Signs of genuine change?
In last year’s Mining Risk Review we suggested that a turn of the tide was perhaps on the horizon of the mining insurance market. 12 months on, we can say that some genuine change is now visible within the market, although perhaps not on the scale or to the degree of uniformity that some insurers might have hoped or imagined. Instead, it’s perhaps more accurate to say that this is a market that is in a state of flux: it’s changing certainly, but these changes are sporadic and materialising under the continuing influence of surplus insurance and reinsurance market capital.
Meanwhile, the overall premium income pool for this line of business continues to deplete. We estimate that this has declined from approximately US$900 million in 2015 to approximately US$600 million today; this is due to a combination of a number of factors, including mergers and acquisitions, the changing mining world, lower values and previous rating reductions.
Last year we went to press just as the first of three major hurricanes (Harvey) was about to strike the southern United States. While we were aware that these storms would have an effect on market conditions, it was difficult to say at the time what the extent of that effect would be. Today we can say that while the storms have had some effect on market conditions, this has not been as pronounced as many insurers in the market were hoping, and the modest upturn in rating levels that became evident during the January 1 renewal season do not seem to be sufficient to provide the magic bullet of turning a loss making portfolio into a profitable one.
If we have a look at the five-year major loss record of the mining industry (see Figure 1 right) it can be seen that this class of business is continuing to hurt insurers with some significant losses. Of particular interest has been the number and quantum of flood losses in Australia emanating from Hurricane Debbie in the first quarter of 2017, together with two other major losses, one from Russia and one from the Middle East. All in all, this is hardly the loss record of a benign market segment and perhaps it is no surprise that we have seen the first signs of resistance to the previous softening dynamic within the market.
Fig 1 – selected major mining losses, 2013-18
Source: Willis Towers Watson
Fig 2 - the global mining insurance markets in 2018
However, current dynamics present a continuing complicated picture. Let’s have a closer look at how today’s market is constituted (as per figure 2 below) and what may result in the months ahead if this dynamic were to alter significantly.
In very general terms, we can say that the global mining insurance market comprises three broad groups:
So what has happened to these three elements of the market during the last 12 months?
Meanwhile with the exception of some “New New” business as described above – where the prospect of fresh premium income has proved to be the catalyst for an innovative approach - the products offered by the market are the same tried and trusted offerings that have been available in the past, with little change in retentions, policy wordings or sub-limits.
The outlook for the remainder of 2018 will, to a large extent, depend on the continued robustness of the D&F market. We have seen that this market is generally Lloyd’s- centred; with Lloyd’s having had a difficult year in 2017, it is facing its own challenges and it is reported that the Lloyd’s Franchise Board will be investigating the bottom 10% or so of their portfolio that has consistently failed to deliver profits over the last few years. It seems likely that some mining portfolios will fall into this category.
Moreover, we understand that some D&F insurers have indicated that they are unlikely to participate in certain programmes next year; and that recent underwriter departures in London may limit the amount of expertise (and indeed capacity) available from this market as we move towards 2019. These underwriter departures include experienced professionals from QBE, Brit, Markel, Starstone and Argo.
Capacity provided by the D&F market has been critical in keeping terms and conditions provided to miners competitive in recent years. Were that capacity to be more seriously impacted by further major losses, not only from within the mining industry itself but also from any consequence of another disastrous North Atlantic hurricane season, then the relatively mild market “correction” that we have experienced during the first part of 2018 may well turn into something more significant. Buyers and regional insurers that have relied on this market for support during the last few years will then have no alternative but to re-engage more fully with the specialist mining market, where the terms offered are likely to be much less competitive.
But for the moment, any market upswing remains sporadic and limited by the abundance of available capacity, especially for quality risks. So long as this capacity remains basically in situ then the usual laws of supply and demand will continue to apply and the current upswing will begin to fizzle out.
