The early 2021 direction of the Excess Liability market place has shown a moderation in the rise in rates and premiums, albeit accompanied by a loss of capacity and increased scrutiny of terms and conditions. For buyers, it is as if there is a welcome break in the weather, and some opportunity to clean up after the turbulence first seen in 2018 and compounded yearly since.
Power and Energy buyers have achieved relatively better results for their programs as we have moved further into 2021. However, the market is not as user-friendly as buyers would like, and meeting both budgets and capacity requirements remains stressful. With some exceptions, programs in this sector are experiencing increases of 15%-20%; this level of increase is being led by the industry specific mutual AEGIS and maintained by following markets.
Insurers that are new to the market are currently taking a cautious approach to business opportunities; we are seeing capital look to take advantage of the premiums which are now considered to be at more sensible levels and which, we believe, will continue to increase in comparison to 2020. Macro underwriting decisions, such as withdrawing from programs featuring the production and burning of thermal coal, as well as almost all wildfire hazard, have aided insurers’ resolve to support the Power and Energy portfolios once more. Added to this, insurers are looking to exclude any coverage arising out of Pandemic and Cyber risk in the Excess Liability market, an initiative brought about by the withdrawal of protection from their reinsurance providers at their most recent treaty renewals. In respect of the latter, this seems as if it is being done to push buyers into investigating/considering the coverage offered in the stand-alone Cyber insurance market.
Where buyers in this sector have lost Excess Liability capacity steadily since the onset of the hard market, they may now find that new capacity will step up. We are not seeing any fresh initiatives to drive competition, thereby signalling the turn of the hard market; rather, they are seeking to fill “opportunities” in Excess Liability programs. As we move further into 2021, we are seeing the impact of the last three years and the effects of the overall experience; true to the cyclicality of the market, the actual rate of the rises in premiums and compression of conditions has now slowed.
Within the Excess Liability marketplace, we now recognise a two-tiered treatment of buyers by insurers, which will continue through 2021 and which deals with differentiation:
An element which must be factored into each tier is the complexity and size of the Excess Liability program “tower” sought; those requiring the greatest amounts of capacity (recognising retentions and excess limits) will have the supply and demand dynamic working against them. While this can be viewed as the way the Excess Liability marketplace works for the industry, we have seen a greater moderation of the continuing hard market within the first tier.
In the last three years, buyers have been faced with the decision of whether to spend the money to accommodate insurers’ demands. North American buyers were faced with alternate methods to replace lost or exorbitant underwriting capacity, utilizing increased retentions throughout a revised program structure, captive insurance use and/or reducing the total limit purchased. On the latter issue, some buyers could only muster limits of less than half of that provided by their expiring programs; 2021 offers them the opportunity to start rebuilding and reassessing. It should be noted that Aegis has expanded its Excess Liability limits to as much as US$70-140 million in the aggregate, and have added more underwriters to their team.
As it has been for the previous two to three years, the driving force behind current market dynamics has been the losses hitting underwriters’ ledgers, both attritionally and spectacularly. We are now accustomed to insurers describing the individual impact of “nuclear” events on their individual portfolios, not all of which belong in the Power and Energy sectors; however, they affect the same underwriters who also write Power and Energy Excess Liability business.
We have also noticed that insurers are coming under public pressure from shareholders and stakeholders to address their overall portfolio of business when it comes to supporting buyers in certain power/energy industry segments, and continued emphasis will be placed on buyers’ ESG commitments and on their operational sustainability progress and goals. In addition, more insurers are looking to understand their buyers’ exposure to climate risk and the energy transition, not only from a liability standpoint, but also from the perspective of the related risks to the buyer’s business.
What sort of increases can buyers expect as we move further into 2021? Notably early in the year, certain insurers have been up front with brokers and clients on their expectations for 2021, including Aegis, QBE, Chubb, OCIL and AXA XL. Others are looking to be opportunistic – even, at times, predatory. More often than not, line sizes are bound for between US$10-15 million; the range only increases to as much as US$25 million under much fewer scenarios.
As expected, the Excess Liability prices and rates in play through 2020 and seen in 2021 have brought in new investments. However, this capacity is expected to play within the current commercial levels and will not be enough to start driving premiums down. We expect extra capacity for certain classes of business to emerge from Bermuda-based Arcadian, Ark, Vantage Risk and Helix among others, with Aspen’s Bermuda operation possibly expanding its remit to include the Power and Energy portfolio. Capacity may be deployed more readily for participation for the Renewables sector, but in the meantime, new Lloyd’s syndicate Inigo, together with the expanding ERS and Sirius, have committed Excess Liability expertise to certain classes of Power. And in the US, OSL Insurance Services, Inc. (OISI), aligned with Bermuda-based OCIL has opened, advising “selective appetite across Utilities and Power Generation”.
Policy conditions continue to be reviewed at each renewal; given the January 1 2021 reinsurance renewal season, we have seen that broader Communicable Disease/Pandemic exclusions will be increasingly required, particularly so for capacity from London, Europe and Bermuda. London capacity will also deal with Cyber exposure, looking to jettison or at least tighten the extent of any writeback previously afforded. We continue to see a sustained review of policies’ Pollution exclusions, scrutinizing time element parameters, named perils and treatment of waste operations as well as an understanding of any coverage that may be afforded to the specific exposure of wildfire.
As we move further into in 2021, the renewal process will again be stressful for buyers, underwriters and brokers. Most buyers will likely be running through their second virtual renewal, and another year of visits and facility/asset tours. Buyers should plan on off-cycle discussions with core insurers, determining the impact of shrinking capacity and moving attachment points, retentions, stress points on coverage and conditions and cost expectations. The role of analytics as a tool to assist in the renewal process is now prominent and is being used to assess various options for setting excess points, layer costs and structuring, limits and advanced benchmarking. And finally, the renewal process should start early, with as much information as is needed to differentiate the buyer and its risk management processes.
David Clarke is an Executive Vice President for Willis Towers Watson’s Liability practice based in New York. David.Clarke@WillisTowersWatson.com
