The two speed market we reported last quarter has changed to a three speed market. Downstream Property had earlier in the year sped ahead of Upstream Property and Casualty, but Casualty has now stepped up a gear.
Downstream continues to lead the hardening, and continues to be a most challenging market as we discuss below. Casualty however is now also becoming increasingly difficult, whilst Upstream remains stubbornly stable, from insurers perspective, but within this report we discuss how this stability looks fragile.
The veneer of the Upstream insurance market is healthy. Generally loss ratios are good for insurers. Capacity is at an all-time high, plus has never been so financially sound. There are still many ambitious leaders. The new entrant Convex with their USD 350 million upstream line will also constrain the increases their competitors would like to charge.
If Insureds possessed platform risks in non-cat zones (such as the UK or Brazil) they would have renewals they should have been happy with.
However, despite the foregoing, many risk managers are now facing challenges in sourcing insurance at the friendly terms and conditions that were readily available in the summer.
North American shale operators and contractors have seen dramatics rises and increases in deductibles. Offshore construction rates have nearly tripled from early 2019 as attritional losses have gone up in the sector.
The Norwegian sector in particular has seen an uptick in settled losses. Conditions such as stricter ‘Schedule B’s and Marine Warranty Surveyor work scopes have been more readily imposed by leaders. In the current market, a safer choice of leader is more prudent to complete the program making traditional mainstream leaders (such as Munich Re) fashionable again.
The insurance hubs of Singapore and Dubai are not the competitive markets they once were. An example of this deflation in attitude is the decision to place the Asian carrier ACR into orderly run off after announcing ambitious plans and a strong underwriting team being employed. Loss of confidence in the regions means it is being more closely monitored and managing from their London headquarters.
Behind the scenes, first loss reinsurance, which in 2018 was plentiful, has become more difficult to obtain; another sign of underlying problems in market dynamics.
The general trend on clean renewals is now firmer at circa plus 2.5% to 5%.
We are also seeing an increased tendency to look at coverage extensions granted in a soft market and to withdraw these and/or offer to maintain them, but at an Additional Premium, if they now seem over generous.
As the market moves towards a hardening phase, albeit slight in percentage terms, we are also seeing it become more difficult to get exposure ‘thrown in’ for free, that was regularly included in the soft market, such as adding to the schedule of values and agreeing to ‘waive’ the additional premium calculated.
The general feeling is that the market is only one or two sizable losses, or a series of attrironal losses, away from seeing contraction in capacity which will result in the market stepping up a gear in its hardening, we therefore continue to recommend that clients obtain the longest period they can lock in for.
This market is for turning and Insureds may find 2020 a negative inflection point.
As the third quarter of 2019 concluded, there were clear signs that the market correction was accelerating and this has proven to be relentless throughout the fourth quarter across all regions. Insurer discipline has strengthened and the combination of withdrawals from class and reduced capacity deployment has reversed the supply/demand balance.
Due to complexities over reinstatement, some doubt remains over the quantum of loss to the market from the Philadelphia incident. But the recent severity of the loss at Port Neches has unquestionably driven the Downstream market well into negative territory for the third consecutive year.
Global aggregated reserved losses are now in excess of USD12.5bn against gross premiums benchmarking at less than 50% of that. Whereas insurers’ global books are under considerable pressure, the incidents in the US have particularly fractured that domestic market.
In terms of market direction, there appears to be two definitive insurer camps. The first group are those that are following a stated strategy to stair step increased rates to clients over consecutive renewal periods.
The purpose behind this is to manage the cycle, show differentiation and preserve established business relationships. The second group is targeting severe rate increases to take full advantage of prevailing market conditions, commoditise clients and maximise short term returns. This latter group itself is polarised between those with immediate need and those that are looking for immediate opportunity.
Whereas the strategies are different, both groups are looking to work towards their individual technical rating adequacy which on the whole currently stands off by between 40% to 60%.
The end result for programs currently being marketed are rate increases for Downstream that spread upwards from 25% to multiples of that depending on sector, profile and geographical region. Pricing differentials within individual programs also show material spreads. Midstream business trends under Downstream and has the benefit of bridging both Upstream and Downstream markets.
