The theme of our Energy Market Review is “between a rock and a hard place”. This theme and many of the analogies are equally applicable to the Liability market: it is a fact that in-between a rock and a hard place one usually finds a number of strong and often conflicting currents. This has been very much the case in the Energy Liability sector over the past 6 months.
There have been are number of currents shaping Liability market conditions, namely:
In terms of capacity, global Liability capacity continues to be abundant. The total theoretical capacity remains constant at approximately US$3.3 bn.
As we have seen in previous years, realistic capacity is approximately 50% of this figure as:
This still puts the approximate maximum realistic capacity (without accessing the ILS or non-traditional capacity providers) at approximately US$1.65bn.
A notable feature of the current market is that some of the major global carriers have significantly reduced the amount of capacity they are prepared to deploy on a Primary basis.
In the past certain carriers were prepared to offer up to US$100m for a Primary limit. Typically, the maximum primary commitment offered by the larger insurers is now US$50m, with many carriers offering significantly less. This is driven by a desire to spread their risk throughout a liability programme and to avoid being the only carrier to be hit by one major primary loss. In the Energy Liability market we have seen in particular a series of pipeline pollution losses over the past few years, notably in Latin America, North America and Europe. This has been the catalyst for some insurers to review their Primary commitment generally and in some cases, to withdraw from the sector.
Balancing this has been the willingness of many of the smaller companies and Lloyd’s syndicates to drop down to primary level or increase their own primary participations. The net effect is a reduction in the average primary size but also a healthy choice of primary market lead options.
While some insurers have experienced a minor upturn in their treaty reinsurance costs, we have not seen the wholesale market hardening in treaty rates (including Casualty treaty rates) that was predicted by some pundits after the 2017 windstorm season. After much posturing by the treaty reinsurers in Q4 2017, many insurers with year-end treaty renewals had their casualty treaties renewed flat, although loss affected treaty placements saw upward rate adjustments.
This “damp squib” (from a carrier perspective) has translated through to the direct market, where the default renewal pricing is basically flat - but with upward pressure on pricing for those programmes with exposure increases or deteriorating loss records.
However, direct Liability insurers remain concerned about the viability of their portfolios over the long term. The steady increase in the size of average awards, a spate of losses in certain sectors (for example pipelines, tailings dams and bushfire losses, as well as some significant losses in the Auto Liability sector) have put pressure on the profitability of many individual carrier portfolios.
That being said, the prevalence of capacity and the better than expected treaty renewal season have countered the attempts of many insurers to move the market upwards.
In order to improve their profitability many insurers are therefore overhauling their books, deliberately shedding unprofitable or poorly rated business and focussing on risk quality.
We are therefore seeing an increasing trend towards risk differentiation and risk adequacy, although the approach taken by insurers can differ; some carriers look at existing rate adequacy when considering renewal (how a given risk benchmarks against its peers) while others focus more on rate movement (historic rate changes on the account). This can lead to some inconsistencies on renewal approach across the market. However, all place increasing emphasis on information, risk prevention and exposure base change; those buyers that can articulate their risk mitigation measures, track record and demonstrate a positive risk profile will always be favoured.
Insurers are increasingly looking to apply consistency in their offering across their regional offices worldwide. However, differing local treaty markets, treaty renewal dates and market drivers still conspire to result in geographical variations in market conditions. For example, Australia remains competitive, but some recent losses in the Natural Resources sector (particularly bushfires) have moderated the still competitive conditions. Latin America also remains competitive locally, both in terms of pricing and also in terms of less exacting information, which can cause a challenge when international capacity is required.
A strong driver for price remains the size of the insured company and the limit required. Smaller energy operations that purchase modest limits often have a wide range of local market options available, whereas the larger, more complex insureds (particularly those multi-territory risks purchasing significant limits) will typically have to access International Liability capacity, where pricing and information requirements are more exacting. Again, this is where a planned considered and strategic approach to the markets plays dividends.
Energy insurance buyers continue to face an increase in the quantum of their liability exposures through:
As a result, after working with their broker to benchmark their limit and analyse their exposure, we have seen a number of insureds review and increase their limits.
We have seen how conflicting currents have dampened insurers drive and ability to push rate upwards, but declining loss ratio and tighter margins have equally forced insurers to become more selective.
While we do not foresee any dramatic hardening in the market in 2018, neither do we see a return to the widespread soft conditions of previous years. In short, there may well be strong currents in between “a rock and a hard place” but when the sand finally settles there is often a flat bottom. That is where the Liability market appears to be now.
This is at least allowing buyers to focus on ensuring they have the broadest coverage the best pricing result and most appropriate conditions in a market that is relatively stable. Not such a bad place to be, perhaps.
The North American Energy Liability outlook for 2018 is tempered by the buffeting of the effect of natural catastrophe losses on the reinsurance markets, coupled with the projected loss amounts that will come from the large California wildfires and various losses (not necessarily energy related) taken by the retail insurance market. As underwriting results were felt and then published at the end of 2017, insurers opined that the soft market that had lasted for more than half a decade was over and that renewals and other transactions had to correlate more directly with those results. In short, the market would push for an end to reductions, hold the line on renewals, and find increases in rates and premiums.
