NATURAL RESOURCES
MARKET
REVIEW
NEWSLETTER
october 2015
TOWARDS A MORE CENTRALISED,
CONSOLIDATED MARKETPLACE?
As excess reinsurance capital continues to drive softening market dynamics,
pressure continues to mount on insurers to provide a more consolidated,
broader offering to meet clients’ needs
Introduction – there’s no escape
from the forces of excess capital!
When we published our Natural Resources Market Review in April of
this year, we led with an analogy which compared today’s general market
landscape to the Antarctic, suggesting that some insurers, like Captain
Scott, might be “sleepwalking to disaster” if they did not recognise the
dangers to their premium income stream posed by a number of different
underlying factors. In the six months since its publication we can advise
that, fundamentally, very little has changed. Global Reinsurance market
capital remains abundant, so market softening in almost every arena
continues. Indeed, many insurers across the Natural Resources spectrum
are facing the fact that the premium income targets agreed with their
management for 2015 are unlikely to be met.
So is there anything new to report as we begin to consider what may
unfold during the January 1 2016 renewal season? While the premium
income challenges faced by insurers are as real as ever, we believe that
2016 may reveal a real change in dynamics towards a more centralised,
consolidated market offering. Let’s look at each market sector in turn.
NATURAL
RESOURCES
MARKET
REVIEW
APRIL 2015
BOXING CLEVER...
OR SLEEPWALKING TO DISASTER?
The Willis Natural Resources Market Review
newsletter is a regular publication that
provides its readers with a round-up of news
affecting the energy insurance arena.
The newsletter should be treated as a supplement
to the Willis Natural Resources Market Review,
which is published in April each year.
Where information has been obtained from
external sources, this is indicated at the end of
each item.
This newsletter is published for the benefit of
clients and prospective clients of Willis. It is
intended to highlight general issues relating
to the subject matter which may be of interest
and does not necessarily deal with every
important subject nor cover every aspect of the
subjects contained herein. If you intend to take
any action or make any decision on the basis
of the content of this bulletin, you should first
seek specific professional advice and verify its
content. Copyright Willis 2015.
All rights reserved.
Willis Limited, Registered number: 181116
England and Wales. Registered address:
51 Lime Street, London, EC3M 7DQ.
A Lloyd’s Broker. Authorised and regulated
by the Financial Conduct Authority.
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 1
Upstream Energy – 2015 losses a shock, but no change of market direction in sight
Upstream Energy Losses, 2014-15 excess of USD50m (as at September 21 2015)
Year
Type
Cause
Region
Land /
Offshore
2015
Platform
Fire + explosion/VCE
Latin America
Offshore
780,000,000
2015
MOPU
Explosion no fire
Latin America
Offshore
250,000,000
2015
Rig
Leg punch through
Latin America
Offshore
240,000,000
240,000,000
2015
Pipeline
Ruptured pipeline
North America Land
190,000,000
190,000,000
2015
Well
Blowout
Latin America
Offshore
2015
MOPU
Faulty workmanship/
operating error
Latin America
Offshore
70,000,000
2015
Rig
Leg punch through
Middle East
Offshore
60,000,000
2015
Well
Blowout
Middle East
Offshore
2015
MOPU
Faulty design
Africa
Offshore
Year
Type
Cause
Region
Land /
Offshore
PD USD
BI USD
Total USD
112,500,000
362,500,000
780,000,000
90,000,000
90,000,000
70,000,000
60,000,000
51,000,000
51,000,000
50,000,000
50,000,000
Total
1,893,500,000
PD USD
OEE USD
BI USD
Total USD
30,000,000
16,500,000
111,500,000
2014
Rig
Blowout
Latin America
Offshore
65,000,000
2014
Platform
Pilingoperations
Latin America
Offshore
95,147,421
2014
Platform
Subsidence/landslide
Asia Pacific
Offshore
89,000,000
2014
Well
Blowout
North America Land
2014
Platform
Unknown
North America Offshore
2014
Pipeline
Anchor/jacking/trawl Europe
Offshore
2014
Well
Blowout
Offshore
Middle East
OEE USD
95,147,421
89,000,000
61,600,000
11,500,000
68,000,000
73,100,000
68,000,000
63,000,000
63,000,000
50,000,000
10,000,000
60,000,000
Total
559,747,421
Source: Willis Energy Loss Database as of September 21 2015 ( figures include both insured and uninsured losses)
2015’s major Upstream loss record has startled the market
A bad start to 2015
No sooner had we reported in April that 2014 was almost bound to be a profitable one for Upstream insurers, than a
series of major losses, most of which will be paid for by insurers out of the 2014 year account, began to find their way
onto our Database (see the chart above). While the 2014 loss record only showed one loss above USD100 million, the
chart shows that four such losses have already reported for 2015 and we understand from market sources that there is
likely to be more to come - on top of a loss deterioration in the back year Offshore Construction All Risks portfolio.
