Liabilities: hardening dynamic continues
Liabilities: hardening dynamic continues
International Liabilities: continued gloom for buyers as ESG pressures bite
As we suggested in our October 2020 Update, there is still little comfort to be had form a buyer perspective from the International Liability insurance market. While it is true to say that the Property markets are hardening but still not truly hard, the International Liability market is indeed just that. If the definition of a truly hard market is one where capacity above a certain limit is unavailable at any price, then this really is where our market are as we move further into 2021. To understand why we are now experiencing these unprecedented conditions, we should examine current capacity, loss levels, underwriting results and litigation trends before determining how buyers should respond.
In addition to the hard market, the last 18 months has seen increasing pressure on buyers’ ESG procedures which has in effect added constantly developing and unquantifiable influencing factor on the International Liability market. Announcements by Zurich in July 2019, and subsequently by Lloyd’s in December 2020, have made firm commitments that certain industries will not be supported by insurers, namely coal and oil sands, which has had a profound effect on the capacity available to drive competition. Consequently, these industries are seeing more significant increases.
The capacity crunch For the last three years, even theoretical – i.e. the amount that insurers publish themselves – capacity has been gently reducing, from US$3.2 billion in 2018 to US$3.0 billion today. However, in this market that is by no means the end of the story. The theoretical amounts on offer from the market bear little if no relation to the amount of capacity available in practice, as Figure 1 on the previous page demonstrates. While in the Property markets the realistic capacity is at least 50% of the theoretical, in our markets this figure stands at 33%, with even less available for most Energy programmes.
There is of course little doubt that major energy companies often require Liability overall programme limits well in excess of this figure, but we must advise that achieving any higher limits is nigh on impossible in this market, without resorting to alternative risk financing solutions.
An opportunity for the opportunists! This scarcity of available realistic capacity has enabled some new, volatile and openly opportunistic insurers to target this market to secure increasingly favourable terms from their perspective from buyers that are keen to secure whatever additional cover they can. This dynamic is reflected in Figure 2 above; the core existing markets, with whom buyers share established long-term relationships, can now only offer as little as US$300 million in total – no more than a minimum working limit for most energy company programmes. Added to these long-term players are some recent entrants to the market, offering another US$100 million of capacity. So perhaps a total of US$400 million can be accessed, bearing in mind that the minimum rates required from these markets are often more stringent than the existing insurers’ terms.
However, above this figure buyers are now having to access more challenging markets. First of all, they are now having to approach insurers whom they would have probably been able to avoid during the previous hard market - insurers who are not encumbered by the programme’s previous history and whose pricing can, to put it politely, appear somewhat volatile. Unfortunately, from a buyer perspective, the amount of capacity on offer from these volatile insurers will exponentially increase, depending on the required limit. Finally, we have now the true opportunists – those who are now sensing an opportunity to obtain highly preferential terms from those buyers who have no choice but to accept their terms.
Furthermore, those buyers operating in those energy industry sectors highlighted as part of the increased focus on ESG –such as the Canadian oil sands– are now being affected more than others. Economically viable capacity for buyers whose sole focus is the oil sands sector is now at around US$ 200 million in London, whereas 18 months ago it would have been closer to US$500 million. A number of insurers in Bermuda can help in achieving the limits required, but at higher premiums and more restrictive terms.
Why has it come to this? Buyers may be wondering why insurers have adopted an increasingly cautious approach to this part of their portfolio. First of all, let’s take a look at recent underwriting results.
Although Lloyd’s represents only a part of the overall global Liability capacity available, their results do provide a realistic indication of the state of the overall portfolio. Figure 3 above shows that while Energy (Property) has produced a positive overall underwriting result for the first half of 2020, the overall Liability (Casualty) result (across all lines of business) has resulted in a £386 million loss; to put this figure in perspective, the corresponding result for H1 2018 was a £40 million profit1 . There can be no doubt that a similar underwriting loss for Liability/Casualty has been experienced in the composite company market.
On top of that, the overall underwriting result from Lloyd’s for the first half of 2020 is also a loss of over £1.5 billion.
