The divergence of Upstream and Downstream Energy markets that we have reported for the past two quarters continues. Whilst the Upstream market continues to struggle to achieve meaningful increases, Downstream, Power, and Bermuda Casualty markets are gaining more traction, driven by withdrawals and cutbacks in capacity deployed in those classes.
Upstream Energy is now the one safe harbour class that energy clients have across the specialty insurance spectrum.
Marine Hull & Cargo, Downstream, Casualty, Aviation, Directors and Officers, and Onshore Construction are all showing extreme stress in providing capacity and also generally imposing rate rises.
Whilst their sister classes are demonstrating dramatically improved economics, Upstream insurers were typically seeking rate increases of circa 5% in early 2019. By the mid-year this target had slid to plus 2.5%.
Terms and conditions, including pricing, may be achievable for accounts that can demonstrate a robust and embedded risk management process if they have not experienced claims.
The big news in the upcoming quarter sees Steve Hawkins (formerly Axa XL Upstream underwriter) start writing business at the Steven Catlin and Paul Brand start up Convex.
Convex can deploy USD 350 million capacity and therefore joins QBE, AIG and Axa XL among the larger carriers.
This will be the largest ever new entrant into the Upstream space. Whilst broker and client relationships mean this is unlikely to have a large scale pricing impact in the short term, the underwriting team at Convex will place pressure on the medium to smaller sized carriers. This will exacerbate the pressure on renewal rates to get to expiring terms.
There is continuing distress in the US onshore shale sector as losses (from both contractor equipment and blowouts) and reduced drilling activity make the loss ratios on the business unattractive.
Offshore construction rates continue to increase as more and more underwriters take a negative view of the sector.
There is definitely more activity offshore around the world, but the reduced values most drilling rigs now have, and overhanging soft OEE pricings, mean that there are not significant cost increases.
We therefore see that for the balance of the year clients should encounter a positive pricing environment.
Traditionally the third quarter is a slower period in terms of renewals. However, this year activity in the sector has continued with budgeting, customer briefings, strategy preparations and coverage reviews.
Clearly customers and their brokers have been employing wider marketing strategies. Some of this is to counter insurers taking advantage of increased rates to proportionately de-risk their portfolios and also to stabilise placements that have previously taken advantage of avarice insurer appetite leaving placements too narrowly exposed.
A number of insurers, as a consequence, are looking to staff up to handle the workload generated by this broadening of opportunity and for the analytics required by more intensive management scrutiny as they look to turn the sector back into profit. ]
Part of the initiative to work towards a positive outcome for insurers is the tightening of coverage scope particularly around managing business interruption exposures and affirmation of cyber coverages.
In respect of the business interruption exposures, a number of insurers are looking for more disclosure and accuracy on forecasts, and the imposition where possible of restrictions on indemnity in the event loss amounts deviate wildly from forecasts.
Whereas premium adjustment to business interruption exposures ensure the risk exposure is rated correctly, insurers fear the quantum of the unexpected loss exposure can cause problems to their own specific retention appetite.
Whereas this is understandable and logical, (particularly if the margins for deviation are generous and any exposures beyond the limitation exempt from adjustment), refining spreads can be particularly fickle and short lived and customer risk management does not like the possibility of justifying to senior management restricted recoveries through the imposition of caps.
Justifiably, customers feel that a proven track record of accuracy in business interruption forecasts should ensure differentiation of the customer base.
Cyber continues to be somewhat of an enigma in terms of fit in the energy space. Cost, scope, value and capacity all pull customers in different directions. With the established NMA2914 and NMA2915 clauses it has been broadly felt that the Downstream and Midstream markets have successfully addressed the resultant physical damage aspect.
Whereas regulatory and authoritative bodies are pushing for affirmative coverage across the broader energy piece, the largest area of dispute in Downstream and Midstream has been the breadth of the peril write back. A recent and well known case involving the application of a war exclusion has muddied the waters, and it is likely that further work will be done to amend the established clauses to ensure clarity.
