assembled and transported to a facility within days (if not hours) of loss – it can now take weeks. In some cases, there is no choice but to conduct inspections by video – which is suboptimal.   Delays in claim response also arise in the context of supply chain interruption and the provision of replacement parts. The culmination of these delays may result in the erosion of waiting periods – and larger claims exposures for the power market.

What to look out for in 2021

On 5 November 2020, (then) Presidential nominee, Joe Biden tweeted "Today, the Trump administration officially left the Paris Climate Agreement. And in exactly 77 days, a Biden administration will rejoin it”. A shift by the United States towards proactive engagement with climate change and carbon emissions chimes with that of other nations – including the UK – with Boris Johnson announcing on 18 November 2020 a new 10-point plan for a green industrial revolution.

Aside from continued COVID-19 disruption, the next 12-months will likely see a renewed global engagement with the climate crisis. This engagement will include a deepening focus on regulation, governance, and transparency with regards to the management of power generation companies (and those companies that facilitate the operation of power generation companies).

Consumers and stakeholders (such as investors, banks, shareholders etc.) are increasingly interested in the environmental credentials of companies with whom they engage. Aside from immediate concerns about the wellbeing of our planet, stakeholders are also conscious that the future financial performance of companies will suffer if they fail to adapt to the changing environmental landscape (be that - physical, political, legal, societal, or economic). 

A term that will likely develop in prominence during 2021 is Environmental, Social, and Governance (ESG). ESG is means of evaluating a company's corporate behaviour including in the context of environmental issues. The intent behind ESG is to enhance the accountability of companies in respect of their environmental credentials - through the attribution of ratings. The hope is that power generation companies will seek to enhance their ESG in order to entice investment and broader engagement from stakeholders and consumers alike.

We will be interested to note the extent to which ESG becomes an underwriting consideration when writing power generation business – both from a pricing/risk-management perspective but also in terms of the reputational risks associated with insuring companies with low-rated ESG.
Authored by Will Jones.

Download our full Annual Insurance Review 2021 for more insights.