International Insurance Market Update
Introduction: “The Good, The Bad and the Ugly” Approaching the midpoint of 2019, the US market for miners hasn’t been immune to the pervasive hardening that other industry segments have seen. While there are pockets that remain stable, most lines have seen significant upward pressure - perhaps less than the International markets, but upward pressure nonetheless. Programs are experiencing much greater scrutiny than in years past and rate reductions are completely off the table for most lines of business. Conditions can perhaps be best expressed in terms of a famous spaghetti western from the 1960s.
The good
The bad
For all types of miners, there continues to be significant scrutiny on loss record and property risk engineering reports. Quality market submission preparation, transparency and access to senior members of the insured’s management team are all now seeming prerequisites to renewal terms being offered.
The ugly And finally - the ugly. Property markets have perhaps seen the most dislocation and volatility in 2019. While many mining companies are more heavily weighted towards London and European markets where specialist underwriting is more common, the US markets still provides a meaningful piece of a miner’s overall market selection process. Whether a single small operation or on larger layered and quota share programs, the pressure on rate and capacity has been significant in 2019.
Most of the global insurers have had mining industry loss activity on top of catastrophe losses from windstorm, quake and wildfires. We have seen US markets open the negotiations at +20% to +30%, though normally that tends to be tempered a little once all is said and done. We see US insurers trying to get back to circa 2014 rates, essentially attempting a five-year correction.
However, we have seen more significant changes on mining programs with losses. In past years there was a glut of new capacity ready and willing to displace the more expensive capacity; now, this is no longer the case.
Another trend that we have noticed in the first half of 2019 is that US property insurers 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, or in some cases, both. AIG and FM Global have also shaken up the markets, with both choosing to non-renew or significantly reduce capacity on programs that they have been writing 100% of for many years. This has left a huge void and many miners scrambling to access dwindling capacity.
Miners should get into the markets early and be prepared for a long negotiating period on upcoming renewals. Having a large number of insurers participating on a program, while more complex, can also provide a bit of buyers’ protection from the effects of one or two volatile insurers. Lastly, those miners with captives should be prepared to think about their long-term risk finance strategy and how to better utilize their captives to moderate capacity and pricing issues down the road.
Environmental: more centralization of underwriting authority 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 the natural resources industries. This unfavorable loss experience has resulted in underwriting authority being taken away at the field level and placed into the hands of executive underwriters, where greater scrutiny is placed on all complex programs. In addition, capacity has been further reduced in light of recent significant market consolidation. In the last few years eight of our veteran environmental carriers have merged into three: XL-Catlin (now owned by AXA), ACE-Chubb, Liberty-Ironshore and The Hartford-Navigators.
Specific to the mining industry, the Environmental market is still very limited and has been since AIG left this sector in North America, with Ironshore and Zurich being the key domestic markets. The only new specialty carrier to enter the mining space in recent years is Channel 2015, a Lloyd’s syndicate supported by Scor Re. While their appetite for US-based risk remains low, they’re a viable option for predominantly “Rest of World” mining operations, including Canada, Europe and Australia.
Securing meaningful Environmental Liability coverage for tailings dams has become even more challenging in the aftermath recent catastrophic breaches. In response, many umbrella/excess carriers are non-renewing “Sudden & Accidental” pollution coverage, or imposing strict underwriting information requirements, higher attachment points and significant increases in premium. This has resulted in more Insureds turning to the dedicated Environmental marketplace to obtain terms for Pollution Liability (“PLL”) programs.
Unfortunately, there has been further withdrawal from environmental carriers in this space as well. In May 2019 AIG announced they were no longer writing any PLL programs for global mining/tailings risks (previously they had only exited the PLL market in Canada and the US). Other insurers, including those noted above, have introduced and imposed sub-limits, leading to the creation of layered programs to achieve the required limits; this has inevitably driven prices upwards.