These losses have come as quite a shock to the Upstream market, because premium income levels have continued
to decline; indeed it is only in the last few months that the full effect of the recent oil price collapse has been felt in
insurers’ bank accounts. Some insurers, sensing an opportunity, have now taken it upon themselves to use these losses
as a pretext for calling for a halt to the overall softening process, citing these losses, as well as other major events such
as the recent major explosion in China, as the grounds for suggesting that “enough is enough”.
Q1/2/3: the softening accelerates..
However, it seems that such calls have fallen on deaf ears in other parts of the market. The pace of market softening in
recent months has actually accelerated; even programmes written by the most conservative section of the market are
achieving modest reductions, while for other programmes, led by those insurers seeking to improve their profile and
increase market share, the reductions have been much more dramatic. Once again the market has stood firm on policy
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 2
wordings, but undoubtedly the growth of the Facultative Reinsurance market, which we alluded to in April, has served
to put pressure on existing retention levels as the direct market can now often avail itself of primary reinsurance
protection and offer reduced retention levels to certain clients. Indeed, the abundance of Reinsurance market capacity
has also enabled many insurers to purchase more Quota Share programmes (usually with an overrider), instead of
the more traditional Excess of Loss. No wonder some new leaders, particularly from Lloyd’s, have felt emboldened to
challenge the established leadership and compete more enthusiastically for a greater share of the dwindling premium
pool that we referred to in April.
…but slowing down in Q4?
That being said, as we move further towards the end of the year, there are grounds for suggesting that the deterioration
of the loss record in 2015 is perhaps now decelerating the rate of softening. We have also seen signs of a retrenchment
by certain Lloyd’s syndicates, who are adopting a philosophy of scaling back their participation in this class until the
worst of the softening process is over. However, this has not been nearly enough to actually change the overall direction
of average rating levels, which continues to decline.
WELD Upstream Energy losses 2000– 2015 adjusted for inflation
(excess of USD 1m) versus estimated Upstream premium income
USD bn
20
Upstream losses excess USD1m
Estimated Worldwide Upstream Premium (USD)
18
USD bn
20
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Willis/Willis
Energy Loss Database as at
September 9 2015 ( figures
include both insured and
uninsured losses)
Reported losses for
2015 have already
passed the overall
total for 2014 – and
can only rise further
as premium income
levels start to decline
2015
Do the larger clients need the smaller insurers?
Whether this retrenchment will turn out to be the wisest approach in the long term for smaller insurers is still open
to question. The major Lloyd’s and composite insurers are brandishing increased capacity and market muscle - some
after having merged with other companies, a trend which is very likely to continue in the months ahead. With the
most favoured Upstream programmes already heavily over-subscribed, it is difficult to see how the smaller Lloyd’s
syndicates are going to continue to attract the interest of the largest energy companies (although it is certainly true
that some of the more “attritional” business that they underwrite is of less interest to a composite company market).
If this trend does continue, and the smaller Upstream players begin to make way for the larger Lloyd’s and composite
markets, then we may well see something of a realignment next year – particularly if the Lloyd’s Performance
Management Directorate begins to scrutinise business plans from smaller syndicates that appear to the PMD to be
unrealistically aggressive.
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 3
Can the composite market capitalise if Lloyd’s insurers lose their appetite?
