Engineering – learning from last year
It takes time for Engineering insurers to digest the hits from a shocking 1.8bn hydropower loss and from a series of other large losses around the world. Luckily – and touch wood – 2019 has been more benign so far. Awareness for the long-tail character of construction business has understandably grown as a result. With an eye on profitability requirements, insurers have been adjusting their tolerance of volatility, a development which has impacted both brokers and insureds. Some argue that overall market capacity has not diminished much and remains in the range of USD 3bn PML. So why would the market harden? The hardening is due to the increased awareness of volatility and tail risks which has led to more cautious line setting, particularly for larger risks, and to a shorter list of potential lead insurers. The underwriters are also starting to reverse some of the broadening of terms that has crept in over the past decade.
A painful truth has emerged for those market players who chose – voluntarily or otherwise - to discontinue segments of their portfolio or their whole Engineering book: Their discomfort not only comes from a tail of losses, but also from underestimated cost. Policies need to be managed over the full multi-year construction periods. Moreover, adjustments of periods and values have to be administered and claims handled competently. Consequently, negative prior-year loss development combines with reduced or no new premium income to cover the continuing cost. And this really hurts.
As portfolios are reviewed and put on a sustainable footing again, reserves and incentives also remain important. Reserves must reflect the underlying portfolio shifts towards longer periods, higher limits or bigger shares. Luckily, the Construction business has not seen dramatic under-reserving. That said, the events from the French Decennial market should still serve as a warning. There, thousands of house owners, contractors and consultants will have their legal liabilities uncovered due to a series of bankruptcies. These were the result of many years of seriously inadequate reserving. Foreign regulators had not intervened on inappropriate reserving practices. And no action had been taken to curb the unfair competitive advantage insurers were benefiting from under the EU's freedom of service directive. Incentives for underwriters are a further important ingredient for sustainable performance: Accounting year results and new written business are poor measures of Engineering underwriter performance and not aligned with the interests of their employers. Actual profitability of the past underwriting years and performance versus the market would be much more relevant measures in this regard.
We need to learn from past experience and move ahead, towards the many exciting opportunities. The global groundswell for sustainability, for fighting climate change and using resources more responsibly puts responsibility for change on every individual, every country, every company. What's valid for re/Insurance overall is particularly true for Engineering. And as an Environmental Engineer, what's especially close to my heart is mitigating climate risk and advancing the energy transition to a low carbon economy. Technological progress of wind turbines continues, conquering new territories with higher wind speeds and deeper waters. Amidst established technologies, new ideas also emerge: Heard about energy kites as a potentially lower investment alternative for offshore wind energy production? Labelled using the Hawaiian term for their never-ending wind, Makani is the name of an astonishing tech start-up with prominent investors. The exponential growth of renewable energy creates investment needs for grid upgrades and new energy storage solutions. Digitalisation starts to make its way into construction. Drones and augmented reality create new possibilities for surveys and risk management. Advanced use of data analytics is transforming the insurance business. And of course, on the infrastructure side, investment programmes around the world are vital for societies: Protection is needed while new infrastructure is built, while existing infrastructure is operated and refurbished and ultimately demolished. Even in demolition, new opportunities and risks arise from more systematic recycling of construction materials, a necessity if we're to reduce the carbon footprint of construction. All the technological advancements towards a more resilient world need reliable support from specialised re/insurers. Let's put our shoulder to the wheel as well!