The announcement of the Lloyd’s 10th Decile initiative in June 2018 pressed poor performing syndicates into improving profitability across all lines of business. The Liability portfolio at Lloyd’s had run at a loss for the four previous years; although it was not a focus line of business for remediation, syndicates offering this coverage were put under scrutiny to improve their financial performance. Several carriers were tasked with significant premium income reductions; in some cases, this involved a comprehensive review of their Energy Liability portfolio. Standard Syndicate’s closure in October 2018 was the start of a continuous capacity exodus, with a total of eight syndicates leaving the Liability market by mid-2019. The company market followed suit, with significant capacity reductions from AIG and a total market exit from Chubb London, Swiss Re and Ironshore.
QBE increasing the pressure Most recently, following a change in strategy to focus on profitability, QBE announced that their General Liability team would no longer have authority to write Energy Liability and that all Energy-related business would now be underwritten within their Upstream Energy Team. Having positioned themselves as a leading Liability market for onshore and integrated energy business; this will have major repercussions. For example, QBE are not renewing a large percentage of their portfolio, reducing their capacity to 15-20% of any one layer and, to date, have been looking to adjust pricing anywhere from +10-200%. The result has seen the Downstream and Midstream Energy Liability sector truly enter a hard market, whilst Upstream insurers are using the market turmoil as an opportunity to make significant adjustments to premium levels on competitive business. The reduction in capacity and changing appetite has resulted in significantly reduced competition. Insurers are consistently increasing rate and tightening terms and conditions. Average premium increases by sector from December 1 2019 to March 1 2020 have been 30.53% for Downstream, 62% for Midstream and 10.63% for Upstream risks; we do not expect these percentages to reduce any time soon. Other influencing factors include:
Global International Liability capacity
On paper, global Liability capacity would seem abundant, with theoretical capacity for 2020 being approximately US$3 billion.
However, economically viable (or “realistic”) capacity is closer to US$750 million for non-US domiciled business - a considerable reduction on what is theoretically available. This discrepancy is due to a number of factors:
The majority of the available capacity tends to target high excess layers, depleting available competitive capacity for the first US$100 million of any one program - where the bulk of the premium is usually located.
Increased insurer focus on risk differentiation and risk quality The importance of demonstrating risk differentiation and risk quality is increasingly important for Liability underwriters. Good quality information and buyers that can articulate their risk mitigation measures correctly will always be favored.
Limit considerations Energy and Petrochemical companies operate in a increasingly litigious environment, due to a number of factors:
Purchasing an adequate limit is therefore paramount and many buyers have capitalized on abundant capacity and competitive pricing over the past 10 years to do this. However, the reduction in available capacity means those companies already buying in excess of US$500 million are having to choose between paying significantly higher premiums to maintain these limits or instead reducing the level of liability coverage purchased, given that the price is no longer economical.
Retention considerations Increased retentions are perceived by the market to reflect the buyer’s confidence in their own operations, and recent renewals have seen significant premium savings by taking this approach.
The outlook for 2020 We do not expect the outlook for buyers to become positive during the next 18 months, as the fundamental issues in the market remain and further market adjustment over a longer time frame appears inevitable. Buyers must continue to take proactive action and work collaboratively with their brokers to achieve the best possible outcome. Insurers are mindful of historical pricing reductions when considering renewal terms; long-term relationships, alongside excellent information, has been proven to produce better than average outcomes. Despite this, Downstream and Midstream buyers have seen significant step changes and will continue to do so as reinsurance costs continue to drive insurance premiums ever upwards. And of course it would be prudent for buyers to consider the level of reduction they have achieved in the soft market when reviewing their renewal premiums. As ever, excellent relationships, excellent information and an excellent broker will position buyers for the best possible renewal terms.
Ben Hickman and Oliver Stone are Energy Liability Brokers at Willis Towers Watson in London.
One only need to look back at the disruptive Primary and Excess Liability renewals in the last half of 2019 to get an unsettling feeling that 2020 would create greater angst and havoc for buyers. Oddly, the first half of 2019 went according to the expectations of many; mild market renewal responses, with rate/premium increases registering from flat to low single digit.
Clouds gather by mid-2019 Yet by June, the clouds had gathered on the horizon; these portended to issues relating to capacity, costs, conditions and losses. By the time of the July 1 renewal season, market dynamics had started to turn nasty, and proceeded to worsen through the rest of the year. It seemed that each passing month brought increasingly difficult renewals, with the low single digit increases turning into double digit extremes. Underwriters, strengthened by market dynamics not seen for a decade, became more resolute. And warnings came that this hardening would continue through 2020.
