In previous editions of this Review, we have divided our Property market analysis into several geographic regions, including separate articles for Europe and North America. This year, we have combined our comments across these regions as the increasing trend towards more centralised underwriting has resulted in very similar themes manifesting themselves in all the major mining market hubs. Today’ market disconnect In doing so, we have discovered an increasing problem affecting both buyers and sellers of Property insurance - a disconnect between the quality of information (and level of detail) now required by insurers and the underwriting submissions that buyers have been providing. Bringing both sides to the table and evolving a “new normal” in terms of underwriting submissions will be critical in the next few years. Without a new consensus on data, we will see an increasing trend towards coverage refusals, the retention of more risk and a much less viable market place for mining risks.
So how do you solve a problem like the market? Only by first reviewing the current trends in the market can we plot a roadmap ahead towards a more confident future. Capacity: steady as she goes On the face of it, supply-side statistics suggest a straightforward, stable market environment. Even for coal mining risks, we have not experienced any significant insurer withdrawals over the course of the last 12 months, and overall capacity levels – at last in theory - have remained broadly similar to what was available to buyers this time last year, with mutual such as Oil Insurance limited (OIL) continuing to offer significant capacity to mining companies. While in previous years we have focused on the withdrawal of certain major insurers from coal mining risks, it seems that lobbyist pressure has now moved on to insurers’ involvement in/with other industries, with only CNA Hardy pulling out of coal this year.
Minor realistic market contraction However, we have noticed a minor contraction in the realistic capacity available, due to certain major insurers offering reduced lines compared to what they were offering last year. For example, both Chubb and Liberty are actively reducing their capacity in the thermal coal sector, with both scheduled to have withdrawn completely by the end of 2023; while AIG are strategically reducing their participations by as much as 40% or so for certain programmes. Furthermore, the reduction of capacity within the London Direct and Facultative (D&F) reinsurance market is likely to have a knock-on effect on the realistic capacity figures in due course.
Although these developments are having some effect, they are likely to be increasingly offset to some extent by the arrival of new markets such as Convex and Guide One as the rest of the year progresses. Figures 1 and 2 above show the extent of global mining losses sustained from January 2018 up until the beginning of this year. It can be seen that overall losses decreased slightly in 2019, by approximately $100 million, but in all other respects (apart from an increase in natural catastrophe losses in 2019) the loss profile was broadly similar in both years.
If we now look at Figure 3 above we can see that overall mining premium income almost certainly remains below US$1 billion, so the market as a whole would almost certainly have sustained underwriting losses in both 2018 and 2019. However, from this chart we can see that this level of losses is likely to be significantly reduced in 2020, with very few losses being reported to date for this calendar year.
So with capacity stable and the loss record improving, some buyers might be thinking that the hardening insurance must be coming to an end. Sadly for them, this is by no means the case.
The main reason why mining insurers across the globe are still hurting is a simple one – very few of these insurers view their mining portfolio in isolation. Instead, it is generally considered to be part of an overall heavy industry portfolio (including industries such as downstream oil & gas, power, steel mills and textiles) which continues to deliver overall negative underwriting returns. In last year’s Review we showed how various management initiatives (such as the Lloyd’s Decile 10 process) have significantly changed the underwriting climate – indeed, culture – across a range of different underwriting disciplines, and mining is no exception.
No freedom of manoeuvre As a result, regardless of location, the amount of capacity in play and the current loss trends, mining underwriters across the world currently have very little freedom of manoeuvre. Their remit is quite straightforward – to restore the overall heavy industry portfolio to profitability as soon as possible. And because insurers around the world are essentially all saying the same thing, individual underwriters appear to be confident that by taking a more aggressive stance they will not jeopardise their existing market share.
So while individual mining companies might think that their risk is a sufficiently attractive one to merit a reduction in rating levels, at the moment they are going to be sadly disappointed. Under strict instructions from their management, mining underwriters across the world are being told to ensure that every programme pays at least a nominal increase in rates. And if the programme in question features coal, underground operations, 20th century-built tailings dams or exposure to natural catastrophe perils, then the extent of the rating level increase will be much more significant. And for the truly “distressed” risk – i.e. one where the buyer is having to approach insurers whom they have avoided completely during the soft market and/or has suffered a significant loss - the situation is going to be even more bleak.
At a minimum, we are seeing rating increases of 10%, escalating to as much as 40%+ for the least favoured programmes. However, it should still be noted that for the most part these increases are still tempered compared to the rises imposed in other areas of the overall heavy industry portfolio. Bermuda at the forefront of the market charge Without question the Bermuda market has been at the forefront of pushing for rate adequacy and profitability. The market has pressed home its advantage as the holding insurers on many key programmes to not only drive rate but also increase retentions, reduce sub-limits and tighten terms and conditions, particularly for coal programmes. In years past, brokers may have had the ability to place such business with alternative markets; in 2020, no such alternatives are readily available. And in any event, coal mining companies in particular are increasingly reluctant to part company with markets that continue to offer them capacity (often on a multi-line basis) in the face of environmentalist pressure; it is often more expedient to reduce an insurer’s line size in the event of punitive terms than to part company altogether. Moreover, some coal companies have been able to mitigate the impact of rating increases by being able to display above-average green credentials from an ESG perspective (see earlier chapters of this Review).
