an apprehensive market climate
Introduction: a tough 2019 Power and utility insurance buyers had a tough year of it in 2019; outside of the mutual insurers, those buyers were in the same market as all buyers of large complex Excess Liability programs. 2019 ended with little hope for sanity in 2020, and by the end of February, so many external forces were at play as to portend an increasingly difficult renewal process for all. The factors are all there: underwriters demanding increased premium levels, the loss of capacity in withdrawals from North American business or a reduction capacity offered, the market segment being battered by the “nuclear losses” of the last several years, unsettling investment positions, the impact on society of COVID-19 and the general barriers in working remotely. “Nuclear” losses fuel apprehensive market climate Perhaps the force behind the consternation in the market have been the losses which, while not all relating to the power and utility industry, became “nuclear” events to the same underwriters who write the specialist industry portfolio. These included significant losses from catastrophic events, including wild fires in the US and Australia, tailings facility failures in South America and named windstorms throughout the globe. These “nuclear” events were then combined with gas-related explosions and “active shooter” losses to create disastrous sets of underwriting figures; taken together, claim amounts from these events are likely to have exceeded US$1 billion. Added to this, these same insurers were hit with repeated and expanded verdicts that resulted in Auto Liability losses and even Premises and Operations Liability losses. From the deep pockets of corporate defendants who had little - if any - participation in the liability negligence, came significant awards of tens of millions of dollars – not to mention the staggering defense expenses that went with each action. The outlook for 2020 We expect Power and Utility Excess Liability renewals in 2020 to grow increasingly more challenging as the year progresses, continuing the pattern seen during the second half of 2019. We expect the Mutual insurers to challenge rate adequacy for a measured increase in premium. We may see Excess Liability rates/premium increase in excess of 10% or more, and this will come concomitantly with a loss of overall capacity. To illustrate, AEGIS members were generally obtaining 3-4% premium increases at end of 2019 for clean risks, which increased to 10% 2 months ago and, as this Review went to press, AEGIS was generally looking for 12% increases. Underwriters’ positions on power and utility Excess Liability business will garner management’s attention and scrutiny. Policy conditions review The market will continue to gauge the coverage afforded for Cyber Liability in its Excess Liability policies and will look to limit the breadth of Pollution Liability coverages in Excess contracts. It would also seem likely that the market will move to some sort of pandemic/communicable disease exclusionary wording. Losses arising from west coast wildfires and dam facilities will cause a review of conditions; it is noted that the capacity for Wildfire Liability is under intense pressure. Capacity will continue to constrict - attachment points will have to be reconsidered Starting with capacity, Aegis and EIM will continue to offer large amounts of core capacity, often the largest limit provider on individual excess liability structures. Overall capacity will continue to reduce further in 2020; insurers who will still deploy more than $50 million will expect to have their capacity priced properly. Buyers will once again see meaningful insurer participations within their total program limits begin to refuse to offer renewal capacity, and the shifting and back-filling around the vacancies will create difficult coverage anomalies. In Bermuda, while the overall theoretical capacity may not have shrunk that much for North American business, there is a difference between what capacity is advertised and what will be offered and utilized in practice; we have seen reductions in deployed capacity from AIG, AXA XL, Argo Re and others. Companies that have taken the strongest stance on premium increases include AXA XL and Chubb. Underwriters are reconsidering their attachment points; renewal negotiations will have to deal with this dual dynamic of individual insurers’ reduced capacity offers and the trend towards increasing attachments points. This is of particular significance to the integrity of Liability program towers written on a claims-made or occurrence-reported basis.
Conclusion: your renewal strategy will be critical As we have advised in other publications, be prepared for a stressful process, for buyers, underwriters and brokers alike. We have moved a number of our clients to a renewal process that runs throughout the year, recognising the importance of well purposed off-cycle meetings and updates and facility/asset tours. With the new working dynamic of the remote workplace for so many of the participants in the process, it is recommended to initiate the renewal process at least 180 days from renewal, as buyers need to determine the impact of shrinking capacity and moving attachment points, retentions, stress points on coverage/conditions and, of course, cost expectations. The role of analytics is becoming increasingly important, and oftentimes can be used to investigate options for layer cost and structuring, limits and advanced benchmarking. Although multi-year, or longer than annual terms may be desirable as the market continues to harden, the market is not offering these, at least not without the opportunity to re-rate and assess at an anniversary date.
David Clarke is an Executive Vice Present for Willis Towers Watson’s Natural Resources Liability practice based in New York. David.Clarke@WillisTowersWatson.com