Program retention levels are generally being offered unamended but with some push back on Business Interruption attachment points where reduction occurred below established norms during the elongated soft market cycle.
Downstream earning volatility and accuracy of declared Business Interruption values is a focus, as are asset values, following some clear undervaluation manifesting post losses. In order to contain unforeseen spiking of Business Interruption losses within refining, there is a drive by certain insurers to impose Business Interruption caps to contain volatility.
A clause has been issued by the Lloyd’s Market Association (LMA) that has had some traction and been imposed by certain insurers on some customers. Nevertheless, the initiative is fractured and the clause is too simplistic, therefore buyers and their agents should be mindful of this before accepting such a clause.
The LMA however, is looking at making much needed practical improvements to the clause. It should be noted that Petrochemical will fall within scope although such a clause is not designed to apply to Midstream risks where fixed tariffs and pricing constrain volatility.
On a positive note, a more granular and transparent approach to declared Business Interruption numbers should make for a clearer and expedited Business Interruption claim. In terms of asset values there has been talk in certain sections of the market about the desire to impose average clauses. Such a clause will be unacceptable to most buyers who maintain significant retention of risk, are looking to transfer risk on complex assets through structured first loss policies, and maintain robust valuation metrics. The use of average clauses may heighten the prospect of claim dispute. It is expected however that most insurers will use proper differentiation when addressing these levers with customers and their agents.
Physical Damage from a cyber-event remains a subject under discussion. As the push for affirmative coverage positions continues, there have been a raft of new clauses ranging from absolute exclusions, through limitations to exclude deliberate cyber acts, to named peril write backs for resultant damage.
The NMA2914 and NMA2915 remain a preferential coverage for buyers within their All Risks coverage. Paired into this is the subject of Terrorism coverage, in particular with territories that traditionally combine Terrorism with All Risks coverage. With premiums heading sharply upwards and Terrorism allocations traditionally set at percentiles of the All Risks and Business Interruption extension premium, the delta for including Terrorism within the All Risks coverage is under tension.
Whereas the preferential default position is to provide a physical damage product that extends to the broadest possible perils, it is clear that stand alone Terrorism coverage is becoming a viable alternative, albeit with restriction on the availability of resultant physical damage from a cyber-event. Such appetite for the Cyber Physical Damage element within the Terrorism market appears relatively static at sub USD500 million.
For buyers, the prospects for 2020 look challenging. Many insurers are targeting 2012 rating levels. Deployed critical capacity levels are down by approximately 20%. As such, rate increases will continue for the foreseeable future, and will be accentuated in refining with a lighter touch in relative terms to Midstream and Petrochemicals.
Certain sectors, where rates have been traditionally considered low such as LNG, are likely to see an acceleration, and it should be noted that no sector is without significant loss contribution to the market.
Underlying to the prospective interface between insurers and their customers are restrictions and increased costs in both Treaty and Facultative Reinsurance, and increased cost of Nat Cat commodity. Few established customers would disagree that they have benefited from a sustained period in a buyers’ market and that inevitably there would be a market correction.
However, there is some bemusement amongst those customers, and their agents, that a great number of insurers continued to pursue top line growth over a prolonged time when it was clear to all practitioners that rating was not sustainable. As highlighted in our previous reports, the critical capacity for Primaries, Quota Share and Nat Cat perils had formed a considerably smaller component within a market awash with available general capacity.
The result is that buyers are now facing a fractious and disparate marketplace where they, and their agents, will have to sift through multiple offers in coverage and pricing to determine which insurers provide value and longevity.
There will be many intense discussions over the balance between risk retention and transfer, and an expectation that the likes of OIL and captives will be the beneficiaries. Those already incumbent within OIL will review the appropriateness of current structures and attachment points.
Those customers locked in by governance structures on coverage requirements or lenders interests stand in most peril.