So as clients become more interested in developing longer term partnerships with key insurers –particularly those
that can offer their capacity on a multi-line basis – pressure may mount on brokers to focus their marketing strategies
on larger, more versatile carriers. This may in turn present an opportunity for the composite (i.e. non-Lloyd’s global
carrier) market as not only do they offer robust capacity but also a range of other risk transfer products.
Upstream Underwriter movements, 2015 (London unless stated)
Underwriter
From
To
Underwriter
From
To
Clive Magnus
Catlin
Hardy
Gordon Browne
Liberty Houston
AIG
Deborah Hurst
Allianz
Travelers
Kevin Hannington
(liabilities)
Catlin
Lancashire
Dervla Lynchehaun
(liabilities)
Arch
Kiln
Julie King
(liabilities)
AIRCO Bermuda
SCOR Re Houston
Howard Burnell
Amlin
Apollo
Joe Peachey
Catlin
Standard
Kelan Hunt
Arch
Chaucer
Michael Poulteney
QBE Singapore
Arch
Sylvain Gauden
Axa
SCOR Paris
Mark Jeary
Willis
QBE
Downstream Energy – time to revert to genuine All Risks cover?
Downstream Energy Losses, 2014-15 excess of USD50m (as at September 21 2015)
Year
Type
Cause
Region
2015
Refinery
Fire + explosion/VCE
North America
PD USD
OEE USD
Total USD
100,000,000
380,000,000
480,000,000
Total
480,000,000
Year
Type
Cause
Region
PD USD
OEE USD
Total USD
2014
Refinery
Fire + explosion/VCE
Eurasia
173,100,000
847,410,000
1,020,510,000
2014
Petrochemical
Fire no explosion
North America
75,000,000
603,000,000
678,000,000
2014
Tank farm/terminal Fire + explosion/VCE
Latin America
65,000,000
110,000,000
175,000,000
2014
Petrochemical
Fire + explosion/VCE
Europe
30,000,000
135,000,000
165,000,000
2014
Refinery
Fire no explosion
Asia
40,000,000
120,000,000
160,000,000
2014
Petrochemical
Mechanicalfailure
North America
27,553,436
98,600,000
126,153,436
2014
Refinery
Faulty work/op error
Europe
2014
Chemical
Faulty work/op error
North America
2014
Refinery
Fire no explosion
Asia
2014
Petrochemical
Fire + explosion/VCE
Eurasia
83,000,000
2014
Refinery
Fire no explosion
Europe
3,445,000
65,460,000
68,905,000
2014
Chemical
Explosion no fire
North America
30,000,000
38,000,000
68,000,000
2014
Petrochemical
Fire no explosion
Middle East
25,000,000
40,000,000
65,000,000
2014
Refinery
Mechanical failure
Europe
775,000
50,475,000
51,250,000
Total
2,972,039,116
41,065,180
65,155,500
106,220,680
30,000,000
75,000,000
105,000,000
100,000,000
100,000,000
83,000,000
Source: Willis Energy Loss Database as of September 21 2015 ( figures include both insured and uninsured losses)
So far our Database has recorded only one loss excess of USD50 million in 2015,
in contrast to 2014. However, during the last few weeks we have been made aware of at least
two other large losses excess of USD50 million, from Czech Republic and the USA.
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 4
A benign loss year so far - so softening accelerates
As we approach the final quarter of 2015, very little seems to be impeding the relentless further softening of the
Downstream market. As the chart above indicates, only one major loss has been recorded by our Database to date so
far this year, although during the last few weeks we have been made aware of at least two other large losses excess of
USD50 million, from Czech Republic and the USA. Notwithstanding this, as it becomes clear that 2015 is likely to yield
overall underwriting profits for this class, the scramble for premium income and market share has intensified still
further since our April publication. And while some observers have forecast a withdrawal of capacity for this class in
the past, it seems clear that no one is prepared to do so given that the loss record has now significantly improved.
