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POWER SECTOR BLIGHTED BY CAPACITY ISSUES REPORT WARNS
Wednesday 04 August 2010
Author: Russell Group
 

There is growing frustration amongst underwriters in the power sector over the inability to drive up rates due to continued over capacity.

Broker Willis said the sector was hit by hefty claims costs in 2009 and have suffered with the rest of the market after a catastrophe-prone first six months of the year. However underwriters’ efforts to increase rates have failed as the level of capacity has seen competition increase.

The broker has issued its annual Power Market Review and Graham Knight, Managing Director of the Willis Utilities Practice Group, said, “In the absence of major natural catastrophes, loss levels were significantly lower in 2009 than in prior years: however, insurers were presented with additional volumes of machinery breakdown losses, particularly involving gas turbine technology, plus a number of less predictable loss events. This may have caused some underwriters to incur an underwriting loss on their power book in 2009, notwithstanding the healthier position of much of the rest of the market.”

Mr Knight said there is “frustration” among underwriters that “the current surfeit of capacity in the market has militated against an increase in rates to levels they consider justified.”

Although the first half of 2010 was marked by a number of significant natural catastrophe-related loss events – from earthquakes in Chile to the European windstorm Xynthia – they have not been enough to change the market.However, further natural catastrophes, particularly from a more active windstorm season, could bring the softening rate environment to a sharp halt, the report warned.

“In contrast with the widespread perception that property underwriters had a good year in 2009, mainly due to an abnormally low level of insured natural catastrophe losses, the continuing level of generator failure claims meant that some power insurers may have failed to turn an underwriting profit in 2009,” he added.

Last year was defined by a steady stream of losses associated with generating equipment, said the report. Insurers continue to be beset withattritional machinery breakdown claims, especially for combined cycle gas turbine failures, while “mega claims” (defined as a claim of more than US $100 million) now seem to be an established feature of the power sector. Willis found that, over a ten-year period ending in 2008, such claims accounted for only three percent of the total number of losses, but 43 percent, or $4.2 billion, of total loss value.

The “mega claim” trend continued in 2009, the report added, with a catastrophic turbine failure at the Sayano–Shushenskaya hydroelectric power station in Russia, followed earlier this year by the explosion at the KleenEnergy combined cycle plant under construction in Connecticut. If 2010 follows the pattern of the last decade, Willis says that one more mega claim can be expected before the end of the year.