At this time, there does not appear to be immediate relief in terms of new capacity with only one notable mainstream entrant who is currently taking considered time to finalise their Onshore strategy. It should be expected that there will be a move to exercise more insurer control over geographical deployment of capacity, and as such a further element of repatriation may occur. At this time we are not seeing credit rating concerns.
Whereas market conditions are severe fortunately there are a number of insurers who continue to differentiate and not to commoditise clients; it is those insurers working with customers, and their agents, that will form the bedrock to a more sustainable market as the cycle moves upward.
We continue to see an adjustment and tightening across the whole of the London Power market. The recent withdrawal of capacity continues as carriers realign their capacity with more profitable areas of their book. Power has been struggling to make money for a number of years for most carriers as losses invariably outpace premiums.
As we close the fourth quarter the position in the market remains as challenging as it has been for the past six months.
The fourth quarter is a very busy time in London with underwriters focusing their energy on 31/12 and 1/1 renewals as well as closing out their years. Good broking helps mitigate overall impact with re-layering and restructuring programmes along with vertical placements (each carrier on their own slip with their own terms).
Straight forward renewals with a clean loss record and no catastrophe (CAT) exposures are taking an minimum of a 12.5% - 15% increase. Accounts that have CAT exposures or losses are taking more, sometimes considerably more including deductible level increases.
In Lloyd’s the situation is compounded with markets limited to income limits for the underwriting year. Hence fourth quarter renewals were tricky for some as insurers get close to their annual income limits.
Deductibles are holding strong and not increasing, but we do expect some fringe coverage to disappear or be limited such as extended cyber, limited terrorism, and construction within a policy.
The renewables market is gone through a significant period of hardening over the past 6 months and especially solar PV and risks in high CAT zones. CAT cover for solar PV is extremely limited and we advise clients to start the renewal process very early in order to prepare lenders, financers and internal stakeholders for the change in the market.
The market continues to transition and this period is expected to continue through 2020. Capacity remains available but is very important for clients to differentiate themselves from their peer group in order to achieve the best possible terms.
Our recommendation is to enter preliminary discussions with markets as soon as prudent to avoid last minute rushed negotiations. Insurers are taking significantly more time to review schedules and are delaying quoting until very close to inception to ensure they are achieving the best outcome. This can cause a lot of frustration for brokers and clients. Above all be prepared for a change in terms.
The shifting sands of the Liability market seem to have positioned it between the downstream property and the upstream portfolio.
While the presence of losses is not immediately apparent in the energy sector, the wider liability market has suffered a series of catastrophic events in the last few years that has resulted in both a contraction of capacity and a determination to leave behind the “as before” mentality and to start charging what are viewed as prices commensurate with the return periods being experienced.
The wildfires in the US and Australia; the hotel sniper event in the US; US auto experience in general industrial sectors; marine yacht losses from the Harvey, Irma and Maria (HIM) hurricanes, and various utility explosions and fires in North America have all had a catastrophic effect on the depressed pool of premium that 5 years of relatively benign loss experience had created.
Many clients, not exposed to the risk factors or classes that have suffered losses in the last few years, may ask why they are being tarred with the same brush as these unfortunate Insureds - why should the offshore space in North Sea exploration and production (E&P) be affected by Australian bush fires or their California equivalent?
The answer is that, similarly to the downstream market, but on a much more pronounced basis, the Casualty insurance market is served by a proportionately tiny pool of premium. Events they are supposed to have a likelihood factor (or return period) of 1 in a 1,000 years, and therefore pricing to match, are happening far more frequently.
The other issue with the relative lack of frequency of major Casualty losses to Property ones is the data set upon which actuaries and loss adjusters model these return periods is much smaller than in Property, and so a single event can skew the results significantly, throwing out the received wisdom of the previous years’ reserving basis.
For example, very few analysts would have predicted an active shooter could affect the hospitality industry to the tune of almost USD1bn as happened in Las Vegas in 2017. With a sample of losses this volatile, modelling becomes increasingly subjective for both insurers and reinsurers, leading to premium volatility and a lack of pricing harmonisation.Coupled with this increasing frequency experience is the more threatening and immeasurable phenomenon that has been labelled “social inflation” by some reinsurers: awards, especially in the US, are rising exponentially and unpredictably compared to previous experience.