Cash is king However, there is another factor which is equally important from an insurer perspective, and that is their premium pool itself. As explained earlier, underwriters are under instructions to recoup as much of their past underwriting losses as quickly as possible. In particular, the specialist mining market – the likes of Scor, Swiss Re, Munich Re and Zurich – are focusing on this issue to an even greater extent that their generalist Property counterparts in Lloyd’s and elsewhere. While asset values are on the increase, clawing back premium paid out in the form of past losses is a fairly straightforward process. However, when commodity and property values are decreasing - as they generally are at present – insurers are finding that they are having to impose even steeper rises on programmes to satisfy their management that their premium pool continues to increase. So while the better-paid programmes are escaping the worst effects of the hardening insurance market, the situation is much more challenging for smaller programmes that contribute less to insurers’ overall premium pots.
Insurers push for quota share placements Meanwhile brokers have had to reassess the efficacy of existing programme structures (particularly for coal) in the light of this shift in focus towards increasing premium at all costs. Previously, brokers have been able to identify those insurers who prefer to participate in the primary arena (often the major composite insurers) and those who preferred to participate on an excess of loss basis (often generalist Property insurers such as Lloyd’s syndicates). But such is the focus now on premium income and the need to be able to stipulate the required underwriting information, we are now finding that insurers are increasingly looking to participate in programmes on essentially a “quota share” basis (i.e. with no layering element) with increased retentions and reduced overall programme limits. However, given that insurers are reducing their capacity and quota share stretches, brokers will continue to use their own market knowledge to deliver optimal programmes that still combine both sets of underwriting philosophies. In particular, Tier 1 miners with multiple locations in natural catastrophe (CAT) zones who need to buy large amounts of Tailings and Underground cover will still continue to have a large portion of their programme being layered, especially if they require capacity in excess of $500m.
Among all the measures that mining insurers are taking during this hardening phase of the underwriting cycle, by far the most challenging has been the new levels of data required in terms of underwriting information. This is because their “underwriting file” for each account that they subscribe to is under so much scrutiny from their own management, requiring them to “tick every single box” on their underwriting questionnaire/check list to make sure their file will pass muster in terms of a peer review. It should be stressed that this is happening even on programmes where the insurer has been writing the business for many years.
Price caps Perhaps the most challenging of these for buyers has been the insurer scrutiny of their schedule of values, and in particular a growing requirement to impose price caps on both Property and Business Interruption amounts due to significant underwriting losses being sustained on programmes where these were not in place. During the period of the soft market, insurers had found that they were basing their premium calculations on one set of values, declared by the buyer at inception as their estimate for the forecast calendar year, but finding that they are actually paying a loss later in the process on the basis of a completely different set of figures. So perhaps it is not so surprising that mining insurers are now seeking to impose an annual cap of say approximately 110% of the values declared at inception, with a monthly cap of say 125% (although there is a conversation to be had with insurers to increase this for clients that provide the right information to the market). Furthermore, insurers are requiring retentions to be expressed in terms of a number of days rather than be tied to a specific monetary amount. This focus on price caps also helps to explain the trend towards “quota-share” underwriting that we commented on earlier. Again, in a soft market brokers would not have to accept quotes with price caps as there would be sufficient capacity being offered across the market without these restrictions.
It seems clear that the solution to this issue is to forecast more accurate numbers to insurers at the inception of the programme. However, there is clearly a tension between ensuring an accurate pay-out in the event of a loss and keeping insurance costs to a minimum in the first instance. Perhaps the professional deployment of risk engineers, forensic accountants and valuation consultants might eventually lead to greater trust and certainty for both buyer and insurer, speedier settlement times and less of a need to resort to lawyers.
An exhaustive focus on technical detail Regardless of the merits or otherwise of the market’s position on these issues, there can be no doubt that obtaining optimal terms from insurers is now requiring much more diligent work from both buyers and their brokers. This level of exhaustive technical detail has been particularly apparent for programmes featuring tailings dams. In one recent example, a mining company was asked by their insurers for their Third-Party tailings reports on every dam across the world. The company advised the market that they were not able to provide these reports for legal reasons; as a result, several insurers refused to provide cover as otherwise their underwriting file would be incomplete, with the result that the buyer was reduced to self-insuring part of their programme. Several major mining companies have multiple tailings dam facilities located across the world, of which each are different in their own unique way. To identify the exact incline/slope of each tailings dam requires engineers to get inside the dam and take specific measurements of each structure – by no means a straightforward process. So no matter how professional the buyer is, the amount of work involved in satisfying each insurer’s specific demands can be very significant indeed. And if you are a mid-sized company, it will be particularly difficult to provide this data and secure capacity without external assistance. Finally, even if a mining company does provide the information in sufficient detail, that of course does not necessarily mean that cover will be automatically provided.
