Unlike both the Renewables and Downstream Property markets, we regret to advise that there nothing by way of crumbs of comfort to be had from the global Liability/Casualty markets. While it is true to say that the Property markets are hardening but still not truly hard, our Liability/Casualty markets are indeed just that. If the definition of a truly hard market is one where capacity above a certain limit is unavailable at any price, then this really is where our markets are as we move towards the beginning of 2021. To understand why we are now experiencing these unprecedented conditions, we should examine current capacity, loss levels, underwriting results and litigation trends before determining how buyers should respond.
For the last three years, even theoretical – i.e. the amount that insurers publish themselves – capacity has been gently reducing, from US$3.2 billion in 2018 to US$3.0 billion today. However, in this market that is by no means the end of the story. The theoretical amounts on offer from the market bear little if no relation to the amount of capacity available in practice, as Figure 1 on the previous page demonstrates. While in the Property markets the realistic capacity is at least 50% of the theoretical, in our markets it is usually considerably less.
But while in 2019 we were able to access in practice US$1.2 billion out of a total theoretical capacity of US$3.2 billion - approximately 33% - now at the tail end of 2020 we can only access in the region of US$800 million for our clients in the energy sector, just 26% of the total theoretical capacity. This figure reduces still further for onshore/offshore follow form capacity and is also considerably less for certain territories and industry sectors (this is particularly the case for Natural Resource clients with mining or wildfire exposures, where available capacity is dramatically less). There is of course little doubt that major energy companies often require Liability/Casualty overall programme limits well in excess of this figure, but we must advise that achieving any higher limits is nigh on impossible in this market, without resorting to alternative risk financing solutions.
Furthermore, the withdrawal of some Liability/Casualty markets has been compounded by the restrictions in average line size that have been deployed per risk by many insurers.
This scarcity of available realistic capacity has enabled some new, volatile and openly opportunistic insurers to target this market to secure increasingly favourable terms from their perspective from buyers keen to secure whatever additional cover they can. This dynamic is reflected in Figure 2 on the pre; it can be seen that the core existing markets, with whom buyers share established long-term relationships, can now only offer as little as US$300 million in total – no more than a minimum working limit for most energy company programmes. Added to these long-term players are some recent entrants to the market, offering another US$ 100m of capacity. So perhaps a total of US$400 million can be accessed, bearing in mind that the minimum rates required from these markets are often more stringent than the existing insurers’ terms.
However, above this figure buyers are now being forced to access more challenging markets. First of all, they are now forced to approach insurers whom they would have probably been able to avoid during the previous hard market - insurers who are not encumbered by the programme’s previous history and whose pricing can, to put it politely, appear somewhat volatile. Unfortunately, from a buyer perspective, the amount of capacity on offer from these volatile insurers will exponentially increase, depending on the required limit. Finally, we have now the true opportunists – those who are now sensing an opportunity to obtain highly preferential terms from those buyers who have no choice but to accept their terms.
Buyers may be wondering why insurers have adopted an increasingly cautious approach to this part of their portfolio. First of all, let’s take a look at recent underwriting results.
Although Lloyd’s represents only a part of the overall global Liability/Casualty capacity available, their results do provide a realistic indication of the state of the overall portfolio. Figure 3 on the previous page shows that while Energy (Property) has produced a positive overall underwriting result for the first half of 2020, the overall Liability/Casualty result (across all lines of business) has resulted in a £386 million loss; to put this figure in perspective, the corresponding result for H1 2018 was a £40 million profit1. There can be no doubt that a similar underwriting loss for Liability/Casualty has been experienced in the composite company market.
On top of that, the overall underwriting result from Lloyd’s for the first half of 2020 is also a loss of over £1.5 billion.
There can be no doubt that one of the key reasons for the losses that have impacted this Portfolio is the advance of social inflation, particularly in the US. We believe that the underlying factors responsible for this are fourfold:
The Natural Resources sector (including Renewables) has by no means been immune from the overall deterioration of the global Liability/Casualty portfolio. In particular, we have seen an increase in both frequency and severity of claims in respect of:
Some of the most significant loses have been the aggregate losses following the recent Californian and Australian wildfires, the collapse of certain tailings dams, particularly in Latin America, a gas explosion in the USA, a water utility pipeline rupture in Peru, an oil leak at an offshore platform in Newfoundland and a major oil spill in the Bahamas.
Faced with such disappointing underwriting results, Liability/Casualty insurers across the globe are now under strict instructions from senior management to secure as steep a rating increase as possible to offset these recent losses. Indeed, we are now witnessing a wholesale recalibration of existing pricing models, with a focus on rate adequacy and risk profile rather than a percentage change on expiring terms.
For non-North American programmes, in very general terms most primary layers are paying increases of between 20-50%, an alarming enough statistic for buyers but significantly compounded by the drastic increases in prices for successive excess layers: low excess layers are seeing increases ranging from 25-100%, with up to 400% - or even more, if minimum rates are deemed insufficient - for mid-top excess layers requiring the participation of the “opportunistic” markets that we alluded to earlier.
In North America, buyers are seeing increases of 25% or more for low/moderate hazard Umbrella Liability programmes, while higher hazard programmes are now paying upwards of 40% on expiring rates. Again, once Excess Liability layers are brought into the equation, buyers are looking at rises in excess of 50% for low/moderate hazard programmes and upwards of 150% if considered high hazard.
However, this simple overview of rating levels disguises some significant variations in an inconsistent and segmented market. The terms offered usually depend on a number of factors, including:
In general terms, all markets are reviewing coverage terms & conditions, seeking to restrict “exotic”/peripheral coverages such as Cyber, Charterers Liability, Pandemic and Pure Financial Loss.
As well as ensuring rate adequacy, insurers are taking a deep interest in buyers’ ESG credentials, particularly when reviewing oil & gas programmes. Midstream programmes featuring significant pipeline operations are also coming under particular scrutiny. Both Cyber and Drone coverage are generally excluded or written back at a significant additional premium, while COVID-19 exclusion clauses are now universally applied across all policies; indeed, an Insured’s overall pandemic response and its effect on CAPEX, maintenance and turnarounds are all being studied carefully.
No wonder several major clients have chosen to self-insure part of their programme or to reduce the overall programme limit rather than be held as “hostage to fortune”.
Other buyers, for whom the option to self-insure more of their programme is not possible, have had to face the fact that the limit that they would usually buy is either unavailable at any price or to voluntarily buy less limit if they consider the renewal pricing exorbitant and/or uneconomic. Indeed, we have seen at least 10 major programmes forced to accept a reduced insurance programme limit for one reason or another during the last few months.
Given the current market conditions, we must advise buyers to be as fully prepared as possible to meet the current market challenges full on. Until this portfolio returns to profitability - an unlikely scenario in the short term, - buyers should expect more of the same as we move further into 2021. Eventually, like all hard markets, this one will pass as more capital decides to invest in this market, supply and competition increase and in time price rises level off. Until then, we will do all we can to prepare our clients for the challenges ahead. We must continue to emphasise that the market positively differentiates those buyers who are long-standing customers, who offer an outstanding risk profile and who understand the level of data required to secure renewal capacity. Sufficient preparation, planning and realistic expectation management, combined with a flexible approach to retention levels, captive utilisation and limit purchased will ensure the best post possible outcome in a rapidly hardening market environment.
Mike Newsom-Davis is Head of Liability, Natural Resources at Willis Towers Watson London. mike.newson-davis@willistowerswatson.com
1 https://www.lloyds.com/investor-relations/financial-performance/financial-results/interim-report-2018