As always when a poor series of underwriting results is recorded, insurers will look to the best programmes as a safe haven for their available capacity. So for those programmes featuring quality risk information, with clean loss records and a track record of well engineered projects, there will be little to fear from a market still beset by the challenge of a reduced premium pool; but for others who are not so fortunate now is perhaps the time to plan ahead with your broker just in case the market climate begins to deteriorate later in the year.
Despite the hurricane catastrophes of 2017, the International Liability Mining market has remained, for the most part, consistent as we progress through 2018. This is in spite of initial conjectures that, following these incidents, there would be a consequential upward effect on market pricing as a result of rising treaty costs. However, such a reaction is yet to materialise, although some markets have been subject to treaty restructuring, most notably in the form of seeing their net retention increase and in certain cases their ability to write large primary lines reduce. Notwithstanding this, the abundance of capacity still available has provided both price and capacity insulation to buyers, particularly at an excess level.
With regards to pricing, we have witnessed a sustained period of resistance from insurers to rate reductions, which has signalled a palpable shift in underwriting conditions. Where small rate reductions may previously have been entertained by underwriters, the default rating position for insurers has become flat and as a result any exposure increase now correlates directly to a desire from underwriters to increase the premium.
In addition, rating rationales are more heavily scrutinised and, in more extreme cases, underwriters are demonstrating a greater willingness to walk away from accounts, especially where loss records are poor. This is also the case where markets are undertaking a general rationalisation or ‘clean up’ of their books as they seek to only retain their profitable accounts. However, on the majority of programmes (where the limits purchased are well below the total available) these measures are largely offset by the accessibility of alternative capacity.
In terms of underwriting, risk quality continues to become an ever more important aspect of the placing process. A series of tailings dams disasters over the past few years have resulted in a seismic change in how markets approach the underwriting of mining risks with tailings exposures, and this approach looks set to remain. In short, the coverage is still available but only when good quality risk information is provided for underwriters to review and legitimise their capacity deployment. Similarly, other underwriting factors continue to be under the spotlight, including exposures arising from underground mining, joint ventures, contractors and transportation. The benefit of surveys addressing these third party liability exposures therefore continues to grow and the demonstration of good risk management is paramount.
Finally, insurers have increased their focus on ensuring that coverage remains relevant, especially with regards to emerging exposures such as risks emanating from cyber and Unmanned Aerial Vehicles. As a result, we have seen insurers attempt to ensure that such exposures are either restricted or entirely excluded and covered under more specific policies.
These are relatively new challenges for insurers to deal with and it remains to be seen how these issues will develop. However, what is clear is that rates are unlikely to reduce in the near future as markets continue to pay close attention to risk quality as part of a wider focus on the sustainability of their portfolios and overall rate adequacy.
In general, the US mining market has fared better than some of the global markets. With less exposure to reinsurance losses and a US mining industry that has produced better underwriting results than other energy classes such as oil & gas, the market has yet to truly enter a hardening phase. Certainly we are in a changing market, where accounts are experiencing much greater scrutiny from insurers than in years past and rate reductions are scarcely to be found. However, the market participants have remained steady and this stable capacity level, coupled with a comparatively higher base rating structure than other industries, has really helped buoy the market to some degree.
On renewal business that has not experienced recent loss activity, rate increases have been modest, in the 2%-5% range across the board for liability. The sole exception is Auto Liability, where irrespective of industry class it seems we are in a market that is demanding increases in the 5%-10% range. On lead umbrella and excess business, the markets have largely followed the primary trends, though with increasing pressure from London markets for lead and first excess business, US markets have been forced to compete more aggressively than they might prefer. There are specific pockets that have more challenges than others, such as underground coal, where the capacity situation is always tenuous.
For new business, there is significant scrutiny of loss records and engineering reports. In the past few years, pressure from new capacity has led to a softening of underwriting standards in some cases; however, we see this trend coming to an end in 2018. Some carriers are declining new business based on lack of sufficient engineering reports, a wording that is deemed too broad or lack of an available loss history. Quality market submission preparation, transparency and access to senior members of the insured’s management team will all lead to better results.
