Engineering Lines
Purchasers of engineering insurance policies can expect prices to remain stable. This will not be altered by the fact that insurers' loss expenses have increased in this line. Based on initial forecasts by GDV, the German Insurance Association, insurers of engineering lines are anticipating a slightly higher combined ratio of 94 per cent for the 2018 financial year (2017: 91 per cent).
Market Situation
German companies are likely to have spent EUR 2bn on engineering insurance policies by the end of 2018. This would be roughly the same amount as in the previous year. In 2017, the sum of EUR 2bn still represented a drop of 1 per cent vis-à-vis the previous year. Based on initial estimates, insurers can expect their loss expenses to rise in 2018 by approximately 4 per cent compared with the previous year, i.e. to some EUR 1.5bn (2017: EUR 1.43bn). In the light of the above mentioned figures, insurers of engineering lines are prepared for a slightly higher combined ratio of 94 per cent for 2018 (2017: 91 per cent).
According to the latest sigma study of Swiss Re, the worldwide revenues of the engineering insurance lines amounted to USD 21bn in 2017. With revenues of some EUR 2bn, Germany therefore has a global market share of a good 10 per cent.
The amounts companies have been spending in the engineering lines since 2012 - in local currency and adjusted for inflation - are almost stagnant, a development that can be witnessed not only on the global markets, but also in Germany. According to the sigma study, the lack of growth is mainly due to the lower demand for project policies in industrialised countries and emerging economies across the globe. At least nearly half of the insurers' total global revenues have been generated in the project insurance line.
Trend in premiums and losses …
… in engineering lines
* Projection
Source: GDV
Outlook
Engineering lines do not constitute purely cyclical segments. There is no distinct market cycle, as in the industrial property or liability lines.
In view of the good results achieved by insurers in the engineering lines over recent years (and likely to be achieved this year, too), most corporate clients can expect prices to remain stable. Corporate clients with contracts with a high loss ratio should, however, anticipate requests for higher premiums or deductibles from their insurers, as this is the usual practice in the engineering lines.
Although some insurers have recently ceased their activities in Germany, the engineering lines market still has much more risk insurance capacity than is required.
Good insurance cover can even be provided for complex technical risks or risks with high PMLs (possible maximum losses). When it comes to less complex risks, established insurers are experiencing increasing price pressure. This is particulary the case where the settlement of a technical claim does not require them to assign in-house engineers, this being characteristic of complex risks, so would no longer apply.
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Market Trends
The engineering lines market has witnessed one constant for several years: continual changes on the supply side. Where, once, a fixed number of insurers ruled the market for decades, the number of insurers and their product ranges have been changing continually for several years now. As a result, customers are finding it increasingly difficult and complicated to choose the right insurer. In the light of constant changes on the supply side, it is barely possible to assess insurance providers without professional support – particularly when it comes to quality.
In the engineering lines, too, the former practice of simply insuring risks outside the EU is a thing of the past. All providers of engineering line insurance now adopt their own – sometimes highly complex – approach that enables them to structure legally compliant insurance cover for risks situated outside the European Union. Since the individual insurance companies structure the finer details of their coverage differently, consulting expenses are rising significantly. The costs incurred for structuring legally compliant insurance solutions often merely serve to increase the already high consulting expenses.
Major insurance companies are gradually withdrawing from the coal power plant segment for political reasons. Insurers, however, are defining their withdrawal in different ways. Some are terminating the policies of individual coal power plants with immediate effect. Others are no longer providing cover for newly built coal power plants. Energy suppliers using other fossil fuels or renewable energies for electricity production besides coal, will, for the time being, continue to receive insurance cover for their coal power plants. It can generally be concluded that there will be a phased withdrawal over a longer period, in consultation with the clients, geared to the two-degree target under the Paris Climate Agreement.
Special Market: Renewable Energy
Thanks to a stable public regulatory framework, the renewable energy market has undergone continuous positive development over the past decade. However, in the light of forthcoming amendments, it is expected that development levels and the expansion of renewable energy as a whole will see significant falls in Germany. Plants with follow-up permits based on previous state-guaranteed tariff schemes will continue to be built until the end of 2018. From 2019, the level of development is expected to decline sharply.
Many older projects for which regulated tariffs will be cancelled after 20 years continue to be decommissioned and demolished. The lack of new, additional projects means that the insurance market for renewable energy is extremely competitive.