In short, capacity remains limited and terms and conditions are hardening for pollution/environmental lines of coverage. The type and extent of engineering information required to underwrite any tailings storage facilities is far more extensive than in years past, with pre-renewal engineering site surveys often a binding subjectivity. Premium increases at renewal are expected to range between 10 to 20%, notwithstanding any change in exposure and claims performance.
Bermuda: consistent appetite but firmer approach Over the last 10 to 15 years the Bermuda Property market has proven to be consistent and disciplined in its approach to underwriting mining risks. Whether writing US or International risks, the Bermuda market has supported the class through the various underwriting cycles, demonstrating a commitment to the industry. And while there are instances of markets pulling back from or exiting Thermal Coal, the core Bermuda carriers remain steadfast, and have largely maintained a consistent appetite, albeit that consistency has been dependent upon achieving “Rate Adequacy”; in the first 6 months of 2019 this has translated to average composite rate increases in the region of 20% to 30% for loss-free business.
As we move into the second half of the year, we anticipate a continued upward pressure on rates, as well as an increased focus on terms and conditions. Capacity is likely to continue to be trimmed, although the trend of buyers opting for reduced limits will go some way to mitigating the impact of the globally diminished capacity. A strong market relationship, robust risk management practice, and a firm understanding of the commodity market are likely to be key focal points as we move forward.
We also need keep an eye on the impact of losses from the broader ‘Energy’ market; while each risk is underwritten on its own merits; underwriters’ ability to continue writing an inherently complex business is dependent upon a profitable portfolio.
Surety market: a turning ship? While Combined Ratios remain favorable and the recent international entrants have attained their budgeted goals, the political headwinds have moved onshore. Large US insurers such as Chubb and Zurich have announced their exit from thermal coal; however, they have carved out Reclamation Surety from the exit. A lingering question is how the international non-governmental organizations (NGOs) will interpret this accommodation as they look to further their influence in the US.
Specific to the coal industry, recent bankruptcy filings by middle tier operators may cause Surety underwriters to pause; though largely unknown, these operators have nine-figure exposures to the markets. Significant losses in this space could drive the underwriting community, and their reinsurers, to re-evaluate their appetite for this space. Should this over-reaction occur, strong relationships with the surety markets will be of paramount importance.
Due to the favorable loss ratio and declining rates, North American insurers continue to branch into international jurisdictions to provide surety and other financial assurances for mining reclamation and remediation; this provides an opportunity for the mining industry to offer third-party promises regarding any environmental transgressions. While the insurance cover reflects a tailored approach resembling stand-by letters of credit, capacity is currently available from the insurance industry to offer an option.
Fred Smith IV heads up Willis Towers Watson’s Mining and Metals practice in the United States.
Property – a constantly changing market To say that the Canadian Property market is changing would be an understatement and early, accurate renewal information will be more valuable than in previous renewals. Property underwriters posting unfavourable results due to increased loss activity across several industry classes has led to a considerable increased pressure on rates and reduced line sizes being offered.
Rate increases will be the norm for even the “best in class” risk, with careful review of supply chain exposures, interdependency risks and deductibles also playing a considerable role in the underwriting process. With respect to capacity, while it remains plentiful and available in the Canadian market, geographic diversification will be beneficial to miners when completing their programs.
In addition to detailed renewal information, underwriters will be keen to understand what miners have done in the past 12 months to improve their risk and look for alignment with their social values and corporate cultures.
Casualty The outlook for 2019 for casualty markets for mining risks in Canada is significantly different than first half of 2018. During the final quarter of 2018, we are saw signs of concerns from Canadian primary liability markets for mining risks, especially from key carriers such as Zurich, Chubb, AIG, and, QBE, which continues throughout 2019 to date. For 2019 renewals, Primary carriers are reducing GL and Umbrella combined limits; this is forcing brokers to formulate options for buffer layers down low or arranging Excess carriers to drop down to lower attachment points.
