Mike Hayes (MH) is Senior Vice President at Berkley Offshore Underwriting Managers and has over 35 years’ experience in the London insurance market. In this interview he talks to Willis Towers Watson’s head of Liability in London, Mike Newsom-Davis (M N-D) about the current conditions in the Energy Liability markets, the current challenges facing insurers and the value of energy companies maintaining long term relationships with insurers.
M N-D Mike, the Energy Liability portfolio has had a couple of years now of hardening market conditions. In general terms, how has the portfolio performed during the last 12 months? MH The real rating increases in Energy Liability started in the first quarter of 2020, where we saw increases of between 3-10% on what was a fundamentally unchanged renewal portfolio; for the remainder of the year, the rates hardened some more, and by December they averaged around 35%. It was tempered slightly by geographic scope– during the first quarter, some European markets were seeing less increases, while for regions such as Australia, Canada and Latin America, larger increases began to show through.
M N-D What was the rationale for these increases? Has the portfolio now attained technical rating adequacy?
MH Essentially, the reason was that rates were predominantly soft in the first place. In terms of technical adequacy, it’s important to compare apples with apples. Take pollution cover as an example; on some risks, we have gone from a 30-day discovery/90-day reporting provision to a 7-day discovery, 21-day reporting provision, which would not generally be reflected in the actual rates charged. However, from a technical rating perspective this development is helpful as a benchmarking tool.
M N-D Do you think that Energy capacity has reduced due to losses in such sectors as Mining and Wildfires, even though the industry is not connected to these losses?
MH Not really. Energy capacity is still generally available, although some markets may offer less due to appetite or their individual portfolios. The one region where capacity has indeed reduced has been Latin America, mainly because of a lack of information accompanying renewal submissions from this region. The two sides of paper which might have been sufficient in the past is no longer enough; we need a thorough review and assessment of detailed information, be that regarding health and safety, the risk management approach, the loss mitigation data etc. We are especially interested in pipeline data: is it crude coming through? Is it just gas? What is the pollution exposure resulting from these operations? There are a myriad of questions which underwriters need to ask, and we have just not been getting this information from this region. So for those programmes we can’t really release any terms that actually make any sense, until we get better data.
M N-D We have seen the Liability portfolio profitability declining markedly over the last few years –as reflected in the most recent Lloyd’s results. What is your view of the Energy portfolio - is it the same for this class? Or is it the Liability losses for your portfolio as a whole that drive your underwriting strategy?
MH That’s not an easy question to answer because there are so many different factors in play. I can’t speak for other insurers, as individual strategies will depend on the shape of individual portfolios. We have our own definition of Energy business at Berkley Offshore, but some insurers might have a wider one; for example, some will include chemicals and others may not. From our own perspective, we have seen the Energy portfolio as profitable and I would reiterate that; I can’t say that this would be the case for other insurers. The focus is about risk selection, developing and continuing important client relationships, as well as building up trust via the brokers.
From an Energy perspective, we have seen some large refinery explosions, as well as pollution from rupture/pipe leakages, with the resulting injury/damage from such incidents. These are significant losses, but they may affect insurers in different ways, as an example depending on whether the insurer writes on a primary or on an excess basis. Buyers need to ensure they are purchasing sufficient limits for the potential catastrophe exposures.
But one thing’s for sure – the market stands ready to renew those programmes where we have been impacted by large claims - so long as we get the baselines right regarding information quality. For example: now that you are aware of the claim, could it happen again? Have the right mitigation and loss prevention measures been put in place? If the buyer can answer these questions properly, then we don’t think we should just pay a claim and then fail to renew the programme. The key is the frequency factor– Energy is a catastrophe portfolio, and as such it’s not generally characterised by attritional losses. If we were suddenly looking at multiple losses which provided risks with poor returns, that’s when consideration is taken to withdraw.
M N-D As the hardening market conditions continue into another year, is there a danger that rating increases are unfairly compounded, year-on-year?
MH As I said earlier, in 2020 the rates changed from single digit increases in the first quarter to an average of 35% by the end of the year. It’s true that as we approach the end of the first quarter of 2021, we have seen those rates continue to increase. For example, Europe is a particularly significant region for us in the first quarter, and we have seen European rates go up by a further 20-35%. But I would temper this by saying that if a risk had been corrected or rated according to its exposures, that correction should not occur again for the second year. So the buyers will see increases, but not for every risk if potential exposures remain unchanged – if there are indeed increased exposures, then insurers would have to rate around that. So there will still be increases, but not to the same extent as last year.