“Nuclear” losses fuel apprehensive market climate Perhaps the driving force behind this was the losses which, whilst not all in the energy industry arena, became “nuclear” events to the same underwriters who write the Energy Liability portfolio. These included significant losses from catastrophic events, including wildfires in the US and Australia, tailings facility failures in the US and South America and named windstorms throughout the globe. These “nuclear” events were then combined with pipeline explosion and “active shooter” losses to create disastrous sets of underwriting figures; taken together, claim amounts from these events are likely to have exceeded US$1 billion. Added to this, these same insurers were hit with repeated and expanded verdicts that resulted in Auto Liability losses and even Premises and Operations Liability. From the deep pockets of corporate defendants who had little if any participation in the liability negligence came significant awards of tens of millions of dollars – not to mention the staggering defense expenses that went with each action.
The outlook for 2020 We expect Energy Liability renewals in 2020 to grow increasingly more challenging as the year progresses, continuing the pattern seen during the second half of 2019. Indeed, we have seen average increases in the fourth quarter of 2019 at approximately 10-12.5%, increasing into the first quarter of 2020 to approximately 15-20%. Some renewals during this time have seen increases well above these levels, and in 2020 we expect that renewal increases will come hand in hand with a loss of capacity. Energy business has been dropped by underwriters from its position as a respected and favoured Liability line; the industry’s Liability results are under constant management scrutiny, with some underwriters seemingly lauded for taking a “no renewal” position or halving their existing deployed capacity. The “minimum” price per million benchmark has moved from $2,000 to approaching $4,000; the percentage increases originally created in higher excess layers are now finding their way through into the lower layers, where the impact is magnified given the quantum associated with those placements.
Policy conditions review Policy conditions will be reviewed at each program renewal; certain grants of coverage which have gone either unnoticed or tolerated will come under examination, to be questioned as part of the underwriting process. In Lloyds, the market push is to utilize the JL2019 form, entered into circulation to clarify the base policy’s intent for coverage for joint ventures including defense costs. We see additional pressure on the use of the markets’ cyber exclusions and buyback and to a lesser extent COVID 19 exclusions (for example, the March 2020 LMA 5391).
Capacity will continue to restrict Capacity will continue to restrict further in 2020; insurers who will still utilize more than $50 million will expect to have their capacity priced properly and will demand a superior rate for this. While in 2019 it may have been said that $25 million was the new $50 million, it may now come about that often $10 million is becoming the new $25 million. We see this new order of capacity affecting the renewal lines offered by AIG and Liberty, both in the US and in Canada. In Bermuda, while the overall theoretical capacity may not have shrunk that much for North American energy business, there is a difference between what capacity is advertised and what will be offered and utilized in practice; we have seen reductions in deployed capacity from AIG, AXA XL, Argo Re and others. Companies that have taken the strongest stance on premium increases include AXA XL, Chubb and OCIL.
Attachment points reconsidered In addition, underwriters are reconsidering their attachment (excess of loss) points; renewal negotiations will have to deal with this dual dynamic of individual insurers’ reduced capacity offers and the trend towards increasing attachments points; both of these are of particular significance to the integrity of Liability program towers written on a claims-made or occurrence reported basis. Capacity provided by the likes of Swiss Re have exited the market for many US energy insurance buyers, and Lloyd’s and London company capacity at former strong supporters of US business such as Aspen and Starstone (for Onshore Liability) have done the same. Liberty and Apollo have also dramatically adjusted their appetite in the space.
ESG re-evaluation It must be noted that insurers are coming under public pressure from shareholders and stakeholders to address their overall book of business when it comes to supporting buyers in certain energy industry segments. As mentioned elsewhere in this Review, continued emphasis will be tracked on buyers’ ESG commitment and to the buyer’s operational sustainability progress and goals.
We note that Everest will partner with some Energy buyers, and we see continued support from CV Starr in the US and in the UK. With a degree of anticipation, certain buyers are looking to Convex, as their Liability underwriting talent starts to build during 2020. We do not see Convex attempting to change temporal pricing dynamics in the Energy Liability market; instead, its underwriters are likely to take a measured assessment of the North American energy opportunities. Ascot in Bermuda also represents new capacity for US business; they too will only cautiously support Energy Liability policies. Could it be that in 2020 the pricing increases pertaining to Liability business attracts additional capital investment?