Why social inflation is resulting in larger underwriting losses
Statute of Limitation reforms. There is now an improved understanding of trauma, which has led to the realisation that disclosure of abuse may be substantially delayed. Statute of Limitation reforms include reviving expired statutes, extending the time allowed for victims to sue, lengthening the tail of liability and exposes the prior year portfolios to further deterioration.Litigation funding is growing. A popular alternative asset class, the litigation funding industry has grown significantly since 2012 and is now considered a mainstream method to fund litigation. Furthermore, there are an increasing number of cases being pursued to full litigation as financiers’ push plaintiffs to trial and not to accept settlement below a set threshold in the quest for an acceptable return. And on top of that, there is now pressure on claims costs due to increased litigation cycle time and defence costs.Jury awards are rising (see Figure 4 to the left). The media is playing a broader role, fuelling concerns over new exposures, shaping perceptions of just awards and making juries increasingly sympathetic to plaintiffs. There is now a common perception that only a stratospheric award will ‘send a message’ with the belief that the corporation/insurer can ‘afford it’. In large cases, the damage awards are also not always based on the facts of the case nor the level of blame assigned to the defendant.General costs of repair are increasing. General claims inflation has resulted in increasing costs of repair for damage, especially to components with embedded technology and to property with aggregation of assets having materially higher valuations.
Recent losses in the Natural Resources sector The Natural Resources sector (including Energy) has by no means been immune from the overall deterioration of the global Liability/Casualty portfolio. In particular, we have seen an increase in both frequency and severity of claims in respect of:
Midstream/pipeline pollution incidents
Wildfire
Tailings dam failures
Gas pipeline explosions
Refinery and chemical plant explosions
Salt caverns
Product liability losses
Some of the most significant loses have been the aggregate losses following the recent Californian and Australian wildfires, the collapse of certain tailings dams, particularly in Latin America, a gas explosion in the USA, a water utility pipeline rupture in Peru, an oil leak at an offshore platform in Newfoundland and a major oil spill in the Bahamas.
Furthermore, this portfolio will continue to be impacted by the wider implications of overall COVID-19 insured losses. All lines of business will need adjusting to recoup the significant losses expected across multiple lines in the industry, and although International Liability programmes have not yet been directly hit by the obvious losses caused by the pandemic such as Business Interruption, we do expect buyers to receive accusations of COVID-19 infections arising from work environments not fit for purpose.
Rating levels Faced with such disappointing underwriting results, International Liability insurers are now under strict instructions from senior management to secure as steep a rating increase as possible to offset these recent losses. Indeed, we are now witnessing a wholesale recalibration of existing pricing models, with a focus on rate adequacy and risk profile rather than a percentage change on expiring terms.
Average increases in premium spend for our International Liability portfolio between October 2020 and February 2021 were generally between 25-40%, depending on individual risk profiles and perceived rate adequacy (we have seen well in excess of 50% for some programmes which have not achieved this adequacy) . We have not had any pure Upstream programmes renew during this period as this line of business predominantly renews between April and July but market intelligence suggests that standalone Upstream Liability rates are increasing between 10 and 12.5%, but for those with charterers exposures, where industry losses have been particularly poor, rate increases of 20% or more have been imposed. It is also worth noting that any energy companies buying limits in excess of US$250 million saw reductions in the overall programme limit purchased.
An inconsistent and segmented market However, this simple overview of rating levels disguises some significant variations in an inconsistent and segmented market. The terms offered usually depend on a number of factors, including:
The perceived rate adequacy of the expiring programme
The limit required - an obvious issue of supply and demand
The type of industry – midstream energy is proving particularly challenging
The quality of information and strength of the buyer’s existing market relationships
The desirability of the risk in question, generally governed by loss record, territory, ESG profile and ownership
Which markets need to be accessed by geography – local markets tend to be the most competitive, followed by London, Bermuda and other international markets, with business that is referred back to “head office” usually emerging with the most expensive renewal terms
Key insurer concerns In general terms, all markets are reviewing coverage terms & conditions, seeking to restrict “exotic”/peripheral coverages such as Cyber, Charterers Liability, Pandemic and Pure Financial Loss.
As well as ensuring rate adequacy, insurers are taking a deep interest in buyers’ ESG credentials, particularly when reviewing oil & gas programmes. Midstream programmes featuring significant pipeline operations are also coming under particular scrutiny. Both Cyber and Drone coverage are generally excluded or written back at a significant additional premium, while Covid-19 exclusion clauses are now universally applied across all policies; indeed, an Insured’s overall pandemic response and its effect on CAPEX, maintenance and turnarounds are all being studied carefully.
The buyer reaction – reduced cover No wonder several major clients have chosen to self-insure part of their programme or to reduce the overall programme limit rather than be held as a “hostage to fortune”.
Other buyers, for whom the option to self-insure more of their programme is not possible, have had to face the fact that the limit that they would usually buy is either unavailable at any price or to voluntarily buy less limit if they consider the renewal pricing exorbitant and/or uneconomic. Indeed, we have seen at least 10 major programmes forced to accept a reduced insurance programme limit for one reason or another during the last few months.
