European Utility Companies May be Underinsured, Warns Marsh

The “Marsh Power Forum” in Paris this week identified potential insurance problems for the industry. Marsh noted that “the combination of rising demand and insured costs in Europe’s electricity sector could risk leaving power utilities firms underinsured.”

Gordon Springett, Leader of Marsh’s Power and Utility Practice for Europe, Middle East and Africa, warned that the industry urgently needed to re-evaluate the potential impact of the growing demand for power on their insurance programs, including rising hardware costs, higher electricity prices and longer lead times for spare parts.

“Increasing global demand for electricity has led to rising costs for power generation equipment, lead times for new parts have lengthened considerably and the skilled workers are now in short supply,” Springett explained. “These factors have adverse implications for the property and business interruption insurance programmes of power generators and suppliers.

“This increase in costs has led to mounting concerns from underwriters about the accuracy of declared replacement values. Underinsurance is potentially problematical in claims situations. Prudent power utilities companies are seeking independent re-evaluation of their assets.”

He cited “longer lead times for replacement parts, ” which are “likely to exceed indemnity periods by several months, resulting in extended periods of self or underinsurance.” Business interruption indemnity periods are usually between 18 and 24 months. “However,” Springett noted; “a 36 month projected lead time stemming from parts shortages would lead to a 12-18 month period of under or self-insurance.”

In order to protect against underinsurance, Springett recommended that firms consider ‘first loss’ rather than ‘full value’ insurance programs. He also recommended firms avoid ‘average clauses’ in policy wordings, which allow underwriters to challenge declared values and lower claims settlements. Firms should also negotiate with insurers to ensure that additional premiums for longer indemnity periods are charged at excess rather than pro-rata rates, he said.

“Policy wordings should be reviewed and amended to reflect current lead times for replacement parts and spares policies and service agreements should be leveraged to their full advantage,” he added. “Likewise, sums insured for business interruption should accurately reflect projected values over the duration of the selected indemnity period and beyond. Increasingly, underwriters are seeking to cap business interruption amounts to avoid exposure to price volatility in the electricity sector. A margin should also be built into the programme if caps are applied. For example, the actual loss sustained is subject to 125 percent of average daily values. Insureds should also review their sums insured for business interruption on a quarterly basis, subject to premium adjustment, to avoid underinsurance.”

Springett concluded: “Clearly, the power industry is facing some of the biggest challenges in its history. However, these risks are not insurmountable. By paying attention to detail in designing insurance programmes and providing accurate and comprehensive underwriting information, power utilities can overcome the challenge of self or under-insurance.”

Source: Marsh – www.mmc.com or www.marsh.com