Resorting to self-insurance No wonder we have seen buyers deciding to increase retentions and reduce limits in response. However, we believe that in most cases such a course of action won’t be sufficient to ensure an optimal risk transfer strategy. We would instead urge buyers to adopt a more technical approach, using actuarial tools and processes to determine exactly how much risk a company can absorb in the long term rather than being driven by short-term financial expediency (see Matthew Frost’s article earlier in this Review).
Just as important an issue, in our view, is the timing of the renewal approach. Given these challenging market conditions, it perhaps won’t come as much of a surprise that we advise buyers to get their renewal submission into the market in plenty of time. However, approaching the market too soon is also fraught with risk. Underwriters are now in the habit of refusing to look at any submissions until at least 45 days before the renewal – and sometimes even 30 days. So if a buyer submits their renewal in advance of this time, all that will happen is that the submission will be left in the underwriter’s in-box and ignored, while the buyer runs a significant risk of their data becoming out of date and inaccurate. Timing is now everything; by all means have your submission data ready, but don’t time it so that by the time insurers look at the submission, the data submitted is no longer correct. Instead, plan the whole process carefully with your broker to ensure that your submission has a perfect market landing to drive optimum terms.
Insurers taking it down to the wire Perhaps it is not so surprising that individual underwriters have begun to latch onto the importance of timing to secure the best deal and are responding accordingly. In several instances we are aware that several well-known insurers have been purposely hanging back from providing terms until the very last minute, thereby hoping that there will be no time for the buyer’s broker to seek alternative terms. However, we can advise that sometimes this strategy can have an unexpected sting in the tail; we have recently experienced a situation whereby a major insurer adopted just this strategy, only to realise - too late – that an alternative had been lined up and that the buyer didn’t in fact require their capacity after all.
What are we to make of an outlook clouded by COVID-19 and an ever-hardening insurance market? Well, perhaps it’s not all doom and gloom – there is still plenty of capital available within the overall (re)insurance market and we don’t think that the pandemic will have quite such a negative effect on the Property market as it is already having on the D&O and Liability markets. And so there is no doubt that, eventually, capital will flood back into this market and new competitors will emerge to challenge the hegemony of today’s market leaders.
Getting used to today’s conditions However, it would be quite wrong to suggest that today’s hardening insurance market conditions are just a short-term phenomenon. We have to advise buyers that we think these conditions are here to stay for the foreseeable future, and in the absence of any market disruptors suddenly appearing and undercutting everyone else in sight – something we have seen at the end of previous hard markets but not this one (at least until now) – there is in reality very little to prevent insurers from sticking to their existing positions. In any event, it won’t be up to individual underwriters to effect any change in strategy; in our view it will take some time and a complete change in underwriting climate and supply-side dynamics for insurer management teams all over the world to decide to compete more vigorously for business once again.
In the meantime, buyers and their brokers are going to have to learn to live with today’s challenging market conditions. For most of us, buyers and brokers alike, this is the first time in many years – perhaps for some, the first time in our careers – that we have seen this part of the overall underwriting cycle and there can be no doubt that a fresh approach is going to be required by all of us if mining risks are to continue to be transferred effectively.
To date, some buyers have expressed incredulity at the market’s current approach and have found it difficult to believe that alternatives have not been available. They have not appreciated the need for additional underwriting data to be collated; they have seen no reason to apply any analytical methodology to their programme design and marketing strategy; and they have not considered which markets will produce longer term benefits and which will prove to be less reliable risk transfer partners in the long run. Furthermore, the amount of work being asked to be undertaken by risk managers has exponentially increased, together with inevitable protestations regarding lack of resources and practical objections to what is being asked of them.
However, simply running more risk when your company can’t afford to do so is a very short-term strategy, to say the least. In managing buyer expectations, we would distil our advice down to four specific suggestions:
This process will require buyers and their brokers to work constructively together in a more co-ordinated fashion than perhaps we have ever been used to. But only by combining our resources together on an all-the-year-round basis can miners offset the worst of the challenges ahead.
Robin Somerville is Editor of the Willis Towers Watson Mining Risk Review. robin.somerville@willistowerwatson.com
This article was produced following a conversation with the following Mining and Broking specialists:
Andrew Wheeler, Client Relationship Manager, Willis Towers Watson London.
Chris Neame, Senior Broker, Mining, Willis Towers Watson London.
Fred Smith IV, SVP, Head of Mining & Metals – USA, Willis Towers Watson Nashville.
Andrew Torr, SVP, Willis Towers Watson Toronto.
Rupert Bedford, Broking Director, International Property, Willis Towers Watson London.
Pascal Calmels, Executive Director, International Property, Willis Towers Watson London.
Michael Benoit SVP, Willis Towers Watson Toronto.
Chris Rafferty, SVP Property, Willis Towers Watson Bermuda.