Conclusion: the outlook for 2021
North American Excess Liabilities
Introduction: a classic hard market Little can be said about 2020 that would surprise anyone now; for Excess Liability buyers, the impact of the worldwide pandemic only made the 2020 buying process even more stressful and angst-ridden. We saw a classic hard market, one for textbooks and lore. And as we move further into 2021, we are seeing the effects of the dramatic results of the overall experience, and true to expectations, the meteoric rises in premiums and compression of conditions have slowed in early results.
Emergence of two-tiered approach From the standpoint of the Excess Liability marketplace, we now recognise a two-tiered treatment of buyers by insurers, which will likely continue through the year and which deals with differentiation;
The potential top-tier energy programs are recognized by quality of risk, stronger loss and incident records and acceptable operational exposure, especially in the areas of Environment, Social and Governance (ESG).
A second tier consists of those programs whose assets and operations are considered more difficult to underwrite as compared to the first tier, along with problematic losses.
While this can be viewed as the way the Excess Liability marketplace works for the industry, the impact of the hard market from a premium perspective is now moderating when it comes to the first tier.
The hard market in 2020 moved through the year in relentless fashion; buyers saw increasingly difficult repercussions with respect to realistic available capacity. By the middle of the year, underwriters seem to bring on another round of program limit curtailment, further exacerbated by premium income levels, which tend to alter the ability of many insurers to entertain new business or limits for programs with even the strongest buyer-insurer relationships.
Limit reductions Renewal results last year showed increases in the lower half of double-digit territory; however, higher-positioned Excess Liability layers saw increases approaching as much as 100%. For difficult risks, the market was demanding even higher increases, and buyers were faced with the decision of whether or not to spend the money to accommodate insurers’ demands. North American buyers were faced with alternate methods to replace lost or “nonsensical” underwriting capacity, including increased retentions within a program structure, captive insurance use and reducing the total limit purchased. On the latter issue, some buyers could only muster limits of less than half of that provided by their expiring programs. And to rub salt into the wound, insurers seemingly used any opportunity to predict more of the same for 2021.
Losses driving harder market conditions The driving force, as it has been for the previous two to three years, was the losses hitting the underwriters’ ledgers, both attritionally and spectacularly. We are now accustomed to insurers describing their individual impact of “nuclear” events, not all of which belong to the natural resources realm; however, effecting the same underwriters who also write the energy liability renewals. 2020 had its fair share of catastrophic events and natural catastrophes.
2021: not so much “confound and astonish” but no real let-up either We expect the results of Excess Liability renewals in 2021 to be just as difficult as the 2020 outcomes; however the process is not likely to “confound and astonish” much as it did in 2020. In North America, renewals have shown only a few signs of letting up from the pace of increases seen in the second half of 2020; this is most likely to be prominent within the primary and lead excess placements, where the market has few leaders and none new appearing on the horizon. We believe insurers such as Chubb (Westchester), Liberty (Ironshore), Starr, Allianz and Everest will continue to support Energy Liability, and we reiterate that increases in rating in this area are not anticipated to abate at least through the first half of 2021. Zurich may support certain classes, as will AIG, while Upstream Liability will continue to be supported by Markel, Berkley and Travelers.
Opportunistic increases? What increases are expected? Notably early in the year, certain markets have been up front with brokers and clients on their expectations for 2021, including Aegis, OCIL and AXA XL. Others are looking to be opportunistic - at times predatory -with regard to certain business. Capacity continues to be meted out sparingly, with income levels for insurers up dramatically compared to the tellingly reduced capacity offered. More often than not, line sizes are bound for US$10-15 million; under fewer and fewer scenarios will insurers offer as much as US$25 million.
Large capacity players flexing their muscles Furthermore, insurers with the ability to deploy up to US$50 million or more acknowledge the commanding position they enjoy, and this is shown in their pricing. We expect anywhere between 20-35% increases for capacity that can offer up to US$50 million, with this escalation dropping off somewhat for the higher excess placements. As we experienced in 2020, it takes very little for the incremental year-over-year percentages to move beyond what we have stated.
New investments from Bermuda and Lloyd’s As expected, the Liability prices and rates in play through 2020 and expected in 2021 have brought in new investments. However, this capacity is expected to play within the current commercial levels and will not be enough to start driving premiums down. We expect extra capacity for certain classes of business to emerge from Bermuda-based Arcadian, Ark and Vantage Risk among others, with Aspen’s Bermuda operations possibly expanding its remit to include the Energy portfolio. New Lloyd’s syndicate Inigo, together with the expanding ERS and Sirius, have committed Excess Liability expertise to certain classes of natural resources business. However, capacity for contractor business has all but withdrawn from the Energy Liability sector in London.
Minimum price per million benchmark increases The “minimum” price per million benchmark has moved from circa US$4,000 to approaching US$6-7,000, and this may move even higher. The percentage increase that originates in the renewal of higher excess layers then finds its way through into lower layers, where the impact of the increases is magnified for these programs.