This is what we expected in 2018; however, without a “market event” that would keep the results “front and center”, there will be a strong push by buyers to return to the way they have been treated in the past. Then again, we believe that the North American Energy Liability market currently has the strength to hold the line and maintaining flat renewals; only the most compelling exposure reduction will allow for any recognition for a decrease in rates. In 2017, there were notifications of pollution events and circumstances after the hurricanes, but whereas similar events after other dominant hurricanes became “market events”, we believe that this does not apply to any of the 2017 events. The market still is wary of Western Canada midstream operations, and buyers involved are being asked to consider retentions for pollution to create meaningful premium differential.
Buyers with risks in California will be questioned about wildfire exposure; while in recent years they have had to detail exposures with pipelines, gas storage, rail transportation, trucking, autonomous driving vehicles and even drones, in 2018 they will be asked about more expansive matters. These will include global warming and climate change, and exposure to the growing movement against the use of plastics easily moved on to waste. Energy companies now are facing suits by municipal, state and federal governments (and aligned citizens) for the companies’ role and part in bringing about climate change. Insurers are also assessing their exposure to their client’s involvement with thermal coal.
As far as Excess Liability capacity is concerned, in the US it remains stable compared to 2017. Insurers such as CV Starr, Westchester and others are taking lead opportunities formerly tightly held by AIG and Zurich. If the buyer is able to access Lloyd’s capacity cover-holders, pricing and conditions for local efforts can be beneficial.
Meanwhile AIG has advised its underwriting staff that the maximum liability capacity it wishes to deploy on any one Insured is US$100m. For their US/Canada, Bermuda and London/Europe operations, aggregate limits will be subject to review; this will cause enough buyers a problem to the extent that we expect an opportunistic entrant to step up. It seems that Liberty Mutual and Ironshore have merged smoothly in the US, with senior underwriters determined to maintain market share while minding overall exposed limits. In Canada, they have committed to maintain capacity offerings to current insureds.
In Canada, capacity remains static, with Chubb, XL Catlin and Liberty (and at times Zurich) being played as leads, often competing with Lloyd’s offerings. When higher Excess Liability limits are desired, capacity available in Lloyd’s, London, Europe, and Bermuda can be accessed. In both Canada and the US, the matter of Auto Liability excess attachments continues to impact lead excess renewal discussions. Capacity for Midstream Energy risks has diminished in part or moved from insurers General Liability desks to Energy specialists.
With the prospect of reinsurance driving retail behaviour, the pundits looked to the results of the February 20 International Group placement renewal as a prognosticator for any impact. This immense program was placed in a timely fashion, notwithstanding some claims development over 2017 and the uncertainty of the natural catastrophe impact and wildfires in general. Rates showed a very small reduction, in comparison to a retail market push to hold renewal rates and premium flat at a minimum.
As in the other Liability market segments we detail herein, leaders in the Marine market pushed for increases in early 2018. This was short-lived, but the market has been able to keep renewals flat, and at this time they have been mostly successful. There continues to be an over-abundance of capacity in this segment, although “capacity risks” will be treated differently from smaller placements.
We have seen increased Liability demand for operations associated with the export of LNG, especially in the United States and Australia. The recovery in oil and gas prices has opened a seemingly pent up desire for offshore construction; from a Liability standpoint, the Marine (and Energy) market is competing vigorously for this class, yet programs requiring broad loss of use cover capacity are still encountering marketing difficulties.
The global EIL market in 2018 remains a niche sector across the world. The USA continues to lead the EIL premium volumes on a global scale, owing to the longer period of pacing this class of business. Outside the USA, other regions are closing the gap to the established market in the USA and Canada.
Capacity continues to be readily available within the EIL sector, with 15 insurers now offering EIL products alongside conventional lines (Casualty/Property/Marine/ Financial Lines).
Company markets are able to put individual lines down to £50m on both a primary and excess basis. Other insurers are routinely putting down £20m any one line in the London and EU markets. Capacity is often available across markets (geographically speaking) meaning that New York can participate on an Excess layer where the Primary is in London as long as there is sufficient ‘ventilation’ between layers.
The start of 2018 has seen facultative insurance placed in London by the Willis Towers Watson EIL team for Primary risks in Brazil. This application of alternative capacity for sensitive risks is a trend we expect to see more of for lager, “heavy end” exposures in developing nations; this is common in Latin American countries that are enjoying a rapidly evolving regulatory regime. Primary insurers are using London capacity to reinsure these overseas exposures.
Environmental incidents are continuing to happen around the world; many remain uninsured if they are caused by gradual pollution or are as a result of legacy issues.
The condensate oil tanker Sanchi that collided and sank early in 2018 is a recent marine loss that has had an impact on the marine environment. Human error is likely to blame and full extent of biodiversity damage is yet to be assessed. Other claims include two incidences of illegal pipeline tapping causing loss of containment in the UK; one loss was diesel and the other petroleum spirit. While the clean-up was routine the potential losses could reach significant levels when Business Interruption is factored into the calculations. It must also be remembered that many pollution issues remain confidential to the buyers and many losses go unreported.
Recent developments in the EIL market in London can be summarised as follows:
EIL is still the niche sector it has been for the past 30 years but we are seeing legislation evolve at an increasing rate in recent years:
EIL can be tailored to meet the specific needs of each client and can address a range of costs resulting from a pollution event or environmental damage, including:
Why are more energy companies buying EIL?
Mike Newsom-Davis is Head of Liability at Willis Towers Watson Natural Resources in London.
James Alexander is Environmental Practice Leader for Willis Towers Watson responsible for developing the practice in London.
David Clarke is currently responsible for the handling of all North American based liability business coming into Willis Towers Watson’s London office.
