NU Online News Service, Aug. 4, 1:48 p.m. EDT

Despite losses that would normally promote a hardening in the power sector insurance market, rates remain soft with no sign of a turnaround in the near future, according to a report from insurance broker Willis Group.

In a 72-page report titled "Power Market Review, Summer 2010, Global Markets International," Willis Ltd., a member of Willis Group in London, said insurance rates in the power sector are expected to soften further in 2010, despite the existence of many of the conditions that would normally presage a hardening market.

Foremost among these conditions is the steady stream of losses associated with generating equipment. Insurers continue to be beset with attritional machinery breakdown claims. Willis found that, over a 10-year period ending in 2008, such claims accounted for only 3 percent of the total number of losses but 43 percent, or $4.2 billion, of total loss value.

This mega-claim trend continued in 2009, the report noted, with a catastrophic turbine failure at the Sayano-Shushenskaya hydroelectric power station in Russia, followed earlier this year by the explosion at the Kleen Energy combined cycle plant under construction in Connecticut.

If 2010 follows the pattern of the last decade, Willis said that one more mega claim can be expected before the end of the year.

Despite this loss trend, the Willis review said a hard market failed to materialize in 2009 and soft market conditions persisted through the first half of 2010.

Willis said that surplus capacity and reduced customer demand, attributable to the global recession, have largely prevented underwriters from increasing rates to the level that many consider adequate.

Willis predicted that absent any market-turning events, power sector insurance rates will continue to ease for the remainder of 2010.

"In the absence of major natural catastrophes, loss levels were significantly lower in 2009 than in prior years," said Graham Knight, managing director of the Willis Utilities Practice Group, in a statement. "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."

He went on to say that 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 (notably the earthquakes in Chile and 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, Willis warned.

Special Reports /

Power Sector Remains Soft Despite Mega-Losses

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