Comparison with late 1990s misleading
Like their Upstream counterparts, Downstream insurers continue, in general terms, to compete on price and price
alone, with little if any movement on offering broader coverage or lower retention levels. So as we indicated last April,
although rates may be lower than the last truly soft market in the late 1990’s, this does not provide a genuine “apples to
apples” comparison as today’s limited Property form bears scarce resemblance to the truly “All Risks” cover that used
to be provided some 15 years ago. In particular, while we are seeing some flexibility on sub-limits relating to Business
Interruption cover, neither Cyber nor Terrorism coverage have been included in recent Downstream market offerings;
instead, these coverages are being re-packaged and sold as separate lines of cover, despite the almost universal wishes
of Downstream clients to be provided truly All Risks protection, as they have been in the past.
Competing on price not the long term answer
As we suggested in April this underwriting strategy of competing on price alone is clearly self-defeating in the long
term – if the premium income pool is reducing in any event by a combination of factors (including reduced risk
management budgets, increased captive deployments and reduced Business Interruption purchase) then logic suggests
that the market will simply run out of premium income at some stage. Instead, if Downstream insurers are to continue
to survive the current market softening, as we alluded in April something must be done to provide clients with truly All
Risks cover, and insurers need to think more seriously about how they are going to respond to client demands.
Some progress on Cyber risk
Indeed, there now does seem to be some sign of progress within the Downstream market on providing a measure of
Cyber protection. Some leaders have now made a concession that they will give resultant Physical Loss or Damage
following a cyber-attack for some of their more favoured clients and while this does not amount to a simple deletion of
the general cyber exclusion (loss of data is still excluded, for example) it does mean that some clients may now be given
something like the protection that they really need at a catastrophe level.
“
So as we indicated last April,
although rates may be lower
than the last truly soft market
in the late 1990’s, this does
not provide a genuine “apples
to apples” comparison
“
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 5
Towards a more centralised market?
One important development in the Downstream market has been the emergence of what have hitherto been regional
insurers into the global arena. For example, Qatar Re have recently opened an office in London and can now underwrite
Downstream Energy business emanating from anywhere in the world. We expect other regional players to follow suit
in the months ahead, as pressures on premium income streams force regional insurers to expand globally in order to
compete on a level playing field with the major global insurers.
At the same time, pressures on the existing global leaders from the composite market to cut costs in light of the
deterioration in premium income levels is causing them to reflect on the wisdom of deploying multiple underwriting
teams in various locations around the world. Indeed, we would suggest that we are likely to see a retrenchment during
the next year or so to their core office in London, Europe and North America – especially as underwriting expertise is
generally concentrated in these locations.
As a result, we can perhaps see in the future a reversal of the previous trend of market regionalisation and a move back
to a more conventional single global market for Downstream risks.
A further opportunity for the emergence of the cross-class package?
In general terms, we are therefore anticipating a more centralised Downstream market to emerge in 2016. For several
years now we have hinted at the opportunities available to the major composite markets to differentiate themselves by
offering a truly cross-class offering to their major clients; if they are serious about differentiating themselves from their
competitors we believe they should do more to offer a multi-line solution. Moreover, the larger Lloyd’s outfits can also
now offer a range of risk transfer products similar to those provided by the composite market.
WELD Downstream Energy losses 2000 – 2015, adjusted for inflation
(excess of USD 1m) versus estimated global Downstream premium income
Source: Willis/Willis
Energy Loss Database as at
USD bn September 9 2015 ( figures
include both insured and
12
uninsured losses)
USD bn
12
Downstream losses excess USD1m
Estimated Worldwide Premium (USD)
10
10
8
8
6
6
4
4
2
2
0
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
The 2015
Downstream
loss record
looks extremely
favourable – at
least to date – in
comparison to
previous years.
A profitable 2015
therefore looks
likely at this stage.
2015
Downstream Underwriter movements, 2015 (London unless stated)
Underwriter
From
To
Underwriter
From
To
Andrew Malcolm
XL
Mapfre
Sined Cormican
Hardy
Hamilton Re
Greg Walters
Argo
Unknown
Mark Johnson
Hardy
Hamilton Re
Ernesto Berger
Zurich
Unknown
Miles Osorio
Hardy
Hamilton Re
Ray Miller
Liberty
New start-up
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 6
ENERGY LIABILITIES – SOME SOFTENING BUT INSURER CONCERNS REMAIN
Introduction
During the last two quarters the Energy Liability market place has continued to offer reductions, most often against
a background of the buyer’s dramatically shrinking exposure base. With predictions of low crude prices pointing to
a pronounced nadir, and the subsequent prolonged depressed effect on any area of expansion, this dynamic, along
with a worldwide soft liability market, is making for interesting renewals - indeed, interesting transactions at every
turn. Furthermore, as predicted by many, the stronger energy companies are finding good opportunities to purchase
those companies with assets and reserves but for whom the price of oil has made it too difficult to operate. Neither the
Upstream nor Downstream sectors have suffered market changing losses, extending the relatively benign loss record
for another year.