In the light of limited development potential, it is expected that some insurers will develop new business fields or areas of operation, with companies based in neighbouring European countries in particular able to benefit from the favourable conditions of the German insurance market.
The individual business segments reveal the following trends:
Onshore Wind Energy
After a record number of new wind farms in 2017, another strong increase in this field is anticipated in Germany in 2018. From 2019, the construction of new plants will depend on the permits issued under the new tender system. The number of new wind farms in Germany is expected to decline sharply.
Future projects will require a new concept that combines a maintenance contract with insurance solutions. Due to cost pressures, the scope of cover of once standard full-maintenance contracts (these constituiting a major share of operating costs), are now being called into question. Full-maintenance contracts with clearly limited scopes of cover are already being offered. Insurance policies usually cover unexpected damage not covered by full-maintenance contracts. As a result of the amended maintenance contracts, insurers need to develop meaningful products to complement the new maintenance concepts.
Older wind farms for which the state-guaranteed feed-in tariffs will be cancelled are also in need of new insurance products. Their continued operation, based on the conventional products available on the market to date, will barely be viable once the state-guaranteed tariffs have expired. Policies combining comprehensive insurance and hull insurance and including, if required, a developed spare parts strategy, represent reasonable solutions in the short term once the subsidies cease.
It is to be expected that insurers will continue to provide operators with sufficient capacities to cover onshore projects in future. Prices should remain stable at a relatively low level; operators of major plant portfolios may hope for further improved conditions.
Offshore Wind Energy
In the offshore wind energy sector, the new tender system has led to a situation where project development and the construction of wind energy plants are largely dominated by major groups. This is preventing the emergence of a host of new players, as frequently desired.
Offshore wind turbine rotor diameter
Average output installed
Year
Source: Stiftung Offshore Windenergie
Icons: freepik.com
Project developers are under huge pressure to innovate to realise economical projects based on low revenues. New plant dimensions and new foundation concepts are being developed for wind energy projects. Insurers always have to be ready to provide coverage for new, insufficiently tested technologies.
Since the number of projects to be implemented in Germany in the years to come is fairly limited, many internationally operating groups have increasingly focused their activities on foreign projects.
Insurance markets for offshore wind farm projects are global. Coverage enquiries are usually made in local markets or through the London market. In the past few years, new capacities have been created by insurers ready to underwrite offshore projects. Recent tenders saw very good results for the insurers, despite already favourable conditions.
Biogas
The construction of biogas plants has largely come to a standstill in Germany. The insurance market is stable in terms of coverage for existing plants, albeit under strained conditions.
Whenever the coverage of insurance policies is to be adjusted, operators have to expect thorough plant checks before new coverage is granted. In some cases, the granting of insurance coverage is subject to specific requirements or much less favourable terms.
Photovoltaics
The German photovoltaics market is largely characterised by a minor projects (below 750 kWp). Nevertheless, the large number of these projects means they account for a major share in renewable energy production. Insurance products that cover photovoltaic systems are well-developed and available at favourable conditions. There are sufficient capacities.
Large-scale photovoltaics projects are currently being implemented in other European countries and in countries beyond Europe. In terms of their insurance cover, German insurers are fully involved; here, too, the insurance sector is increasingly becoming a global one.
Geothermal Prospecting
There are currently no new geothermal projects being implemented for power generation in Germany. This is due to the fact that the insurance market does not provide sufficient coverage for the risks associated with drilling and prospecting. The insurance market is not sufficiently developed for this. The companies' lack of equity and the resulting need to raise capital outside mean that it is often impossible to implement projects without insurance coverage.
Energy Storage Technologies
Since renewable energies have little to no base load capacity, the development of sensible storage media will play a significant part in future energy production. So far, however, none of these technologies has established itself as the most economically viable solution. The insurance industry can make a significant contribution to the further development of storage technologies by being open to new concepts.
Network infrastructures
A major challenge in connection with the energy revolution in Germany and surrounding countries is the expansion of onshore and offshore electricity grids. This is due to the fact that electricity from renewable energies is often generated far away from consumers. The required expansion of offshore and onshore electricity grids will entail major investment on the part of the relevant grid operators in the years ahead. The current lack of grid infrastructure means that large quantities of generated electricity are not being used efficiently.