Conclusion: your renewal strategy will be critical In short, be prepared for a stressful process, for buyers, underwriters and brokers alike. We have moved a number of our clients to a renewal process that runs throughout the year, recognising the importance of well purposed off-cycle meetings and updates and facility/asset tours. It is recommended to initiate the renewal process at least 120 days from renewal, as we need to determine the impact of shrinking capacity and moving attachment points, retentions, stress points on coverage/conditions and of course cost expectations.
The role of analytics is becoming increasingly important, and oftentimes can be used to investigate options for layer cost and structuring, limits and advanced benchmarking. Indeed, we see expanded use for analytics in the renewal negotiation process. Although multi-year, or longer than annual terms may be desirable as the market continues to harden, the market is not offering these, at least not without the opportunity to re-rate and assess at an anniversary date.
Underwriters will demand greater underwriting data detail than they have in the past. As expected, this will include:
Regarding Capex, given the stress on buyers’ financials caused by world events at the beginning of 2020, as they adjust maintenance spending in 2020 buyers should expect detailed questioning on where the impact the cuts being made will be felt.
The Marine Liability market sector in 2020 will continue to press for the increases obtained in 2019; general pricing increases in the region of 5-10% should be expected for most renewal business, regardless of loss record. Larger increases are being charged for programs which are considered either to have underperformed in terms of profitability or to be under-priced at current rating levels. Pricing allowances are only being considered on programs with material reductions in exposure levels and on which pricing levels are already considered to be adequate. Buyers should expect increased risk scrutiny, pressure on capacity and longer lead times during the renewal process. The London Marine market hardened considerably in 2019 following a continuing deterioration in profitability levels over the past 5-10 years. This has resulted in a situation whereby many underwriters in the sector showed an overall loss position in 2018/19.
Re-marketing options are limited for programs where more complex exposures are covered and/or where high limits of coverage are purchased. In the Ports and Terminals sector, the underwriting of Property risks is being scrutinised more closely. The pricing of Property and Handling Equipment in Catastrophe Risk areas has come under particular pressure, with higher than average increases being applied. Bulk liquid terminals have produced a number of large market losses during 2019, which have resulted in a contraction in underwriting appetite, together with more rigorous reviews of underwriting information for this type of operation.
David Clarke is an Executive Vice President for Willis Towers Watson’s Liability practice based in New York.
Environmental Impairment Liability (EIL) coverage and capacity continues to evolve as a result of the market’s heightened awareness of increased exposures, legal liability and regulatory risk. Particularly for Energy risks, London is the main centre for underwriting EIL risks outside of the USA, with developing markets emerging in Australia and the EU supporting our rest of world placements. Useful additional coverage As the Energy Liability market hardens and contracts, the Environmental Liability market is being used increasingly to provide additional Sudden & accidental, unexpected and unintended cover at the top end of Energy Liability programmes or to infill gaps mid programme. Our market can write onshore and offshore risks quite comfortably and US$200–300 million-plus limits are readily available.
1) Mexico – Offshore Mandatory Environmental Liability cover has been required by the Mexican environmental regulator (ASEA) since 2016 for offshore Oil & Gas E&P related construction activities, processing and refining. No local environmental liability cover is available, but the London market now has a bespoke solution with a wording acceptable to ASEA.
2) Canada – Onshore Local Canadian General Liability markets are stripping out sudden & accidental cover; however, the London market has produced an energy specific, cost effective solution in the Environmental Liability market. Hard market conditions in standard lines of insurance have also had both positive and negative effects on the EIL market. As demand and application for Environmental products continue to grow, many clients facing hardening conditions in the Property and Excess Casualty markets are strategically locking in multi-year operational environmental programs (2–5 years) where available to mitigate future market uncertainty. Stretching the aggregate policy limit across a longer policy period is proving a popular and cost-effective way to build an EIL programme. While longer policy term programmes (5+ years) are available for transactional business such as mergers and acquisitions, insurers are less likely to offer them based on regulatory uncertainty surrounding emerging risks. Furthermore, pricing increases on long term programmes also mean some buyers are less likely to purchase them when they are offered. Having said that, these transactional programmes are extremely effective deal facilitators, unblocking impasses in sales negotiations where the seller wants a clean exit from an environmentally-distressed business but where the buyer is reluctant to take on responsibility for unknown historic risks that are difficult to quantify financially. Venture capitalists, banks and lawyers increasingly see the deals available in the EIL market as a valuable tool to ensure that a deal moves ahead.
Joanna Newson is Account Exec/Broker - Environmental at Willis Towers Watson London.