So finally, where is the market in terms of the 2019 venture? As it stands the underwriting result to date somewhat depends on the crystallisation of a June refining loss in the USA. Should that loss come close to current reserves then, coupled with the other established year to date losses and prior year deterioration, it will be the near equivalent of the Downstream markets annual global premium. Nonetheless, the loss in question has a myriad of complications and uncertainties and the quantum is unlikely to be known for some time.
In the meantime Downstream rates remain disparate but as a rule of thumb are running between a 20% and 30% uplift, with Midstream 10 points under that.
Capacity is relatively static but being deployed in conjunction with the prevailing bearish sentiment. An unfortunate dynamic to the pricing matrix is the continued opportunist behaviour by a few markets that consistently undermine pricing established between clients and leading markets. Fortunately this is a limited contingent and can generally be managed with a robust marketing strategy.
We are seeing an adjustment and tightening across the whole of the London Power market. There have been some recent withdrawals of capacity as carriers realign to more profitable areas of their book. Power losses invariably outpace premiums for most insurers.
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).
The fourth quarter is a busy time in London and our markets will not consider reviewing this until mid-November.
Underwriters are working through over a hundred submissions that incept before the year end; limited resource means it is currently difficult to get the required focus accounts which incept in 2020. Straight forward renewals with a clean loss record and no catastrophe exposure are generally experiencing an average increase of a 12.5%-15%.
Accounts with catastrophe exposure or those that have experienced losses are seeing higher rate increases as well as deductible level increases.
In Lloyds the situation is compounded with markets limited to income limits for the underwriting year. Hence, fourth quarter renewals might be tricky for some as insurers get close to their annual income limits.
Generally, deductibles are 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.
Our recommendation is to enter preliminary discussions with markets as soon as prudent to avoid rushed negotiations. Insurers are taking significantly more time to review schedules and are delaying quoting until very close to inception as they look to achieve the best outcome.
This can cause a lot of frustration for brokers and clients. Above all be prepared for a change in terms.
Sabotage & Terrorism and Political Violence
The recent drone attacks on Saudi oil facilities are likely to throw up questions about the dividing line between War, and Sabotage & Terrorism risks.
Terrorism buybacks in ‘All Risks’ polices or in stand-alone policies typically cover “the use of force … of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s) or government(s), committed for political, religious, ideological or similar purposes”, whereas the dedicated “Political Violence” (PV) market will include the wider perils of War and Civil War risks - typically defined as “war,…acts of foreign enemies, hostilities (whether war be declared or not)…”.
There is likely to be increased interest in purchasing PV polices after this event, but whilst this loss may not hit PV insurers the perceived increase in threat is likely to see a tightening in that market in available capacity, breadth of cover and pricing.
Generally speaking, for the first time in many years the idea of a transitioning Energy Casualty market has become more apparent, caused by escalating losses and non-profitable underwriting.
Although there haven’t been any market-turning energy liability losses in the past few years, there have been some meaningful claims and incidents arising from the energy and non-energy sector that have the attention of insurers.
Underwriter caution has been accentuated by the ever inflating costs of remediation and clean up in various jurisdictions.
Over the last five years the market has shown, on average, a steady decline in rate to the point that is deemed unsustainable. This has led to stringent reviews of insurers books and extensive approval processes from Lloyd’s in respect to syndicates business plan approvals.
The end result of the events of the past 12-18 months is that, essentially, reductions are very hard to come by. Increasingly, insurers are looking to charge rises commensurate with exposure increases.
While significant rate rises are only being applied to poorly performing accounts, or else to specific niche classes (US Wildfire, Canadian midstream), there is meaningful pressure to increase rates across all Energy Casualty risks, and this is particularly true in Bermuda where the majority of markets are looking to cut back their capacity deployed.
More time, more imagination and more sourcing of available capacity (when available) are becoming necessary courses of action, when before renewals on the current basis with expiring markets were more prevalent.
The continuing good liability loss experience in the refining and petrochemical sectors means we do not expect significant rises in this sector (unless the market views an account’s current rates as inadequate).
Some markets have exited the space; however there is a good capacity level available for most risks.
