Willis

London, UK, August 3, 2010 — 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, according to the latest Power Market Review from Willis Limited, a unit of Willis Group Holdings (NYSE: WSH), the global insurance broker.

Foremost among these conditions is the steady stream of losses associated with generating equipment. Insurers continue to be beset with attritional machinery breakdown claims, especially for combined cycle gas turbine failures, while “mega claims” (defined as a claim of more than US $100 million) now seem to be an established feature of the power sector. Willis found that, over a ten-year period ending in 2008, such claims accounted for only three percent of the total number of losses, but 43 percent, or US $4.2 billion, of total loss value.

The “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 says that one more mega claim can be expected before the end of the year.

In contrast with the widespread perception that property underwriters had a good year in 2009, mainly due to an abnormally low level of insured natural catastrophe losses, the continuing level of generator failure claims meant that some power insurers may have failed to turn an underwriting profit in 2009.

Despite this loss trend, the Willis review said a hard market failed to materialise in 2009, as some predicted, and soft market conditions persisted through the first half of 2010. Surplus capacity and reduced customer demand, attributable to the global recession, have largely prevented underwriters from increasing rates to the level that many consider is merited. Willis predicts that absent any market-turning events, power sector insurance rates will continue to ease for the remainder of 2010.

Commenting on the report’s findings, Graham Knight, Managing Director of the Willis Utilities Practice Group, said, “In the absence of major natural catastrophes, loss levels were significantly lower in 2009 than in prior years; 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.”

Knight said 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 — from earthquakes in Chile to 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, the report warned.

Continuous modification and innovation in generation technologies to increase efficiency and performance, coupled with increased use of prototypical machinery and the accelerated development of “clean” energy, will continue to make the business environment challenging for both power generation companies and their insurers, the report said.

Other key findings from the Willis Power Market Update include:

• Recent events in the Gulf of Mexico are strengthening the case for alternative, ”clean” energy resources.
• Global property market capacity for power risks is at an eight-year high of US $4 billion.
• With growing electricity demand in the Middle East (likely to triple in the UAE by 2020) and some additional 35,000 megawatts required in Saudi Arabia over the next 10 years to meet projected demand, requiring capital expenditure of more than US $50 billion, it is not surprising that US $1 billion of energy and engineering capacity is now available from within the region.
• Renewable energy represents the fastest growing source of power generation worldwide. The size of the wind market has grown from 60 gigawatts to 130 gigawatts between 2005 and 2010. The solar market currently stands at 10,000 megawatts. In 2008, wind power (onshore) in Spain generated more electricity than coal for the first time.

The Willis Power Market Review provides a thorough overview of insurance issues related to the global power generation industry over the last 18 months. The report looks at how rapid changes and new challenges in this sector are affecting the insurance market in the areas of Operational Property, Renewable Energy, Claims, Liability, Terrorism, Political Risk, Accident & Health, Engineering and Construction.

Click here to read the Willis Power Market Review.

Willis Group Holdings plc is a leading global insurance broker. Through its subsidiaries, Willis develops and delivers professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries, with a global team of approximately 17,000 employees serving clients in virtually every part of the world. Additional information on Willis may be found at www.willis.com.