M N-D Does that mean you have achieved technical rating adequacy for those risks which suffered rises last year? Logic would suggest that those risks should basically go flat going forward.
MH Just because it is a hard market, it’s poor business practice to say to a client, I’m increasing the rates anyway without any justification. You should really rate around the metrics, not just increase rates because of market conditions. Whether the market will flatten out is difficult to say so early in 2021. It may depend on the business trades; some of the wider risks that include some US content or US operations could see larger rating increases. This is predominantly because of US award inflation; some of the US auto awards in particular have been nothing short of crazy recently. So for this business, there has been a trend towards increased attachment points and rating levels.
M N-D How does Berkley Offshore differentiate itself from some of its larger competitors?
MH When we set up Berkley Offshore, we wanted to do something niche with specific areas of expertise; we are small and nimble, we are not there to compete with the larger markets and nor do we wish to. But by offering something that was bespoke and specialised, we could offer something that clients wanted - knowledge of our subjects, which we have achieved by surrounding ourselves with a good, experienced and innovative team. We also wanted to put an emphasis on service, whether it be a quote coming in to review information, or whether it be meeting with a client or a broker. For us, communication is massively important – we want to respond as quickly as we can. We think this is an aspect that could separate us from our competitors, where some may have extensive portfolios and may find it challenging to respond in such a bespoke way.
M N-D It’s true that poor underwriter service is the biggest complaint that we receive from the client base.
MH I’m not surprised; we also receive feedback from other brokers that this is still the case. Here at Berkley Offshore, we will always try to respond as soon and efficiently as possible; we think that it’s the small things like this that may assist in the wider picture for buyers. We have all sat in our homes working during this pandemic and yet we are fortunate that we now have the technology to keep communicating effectively with our clients and brokers online. For us, the client relationship remains absolutely critical; we welcome as many client meetings as we possibly can. For each meeting, we do our research and brief ourselves on the latest developments at that organization and we want to ensure we can ask the right questions and increase our knowledge with these respective clients. Our experience suggests that clients want their underwriters to show an interest in what they have been doing.
M N-D Have you found that this approach has resulted in clients actively requesting a deeper relationship with Berkley Offshore?
MH Absolutely. It takes many years to build that client relationship up, and it gives them the confidence that you understand their business. While we are going through the pandemic, that ability to still speak to our clients through technology has been essential.
M N-D So do you think that those clients that have shopped around during the soft market to get the lowest pricing are now finding themselves disadvantaged compared to others in their peer group?
MH Yes, I do! We are fundamental believers in longevity. Both the clients and insurers have to go through some of the softer phases of the cycle as well as this harder phase together to come to a long-term landing. The key is no surprises; if the client is briefed and has sufficient early warning, then their expectations can be managed. Insurers don’t appreciate programmes being tendered every year purely on the basis of establishing the best price at the time. In such cases, we will simply walk away from those tenders, as by definition they won’t represent a long-term proposition for us or the market. We believe in a client that shows some loyalty, through the good times and the bad, and of course we as insurers also have to show the same loyalty.
M N-D What’s Berkley Offshore’s view on terms of providing Cyber coverage to clients? At the moment, so many Liability policies are still silent on this issue.
MH Indeed, there is a tendency for our Liability product to be silent on Cyber; most insurers’ portfolios have been in the past. The concern here is not really knowing what you as an insurer are giving or indeed not giving - until there is an incident, and then both insurers and clients are at the mercy of the courts. It’s also a concern for the reinsurance treaties that sit behind us. So implementing clauses such as provided by the recent Lloyd’s Cyber Exclusions LMA 5468, LMA 5469 and LMA 54670, together with the two buy-backs, should provide much more clarity on the Cyber coverage provided. From the conversations that we have had with both brokers and clients, this new clarity has been received positively.
M N-D How have you as a Liability underwriter dealt with the issue of COVID-19?
MH It can be difficult to implement COVID-19 exclusions. Various businesses will have different potential exposures, with insurers having variant exposures that may affect their portfolio. In the Energy sector, the risk is more remote, and we don’t see a heavy footfall; for example, you won’t be writing retail or care homes on an Energy programme. Our Energy portfolio is designed to be catastrophe-based; it’s not designed to absorb multiple attritional losses or heavy frequency. Furthermore, most Liability insurers have a reinsurance treaty behind them and if their reinsurers insist on a COVID-19 exclusion, then the direct market will insist on it in turn. My main concern on this issue would be the US; we and other insurers have implemented a Communicable Disease Exclusion (LMA5396) on any US-exposed business. In this domicile, it’s all about defence costs, whether there is ‘deemed’ exposure or not; these costs could impact the market even if no indemnity is ultimately paid.