The challenging loss experience in the downstream property sector has had the effect of reminding liability underwriters how close they could have come to market turning losses, and also meant that their company’s overall loss record may have been negatively impacted even though the liability class results may be fairly healthy; this could result in pressure from management to deliver increased rate performance.
Continued events in the power and mining sectors involving dams, both engineered conventional and tailings dams, means this is a hot topic requiring significant information and review.
A positive few years in this class has continued in 2019 and there have been almost zero meaningful losses to talk about.
Unlike the downstream sector, however, the property part of this class has also run very well, so there is far less pressure on cross class companies to impose increases on their liability book.
Reductions are few and far between.
2018 was generally a good year for this sub-class, however the wildfire losses in California (estimated at circa USD11bn) means that underwriters in this space are suffering from a very poor loss experience in general.
This exposure is ring-fenced to a certain extent; however, insurers will be looking to address a very poor performance in this by looking for opportunities the US Casualty space.
Wildfire is all but uninsurable in a conventional fashion now, and many insurers are re-evaluating their view of US utility accounts in general, irrespective of their exposure to Wildfire. There is a similar concern about tailings dams.
A very similar story to the International Upstream segment, with excellent loss experience meaning rates are not significantly increasing.
Again, it is rare to find markets that are solely exposed to US upstream without exposure to other classes that have suffered losses (Marine, Cargo, Downstream Energy) and so aren’t aware of the general unease of the London market; however, there is tangibly less pressure on this class.
US Auto is being looked at increasingly as a source of outlying losses, due to some extraordinary court awards and settlements in the last 24 months.
The beginning of 2019 saw a number of Bermuda casualty markets signalling capacity reductions and a push for rate increases. However, the momentum increased significantly at the start of the second quarter when markets aggressively pushed rates further and in some cases did not renew business where the offered rate was deemed to be unsustainable.
Last year major carriers started taking corrective action on limits deployed and rates required. This has been adopted by other carriers, especially those with substantial limits deployed across the marketplace. We have seen some carriers offer various options for limits at differing prices – generally larger rate increases for larger limits.
Moving into the third quarter the market continued to transition with reduction in limits and increase in rates being seen across all classes.
The thought is that this could get worse as the year progresses and as we move into 2020.
Heading towards the end of the year, the Marine Market is still readjusting to the Lloyd’s review of Syndicates profitability with the unfortunate closure of more dedicated marine syndicates concentrating the mind as to just what is at stake if pricing remains at current levels.
The further reduction in hull capacity in the last month, has not only created a shrinking of available carriers, but has sent a clear message that management teams are still analysing their portfolios, and underperforming lines will not be shown the same sympathy as in previous years.
The constant erosion of the premium base in the soft cycle has naturally taken its toll, which, as we are seeing has led to reduced returns on investment and a retraction of capacity.
The news of Swiss Re closing its London office and writing hull insurance from their Genoa office has highlighted that this change of mind-set is not the sole preserve of the Lloyd’s market.
In addition to the reduction in capacity, we are seeing insurers adopt a more stringent approach to their renewal books, with most seeking to impose minimum premium levels for their lines as well as withdrawing from certain vessel types in a bid to increase their premium base and stop claims from underperforming vessel types. Insurers are using data to review and analyse their core book down to a very granular level.
The overseas markets are also seeing a reduction in capacity, especially with the Singapore markets losing many hull carriers, which has strengthened the insurers’ resolve to gain rate increase and adjust terms to reverse years of soft market policy upgrades.
Tensions in the Gulf of Oman remain at a critical level and, whilst the actual number of attacks may have fallen, the situation is still giving cause for concern for underwriters, owners and charterers alike.
The cargo insurance market has reacted to the change in political tension by imposing additional premiums for war and strikes risks coverage, predominantly on hydrocarbon products transiting the Gulf, which in many cases is higher than and in addition to the previous “All Risks” rate that would have applied.
This has led to the increased use of Cargo War Facilities to insure war and strikes risks, where the insured volumes warrant it, as a means of reducing the premium cost.
The marine liability market remains consistent and robust when compared to the hull market. There has not been any significant retraction of capacity and insurers have sought to push for nominal rate rises on increased exposures.