Large awards seem here to stay. Even if they are overturned, or reduced on appeal, inflation of legal costs alone is enough to wipe out some layers, or even towers that previously were thought to provide sufficient coverage.
This change has most tangibly been experienced in US Auto, where it is no longer the very heavy industrial fleets, like those belonging to fracking companies, which are the red flags - many of the largest reserves are due to simple pick-up truck incidents and, worryingly, those in which the events, or indemnities, might previously been thought to give ironclad defences to the various Insureds who have been surprised to have to claim for them.
In short, the whole landscape of Casualty losses has changed, as ever precipitated by the US legal system and the allowances it has created for plaintiffs.
While many sectors of Casualty are not yet hard, they are all now certainly transitioning, and doing so at an alarming rate.
The speed with which markets have been emboldened to turn negative rating protocols into rises has taken most by surprise.
The most affected sectors are:
- US and Australian wildfire, which are now almost year round risks.
- Onshore Pipelines, especially in North America but globally too.
- US Auto, especially in the Service and Drilling contractor sector.
- Utility business - power and liquids transmission and distribution.
What looks to be a list of disparate risk sectors and classes being affected, combines to be a tremendous cacophony of markets clamouring for more money; less limit being offered; tighter conditions under which the risk is written.
There is now a tangible fear amongst underwriters that they could be fired for a bad quarter, or maybe half year of underwriting, and therefore erring on the side of caution with renewal pricing is the new normal.
The effect? Increased stress for Insureds and a precarious situation whereby risk transfer budgets are ill-equipped to deal with the market’s requirements.
There is also a phenomena that many International accounts being re-underwritten from scratch due to perceived inadequate premium levels now being scrutinised at the highest level within companies.
There are lists of “worst offenders” where rating is below USD1,000 per million.
And finally, rate increases are on top of exposure driven increases. While subjective in their size, insurers are no longer willing to gloss over more drilling or throughput as part of the cycle and will charge for this in addition to the management mandated rate rises.
Bermuda Casualty market
The Bermuda market continues to withdraw capacity from standard market priced accounts (currently paying an average of around 20% increase), often as much as 50% reduction in capacity, but some markets are willing to offer their remaining expiring capacity at significantly higher pricing.
Many Insureds are resisting this to avoid inverted pricing (higher rate per million of capacity in higher layers than in lower layers) but some wanting or needing (due to covenants or the like), to continue to buy as much capacity as they can, cannot avoid being held to ransom by the market.
As we approached the end of the year, it became clear that the Marine Hull and Liability markets were in a state of change.
A major feature of 2019 was the speed at which a number of both Lloyd’s and London Company markets withdrew from marine classes, or ceased writing business.
This retraction of marine capacity had a profound effect on not only rating levels, but also appetite of those carriers left within the marine market.
This feature has also rippled into the overseas markets with the demise of the Asian markets of particular note, as well as the withdrawal of Allianz in the US and Singapore.
The result of the above has been a sharpening of risk selection, with each carrier scrutinizing renewal terms as if they were the market leader, and a real sense of careful selection of which risks they are prepared to give out their capacity. We have also seen a retraction in those carriers willing to write policies over 12 months.
With the marine Lloyd’s syndicates currently undergoing their business planning for 2020, we will be keeping a watchful eye on whether there will be a repeat of the process seen towards the end of 2018, which resulted in a number of plans being rejected by Lloyd’s.
The Marine Liability market has enjoyed a more stable period than their Hull and Cargo peers, that being said, we are now starting to see a slight retraction in capacity on this side, which will inevitably bring with it the rise in rates and careful risk selection. Insurers are not afraid of removing capacity from accounts they have written for some time while some have also started implementing minimum premium levels for their shares.
The key themes of the year have been a retraction of capacity, rate increases, job losses, and a keen approach to risk selection. It will be interesting to see if these themes continue to take a firm hold of the Marine market in the New Year, or whether the pendulum will swing back to a softer market for both clients and industry professionals alike.