M N-D Are defence costs simply a fact of life, something clients have to learn to live with rather than try and insure against?
MH Indeed. I would also add that no one had ever come across COVID-19 before this time last year, and now most insurers see a high percentage of their portfolio with a COVID-19 exclusion. I would add that the Australian market has the least number of exclusionary clauses; generally their exposures are more benign and in fairness to the clients, the information they provide is excellent.
M N-D How is the changing climate going to affect the Energy Liability risk landscape?
MH This topic has been growing in significance now for some time and I feel has been generally ignored until the last 6 months and it’s an area that the market should be taking very seriously. Portfolios could potentially have some class action litigation in the US, which only reinforces my thoughts when we spoke about COVID-19 and the US costs. There are numerous factors that can contribute to climate change; some of these can include weather patterns, volcano emissions, greenhouse gasses/emissions or even the earth’s orbit pattern. A number of insurers have started to do some work on this; we have seen a few risks with some exclusionary language implemented relating to agricultural chemical risks and mining. So we discussed climate change with them and implemented a climate change exclusion. What we now need to learn is the language around it, what are we covering and not covering, and this learning and understanding will continue through 2021. We have listened to various lawyers and now is the time to get some clarity before all this escalates. We haven’t seen too many awards just yet, but it is certainly been spoken about.
M N-D Do you think it is time the industry innovated more to try to bridge the gap and cover more of the really critical risks that the energy industry is faced with relating to climate change?
MH You make a valid point – in some areas, I don’t believe the market is innovative enough. It’s basically because of the unknown, and perhaps we as insurers need to do more research. The goal is to indeed innovate and find a way to positively respond to the challenge. This does not mean that on every risk insurers are going to impose a climate change exclusion – but there is always the concern in the back of insurers’ minds that climate change may be the next asbestosis.
M N-D I guess this comes back to the point you were making about client familiarity – if you know your client well, are you are less likely to impose these exclusions?
MH The answer would depend on the client’s exposures; it would certainly be a consideration, especially if insurers had a strong knowledge of such clients. In overall terms, I don’t think that the London market is going to run away from this issue, especially for our long-term clients; I really hope that in six months’ time I might have a better answer for you. No one would have conceived this situation 5-10 years ago; the potential exposures are huge, so we must quantify them and find a solution.
M N-D Do you see overall Liability insurance market capacity, particularly for Energy, impacted by the issue of ESG in the future? Should the industry be concerned that it might one day run out of Liability market protection?
MH No I don’t believe that it will ever be the case. It’s true that some insurers are having some challenges and concerns with Coal, and especially for Mining in general, where coverage for tailings dams is sometimes now being excluded. But for Energy, the capacity is certainly not reducing; we have seen many risks renewed very successfully without the factors that have affected the Coal portfolio from being an issue. There are always factors in the Energy portfolio such as pipeline exposures - their age and location for example - that may restrict the capacity on offer. I would mention that in the last few years ‘general insurance’ capacity has reduced; however, that has been offset by new entrants and so this development does not amount to a significant withdrawal from the portfolio.
M N-D Finally Mike, Long Term Agreements often come up as a subject for conversation, particularly during a hard market – do you welcome such arrangements with trusted clients?
MH My message would be that we should be flexible on this, so long as there are practical and agreeable annual review caveats incorporated. But LTAs can be irrelevant in my opinion; we are here to build longevity with our clients, and we should not need LTAs to achieve this over the long term. The long-term benefits of such a relationship will surely outweigh any perceived cost disadvantages in the shorter term. What will be interesting will be when the market softens again, how many clients will be prepared to continue with their existing markets. I would assure them that it will always be worth it for them in the long run.
M N-D Mike, thank you very much for your time.
Mike Hayes is Senior Vice President at Berkley Offshore Underwriting Managers (BOUM) and has over 35 years’ experience in the London insurance market. The BOUM Liability team based in London was created in August 2012; it has established itself as a specialist market player in the UK & International Energy & Construction worlds, focusing on those niche business segments.
Mike Newsom-Davis is Head of Liability, Natural Resources, Willis Towers Watson GB. Mike.Newson-Davis@WillisTowersWatson.com