Broader communicable disease/pandemic exclusions will be increasingly required Policy conditions continue to be reviewed at each renewal; we expect, given the renewal of reinsurances at the end of 2020/start of 2021, that broader communicable disease/pandemic exclusions will be increasingly required, particularly so for capacity from London/Europe and Bermuda. London capacity will also deal with cyber exposure, looking to tighten any writeback previously afforded. We continue to see a sustained review of policies’ pollution exclusions, scrutinizing time element parameters, named perils and treatment of waste operations as well as their understanding of the specific exposure to wildfire.
It is also noted that insurers are coming under public pressure from shareholders and stakeholders to address their overall portfolio of business when it comes to supporting buyers in certain energy industry segments. Continued emphasis will be placed on buyers’ ESG commitments and on their operational sustainability progress and goals.
The outlook for the remainder of 2021: expect more stress As we move further into in 2021, the renewal process will again be stressful for buyers, underwriters and brokers. Most buyers will likely be running through their second virtual renewals, and another year of visits and facility/asset tours. Buyers should plan on off-cycle discussions with core insurers, determining the impact of shrinking capacity and moving attachment points, retentions, stress points on coverage and conditions and cost expectations. The role of analytics as a tool to assist in the renewal process is now prominent and is being used to assess various options for setting excess points, layer costs and structuring, limits and advanced benchmarking.
With very few exceptions, multi-year contracts, or ones longer than annual terms, are not being offered, at least not without the opportunity to re-rate and assess at anniversary date.
Renewal information should include payroll, general liability information, well counts and footages, drilling details, cyber exposure (protection and practices), refinery throughput and turnaround schedules. It should also specify third party surroundings around any facility, pipeline and gathering system information, including integrity details, regulatory reports, rail exposure, specific auto fleet details (including use of autonomous vehicles) and capital expenditures. Regarding capital expenditures, buyers should expect questions on where the impact of any cuts being made will be felt.
Marine Liabilities
The London Marine market hardened considerably over the past two years, caused by continuing deterioration in profitability levels over the past 5–10 years. Despite corrective action taken over the past 24 months, many insurers are still showing loss positions. This is partly due to the poor performance of the P&I and Charterers Liability Reinsurance portfolio, which has suffered significant losses and continued back-year deterioration.
Remarketing options remain limited on programs where more complex exposures are covered and/or where higher limits are purchased. Programs with high limits are also facing increased scrutiny in terms of their structure, with re-layering required on placements with long “stretches”, as well needing to demonstrate pricing adequacy and technical rating in order to secure full market support. In the Ports and Terminals sector, Property risk underwriting is being scrutinised more closely. The pricing of Property and Handling Equipment cover in catastrophe risk areas has come under particular pressure, with higher than average increases being applied. Bulk liquid terminals have produced several large market losses during 2019 and 2020 which have resulted in a contraction in underwriting appetite, together with more rigorous reviews of underwriting information, for this type of operation.
Environmental Liability
Gradual pollution cover in great demand The gradual pollution cover that our market offers is increasingly in demand to provide balance sheet protection; these transactional programmes surrounding mergers and acquisitions or disposals are extremely effective deal facilitators, unblocking impasses in sales negotiations where the seller wants a clean exit from an environmentally distressed business but 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 Environmental Liability market as a valuable tool to ensure a deal moves ahead by transferring these risks to an insurer for a one-off premium payment for a policy of 7-10 years’ duration.
Cover continues to evolve Environmental coverage and capacity continue to evolve as a result of the market’s heightened awareness of increased exposures, legal liability and regulatory risk. The risk of biodiversity damage and complementary or compensatory remediation costs attached to rectifying this is increasingly a big-ticket item that the market can provide protection against.
The market’s appetite for Energy risks remain fairly broad, even to the extent of still being able to provide cover for TMFs (Tailings Management Facilities). Particularly for Energy environmental risks, London remains the main centre for underwriting outside the USA, with developing markets emerging in Australia and the EU supporting rest of world placements.
Providing seamless Pollution cover Generally, Environmental programmes dovetail around the Energy Liability programme to provide seamless pollution protection for pollution from any cause, whether that be sudden & accidental or gradual. As the Energy Liability market hardens and contracts, we also continue to use the Environmental Liability market to provide additional sudden & accidental cover at the top end of Energy Liability programmes, or occasionally to infill gaps mid-programme. The Environmental market can write onshore and offshore risks quite comfortably and USD200 – 300 million + limits are readily available in this sector.
Niche product demand continues to increase The niche products mentioned in last year’s review continue to be in demand:
Mexico – Offshore Canada – Onshore
