Competition and market landscape

Increased optimism about the level of profitability that has been achieved over the past half-decade is attracting a significant number of start-up MGAs, MGUs and traditional oil and gas businesses into the market. These new entrants are now aggressively deploying capital into renewables to secure more market share.

Although we’ve been discussing this topic and the effects that new entrants are having on the market for some time now, these days it feels more significant. There seems to be more capacity entering the market than ever before, driving an intensely competitive business landscape.

A lot of it has to do with the war in Ukraine and the current energy crisis. Both situations, one clearly being driven by the other, are creating an accelerated move into renewables. The over-reliance on Russian oil and gas has come into sharp focus, and now governments and energy businesses are exiting as quick as possible. Underwriters are subsequently on the hunt to plug the income gaps this is creating.

There is also another side of the coin, which is that more insurers and brokers, especially large publicly-listed entities, are looking to boost ESG compliance through new capital investments in sustainable businesses. These commitments are naturally leading many to increase their involvement in renewable energy.

However, over the past half-decade, we, in the renewables business, have been working hard to ensure terms and conditions remain firm. We’ve taken great strides in these areas and have addressed some of the systemic loss issues that were driven by softer wordings and weak pricing.

Alongside improvements in pricing, we’ve also made substantial strides in contract structure, increasing deductibles, and addressing repeated claims exposures, such as wind turbine cabling and hail risk at solar farms, with more restrictive language and sub-limits. A lot of the systemic loss issues were outlined in GCube’s Hail or High Water and Uncharted Waters reports, distributed in 2019 and 2020.

Fire and hailstorm damage at solar farms, damage to wind turbine cabling, and numerous issues around battery storage systems have pushed us to take a more cautious approach. However, today, it feels like we’re rolling back a lot of the good work that has been done by underwriters over the multi-year period of market hardening.

The terms that are being offered to renewable energy projects from new MGA & MGU start-ups and the oil and gas market do not correlate with the those being offered in the conventional energy space. To get a foothold in the competitive renewables market, many are feeling compelled to offer much broader terms, placing pressure on the quality of service and gains made over recent years.

Although healthy competition is welcomed, it unfortunately takes three or four years to learn and triangulate large losses. The key difference now is that everyone is at a different point in the learning curve. New entrants are coming in with less experience and understanding of the nuances of underwriting renewable energy technologies. It’s therefore important that lessons are learned quickly, and GCube continues educating the market on renewable energy’s technological complexities.

Under the current conditions, there are a few ways in which I see the market field playing out in near- to mid-term. Firstly, and like we’ve witnessed before, new entrants will suffer larges losses: We’ll see a significant claims inflation and eventual exodus of capital from the market. With the size of losses already being seen this year in the US, this process could already be underway.

Another situation is that the long-term growth potential in the sector could outweigh any initial shocks. However, with terms becoming broader, combined with the recent claims uptick, I don’t think this secondary scenario will play out. I also believe this because of the loss severity that’s being exacerbated by current global issues around supply chain disruption and currency inflation.

Although both situations don’t appear to be overly positive, we need to be patient and optimistic. The global economy is doing strange things now and the political environment is volatile. It’s difficult to predict what will happen next week let alone next year. One thing that we can be optimistic about is that we’ve been through these cycles before, and we continue to learn lessons from them. That’s the nature of having a lot of capital chasing limited space.

GCube is prepared to weather the storm, like it has before, and our success in the class proves that when it comes to knowledge, experience, and integrity, GCube will continue to lead the renewables insurance space.