On smaller, single market property accounts, rating increases have also been modest - in the 2%-3% range - whereas on larger layered and quota share programs that utilize specialist global markets or London, the pressure on rating levels has been more significant. Most of the global insurers have had mining industry loss activity on top of catastrophe losses from windstorm, quake and wildfires. We have seen markets open the batting at +10%, though normally that gets tempered to 5%-8% once all is said and done. However, on mining accounts with losses, we have seen more significant changes.
Other trends that we have noticed in the first half of 2018 is US property markets looking to maximize their capacity on renewal business where possible. In addition, carriers are increasingly taking isolationist approaches, looking after their own long term interests; where deal specifics don’t conform to that view, they will choose to walk away. Where target rate increases aren’t achievable, we see attempts to restrict coverage terms and conditions.
When one considers that rates have been falling by an average of 10% every year for the past 4-5 years, and that the global premium base in 2013 was significantly larger than it is in 2018, it can be seen that it will take a lot longer to get premiums back up to profitable levels if the market is moving at 2%-5% increases – it’s a relatively low starting point. Until we see meaningful market withdrawals, or another bad year for catastrophe events, the market is unlikely to see any material hardening.
In general, the Environmental Insurance sector is experiencing its first hardening market in over a decade as a result of a loss-driven reduction in underwriting appetite. High severity claims have hit a number of different classes of risk including real estate, natural resources, transportation & logistics and energy. This unfavorable loss experience has resulted in underwriting authority being taken away from the field level and placed into the hands of executive underwriters, where greater scrutiny is placed on all complex accounts.
In addition, capacity has been further reduced in the aftermath of considerable market consolidation. In the last 24 months, six of our veteran environmental carriers have merged into three: XL-Catlin, ACE-Chubb and Liberty- Ironshore. Zurich and Ironshore continue to lead the mining sector and tailings dams remain the largest risk transfer challenge. In short, capacity remains limited and terms and conditions are hardening for pollution/environmental lines of coverage. Premium increases at renewal are expected to range between 10% to 20% outside of any change in exposure and claims performance.
As anticipated in our last Review, North American surety continues to enjoy attractive Combined Ratios as the economy grows. Consolidation within the space is beginning to show some discipline; however, rates are now approaching the cost of allocated capital, meaning that the economic pendulum may be stalled. Global insurers such as Sompo have acquired niche US insurers with surety exposure to provide non correlating premium.
Of interest to the mining sector are the perceived gains that international non-governmental organizations have made with the international insurers and the actual results of these perceived gains. As we reference elsewhere in this Review, a few global insurers have declared that they will withdraw from investing in (and in some cases withdrawing cover from) heavy consumers of coal and coal producers.
More broadly, US mining operations have seen favorable commodity pricing as the global economy expands and a more balanced US regulatory environment appreciates the interplay of environmental responsibility and husbandry of our natural resources. The US surety industry has embraced these two events and broadened their appetite into international obligations. Specifically, US sureties are branching into Australia and Latin America as they grow comfortable with the mining remediation obligations. Barring a severe economic downturn, the mining space shows promise for the surety industry.
While we have seen more activity amongst miners in reviewing their cyber risk exposure, the purchase of risk transfer products still remains thin. As insurer forms develop, there is more and more pressure to truly separate all cyber risk from Property and Casualty products, though in some cases isolated areas of coverage can be negotiated back into those lines of insurance.
However, the Willis Towers Watson Cyber Risk Profile Diagnostic (CRPD) consulting engagement process has proved to be of value to the mining industry. We have seen a number of miners that have taken up this engagement, and in most cases it has led to the deployment of capital internally after gaining a better understanding of where the true vulnerabilities lie within the organization, whether that is Human Resources, IT, Operational Technology or elsewhere.
