a more technical – and selective – norm
Introduction The second half of 2019 saw a palpable change in market dynamics for the International Liability market and this momentum, compounded by a challenging treaty renewal season, has been carried forward into 2020. To this end, the further deterioration of underwriting performance, driven by a series of losses and rising social inflation costs, has prompted insurers to reconsider reserving adequacy and shifted the previous mandate for ‘top line’ growth to stronger underwriting discipline. Focus on technical rating and benchmarking Consequently, we have seen a much greater focus on technical rating and benchmarking as part of the underwriting process. The impact of this is much more significant for Excess of Loss placements which are often deemed to be more significantly under-priced, according to insurer rating models. On the other hand, primary placements are being subjected to more measured increases, with insurers tending to apply base rate increases of 10% to 20% prior to factoring in further rate adjustments for poor loss records and/or historic under-pricing. This said, with the full impact of COVID-19 still unknown at the time of writing, it is likely that underwriters will be under even greater pressure to deliver rate increases to their management and consequently average base rate increases could be more pronounced in the second half of the year. Capacity deployment reconsidered The stronger underwriting discipline being applied is also leading to a growing trend for insurers to reconsider capacity deployment at renewal, and often limit or reduce line sizes on programmes where there is a perceived catastrophe-risk exposure. The impact of this is mitigated for programmes which require less capacity but for those buyers that purchase more significant limits (such as European Hydropower placements) the lack of arbitrage can serve as a further factor in pushing up costs. The combination of all these factors, coupled with the substantial increase in new business flow to the London market this year, is resulting in a much more selective approach from underwriters in terms of what type of risks they are willing to write and – importantly – how prepared they are to negotiate. Coverage considerations In tandem with insurers’ focus on rate and capacity deployment, much greater attention is also being paid to policy coverage and, depending on the premium adequacy of the risk, insurers may look to rule out soft market coverage extensions in a bid to achieve – or at least get closer to – rate adequacy. For example, underwriters are now taking a firm position on cyber coverage and ensuring it is either excluded from policy wordings or provided on an affirmative basis, although there remains some inconsistency in the clauses preferred by insurers. Failure to Supply exposures continues to be a key consideration for insurers, with exclusionary language commonplace. However, Injury/Damage writebacks can often be negotiated back into the clauses if the rate is adequate. The most recent coverage development, deriving from the COVID-19 pandemic, is the introduction of Communicable Disease exclusions. Whilst at the timing of writing this is very much an evolving landscape, the responses from insurers have varied, ranging from blanket exclusions for all forms of communicable diseases to some insurers preferring to abstain from applying any exclusionary language altogether. Exposure challenges While Power business continues to be within most insurers’ general underwriting appetite, specific appetite for coal exposures amongst company insurers continues to decrease, and consequently the pool of insurers available for risks that have a significant exposure to coal is more restricted than in previous years. Notwithstanding this, it is still possible to place meaningful limits for coal-exposed insurance risks although buyers who have hitherto not purchased significant limits will find their options more limited. This is because some of the insurers who can continue to write coal exposures are unwilling to increase their exposure to coal further by writing new risks and will only consider renewing existing policies. Where insurers are able to write coal exposures, there is a much greater emphasis on understanding buyers’ ESG position; a forward thinking and strong approach to ESG often forms part of the prerequisites for insurers being able to participate on coal-exposed programmes. In addition to coal, Transmission & Distribution and Bushfire exposures continue to make up the complement of most challenging Power placements, with certain insurers not willing to provide cover at all and others only willing to consider providing cover on the basis of a particular attachment point or territory. The recent bushfires in Australia are likely to exacerbate these underwriting challenges further.
Market capacity Whilst in theory the global capacity for International Casualty risks remains high at approximately US$3 billion, the realistically available capacity is ultimately closer to a around a third of this amount. This notable delta is due to several key factors including insurers’:
Marketing tactics While the current market is not without its challenges, there remains a vibrant appetite for Power risks and sufficient capacity to maintain an element of competitive pressure on rates in the majority of cases. However, market capacity contractions will naturally result in a reduction in the number of programmes that are over-placed than we have seen in previous years. Restructuring programmes is still an effective strategy for mitigating the impact of ongoing market dynamics and vertical placements are sometimes an essential method of driving down layer prices to achieve overall premium targets. Ultimately the provision of good quality and robust underwriting information, ideally in the form of a comprehensive underwriting submission, is key to evidencing effective risk management and unlocking the best possible terms from the market. In conjunction with this, it is essential that brokers begin initial renewal conversations with the market as early as possible in order to both flush out potential renewal issues and also enable sufficient time for underwriters to review the risk, particularly given the increasing necessity to source new capacity to renew expiring limits. Separately, the value in maintaining long-term insurer relationships continues to be increasingly important, given the effect it can have on mitigating knee-jerk reactions to technical pricing. However, this needs to be balanced with the benefits of buyers diversifying their insurance panels to ensure they are not left overly exposed to a significant change in underwriting approach from a single insurer.
The net effect In summary, and notwithstanding the considerable amount of capacity still available for Power risks, buyers should be prepared for the upward rate momentum that we witnessed in the second half of 2019 to continue into 2020 and for underwriters to take a much firmer stance on risks that do not fall within their underwriting appetite. Consequently, brokers will need to be more creative in their marketing approach and utilise their experience and market relationships to greater effect to mitigate the impact of these market conditions. In terms of insurers, the London market is likely to continue to be used in a lead capacity role for the majority of multi-layered Power programmes, although the largest programmes are likely to face a significant challenge when it comes to maintaining existing limits as the pressure of market contraction and reduced capacity deployment takes effect. Overall it is clear that it will take more than the six or so months of a ‘hardened’ market for conditions to settle. In the meantime, buyers should seek to ensure that the broker appointed to represent them in the market is equipped with the industry experience, technical knowledge and market relationships sufficient to obtain the best possible terms from what remains a challenging environment.
Matt Clissitt is Director, Natural Resources, Willis Towers Watson London. Matthew.Clissitt@WillisTowersWatson.com