It’s perhaps not surprising that key concerns from Liability underwriters include Tailings Storage Facilities (TSF) collapses causing severe environmental claims as well as massive property damage and bodily injury, including deaths to nearby local communities. Full and complete detailed information on TSFs are mandatory for underwriting purposes.
There has been a consistent increase on primary CGL rates and Umbrella layers, ranging from flat to 5% on good risks; Excess Liability carriers will follow the increase from underlying layers. There has also been significant rate increases in Automobiles, ranging from 5-10% on good risks.
Executive Risk (D&O) The Executive Risk market has firmed significantly over the past 18 months; however, marketplace competition continues to be present amongst carriers due to available capacity. The market has largely followed the leaders on rate-increase strategies for primary and lower excess layers, therefore insureds should not expect pricing reductions on D&O placements. Leading insurers have demonstrated effective discipline and are more conservatively deploying capacity in the face of profitability challenges due to large volumes of securities class actions, uptick in the cost of defense, and a general shift towards both high frequency and severity claims in this space.
The severity of losses could worsen as relatively higher stock prices could produce precipitous stock drops, this is particularly noted for the natural resource space. Additionally, more merger and acquisition suits surviving the transaction effective date could drive up losses and increase premium pressure.
Michael Benoit is Senior Vice President at Willis Towers Watson in Toronto.
Property - Munich Re withdraws The biggest issue is the withdrawal of Munich Re of Africa (MRe’s South African office) from all forms of mining risks in South Africa. This action followed three years of underwriting losses for the company, principally as a result of mining industry claims.
There is very limited lead capacity, with only three recognised lead markets. Their capacity and pricing are very much driven by the international reinsurance markets. There are also a restricted number of following insurers, due to the reluctance of insurers to provide capacity for underground risks; as a result, most insurers prefer an excess of loss position above the underground limit.
The anti-coal movement has had insignificant direct effect; the local offices international insurers such as Allianz, AIG and Chubb have advised that they will no longer be underwriting coal programs. However, these insurers have provided little if any mining capacity in recent years.
Risk management, especially the response to surveyors’ risk improvement recommendations, is paramount. Insurers will not provide capacity for existing or new risks unless they receive proof of compliance with recommendations.
Liability – AIG withdraws The withdrawal of AIG from the mining liability market and the exit into run-off of a Lloyd’s liability underwriting facility has caused a serious gap in capacity. Liability insurers require far more detailed information regarding tailings storage facilities following the Brazilian losses.
D&O – hardening pressures ease The premium pricing for mining companies has generally been stable to 10% uplift increase in 2019 which is a significant improvement compared to the huge increases experienced over the 2016-2018 period.
Commercial Crime Premium increases of around 10% are normal. Clients with perceived poor risk quality have suffered higher increases & scope of cover restrictions.
Adrian Read is Industry Specialist Leader: Natural Resources, Willis Towers Watson South Africa.
The Australian mining market has seen a continuation of the conditions from 2018, with further increases in premium rating experienced throughout the first half of 2019. The previous twelve months was another challenging year for underwriters in this sector and has seen the enforcement of underwriting guidelines from management, with requests for more granular information that in past years as underwriters seek to return to underwriting profitability.
Quality submissions, inclusive of detailed operational exposures (especially tailings dams) and natural catastrophe exposure information, analysis of commodity price changes and Business Interruption values that are declared, risk engineering programs and mitigations that are in place will all be crucial to ensure that optimal renewal outcomes are achieved and that underwriters continue to deploy their capacity to expiring levels.
Capacity remains relatively stable; however, underwriters are reviewing the deployment of their capacity to each and every operation. The exception to this trend is the continued constriction of capacity for thermal coal operations, with further insurers recently announcing they are also withdrawing from this part of the mining sector.
Stephen McDermott is Placement Services Director at Willis Towers Watson in Brisbane, Australia.