In this current environment of rising/ recovering metal prices (and by extension increasing Total Insured Values), underwriters are able to collect more premiums for the same line size than was the case in previous years. So while there is likely to be in excess of CAN$1billion of available Canadian domestic property capacity, underwriters are no longer motivated to contribute larger line sizes to capture more premium.
Miners will benefit from a more competitive bidding environment if they are able to furnish the market with up to date quality risk information. With an increase in the number of submissions on underwriters’ desks, those clients that are able to differentiate their risk will find the market more competitive - leading to better pricing, broader coverage and a choice of which insurer they want to partner with.
Barring any additional material claims activity, 2018 will see flat to nominal rate increases for the majority of miners’ programmes in the Canadian market. However, the potential for rate decreases, although rare and likely to be in the low single digits, will still be achievable for best in class risks that are desired by the market.
The landscape of the primary casualty market in Canada remains stable, with Zurich, Chubb, AIG, and Allianz demonstrating that they are comfortable in deploying limits in the working layers. These carriers differentiate themselves by their ability to not only write Canadian domestic mines but mines located around the world on an admitted basis, where required. 2017 did not see any significant liability claims in Canada and, in particular, any breach of tailings facilities. As a result, capacity has remained consistent; however, tailings remain the primary casualty markets’ key concern. Primary liability underwriters are consistently requesting very detailed underwriting information relating to foreign operations to tailings facilities on site, while renewal mining business can expect flat to minimal rate increases when compared to production.
For excess liability, an abundant of capacity continues to be available in Canada. The London market also plays a large role in Canadian miners’ programmes, often deploying a larger limit on a given layer.
For most risks, excess layers have reached minimum premiums for the capacity provided; flat premiums are therefore being achieved. Some accounts will see slight increases in rate per million, primarily driven by increases in clients’ exposure.
Consistent with our advice from our previous Review, natural catastrophe and Business Interruption exposures continue to be scrutinised by insurers as they review accumulations, particularly following the Tropical Cyclone Debbie losses in early 2017 and global natural catastrophe losses in the second half of 2017, and the impact of commodity prices respectively. There has also been an increased review of operational exposures to ensure insurers are deploying capacity to programmes with a commitment to ongoing loss control and risk mitigation.
Despite the losses that have arisen in the Australian market both from operational and natural catastrophe events throughout 2017, capacity has remained stable. As mentioned earlier in our Review thermal coal operations are subject to capacity constrictions, in particular from global insurers that have reviewed their capacity commitment to these types of operations.
Whilst capacity is available there has been uplift in premium rates in the property market throughout the first half of 2018 with insurers seeking to improve the profitability of their portfolios and we see these increases continuing for the remainder of the year. The level of increase on a per account basis is reflective of loss experience. Whilst pricing has increased, there has been no restriction in policy coverage to date, although sub limits for business interruption are being reviewed.
The South African insurance market has experienced a torrent of mining industry losses during the first half of 2018, including seismic events closing gold shafts for 3 months, a transformer fire at platinum mine and a collapse onto a longwall miner in the thermal coal industry. The market reaction experienced since May 2018 includes:
The reaction has been broadly similar across the market rather than specific to any carrier.
In addition, the environmental concerns of some global reinsurers referenced elsewhere in this Review are reducing capacity in the thermal coal sector, making placements harder to complete.
Chris Neame is Senior Vice President, Willis Towers Watson Natural Resources London.
Matt Clissitt is Executive Director, Willis Towers Watson Natural Resources London.
Fred Smith IV heads up Willis Towers Watson’s Mining and Metals practice in the United States.
Michael Benoit is Senior Vice President at Willis Towers Watson in Toronto
Stephen McDermott is placement Services Director at Willis Towers Watson in Brisbane, Australia.
Adrian Read is Industry Specialist Leader: Natural Resources, Willis Towers Watson South Africa.