Upstream - Domestic markets step up the competition
The forces of supply and demand are providing buyers with great opportunities, with notable renewals coming on the
back of fresh package placements. Astute leaders are starting early with their clients, some looking to increase lines
to ensure market share and also negotiating conditions which before this year would have been immovable. Markets
deemed to be domestic around the world have stepped up their efforts to increase their share. Buyers can therefore
find some great pricing opportunities from domestic markets; indeed in several instances we have seen that the pricing
indications from a local market can be dramatically less than that those offered by global markets. The regulatory
regime for offshore operations (exploration and production) has started to gain momentum, and we expect that
those buyers with offshore operations will need to look for additional capacity to comply with these requirements.
The market has dealt with these matters before, but not with the new limit requirements coming into place.
Downstream – No real downward pressure as yet
Capacity still is strong for Downstream operations, and those buyers who maintain higher retentions are viewed
disproportionately favourably by the market. Underwriting concerns continue to centre around refinery utilization, rail
exposures, pipelines and products liability. We have seen some softening with leaders in the Downstream arena, but our
view remains that real downward pressure will not materialise until the number of leaders increases. We cannot see any
sign of a broadening of policy conditions for buyers; however, individual clauses can be negotiated, both in light of the
overall soft market and insurers’ need to increase market share.
Marine – stronger downward pressure as leadership options open up
Capacity remains high, and again renewals in this sector have given buyers reason to smile. In this area leadership
is growing, and this is helping to produce strong reductions. In this sector, financial responsibility regulatory
requirements are also starting to impact renewals. However, we see this market remaining soft and, just like the
Upstream market, domestic markets are increasing their share and hence their impact. We expect more of the
same for year-end renewals, both for standalone and package placements.
“
Neither the Upstream nor
Downstream sectors have
suffered market changing losses,
extending the relatively benign
loss record for another year
“
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 7
Metals and Mining – competitive market climate suggests reduced market share
for specialist insurers
Continuing headwinds for this industry
While it is too soon to call the end of the commodity downturn (particularly given recent events in China) there is
some evidence to support the view that the majority of those miners still standing in 2015 may in fact live to fight
another day. Nonetheless, the challenges are far from over and the mining industry continues to reel from depressed
commodity markets and weak demand for most minerals.
In the United States, government energy policies further threaten the stability of thermal coal and while Mergers &
Acquisition activity in the US has moderated supply and demand to some extent, there is still a surplus of production
holding pricing low. Many mines are being put into care and maintenance and the number of miners entering into
bankruptcy reorganization continues to grow. Ultimately for the industry to recover, margin improvement through
price increases will need to be achieved both in the domestic US and global markets.
Furthermore the industry still faces a tough mix of other obstacles on its road back to prosperity; heavier debt burdens,
deeper mines, lower ore grades, uncertainty in power supply, social and geopolitical risks, supply chain issues and
resource nationalism, to name just a few. Controlling costs and improving efficiency, while aiming to improve safety,
remains the key focus. Moves toward automation are gathering pace, and while some risks are diminished in the
absence of personnel, others such as cyber risk are rising.
Market softening process continues
Insurance costs continue to fall for most miners as insurers continue to compete, primarily to maintain their existing
proportion of their market share rather than acquire new business. There has been no significant change to property
capacity, which totals some USD1.2–1.5bn (excluding FM Global) for aboveground exposures. Underground business
interruption capacity remains constant at approximately USD300-350m, while Underground coal capacity is typically
no more than USD150m. These are typical maximums and there remain some variations within regions.
Recent loss record makes little impact
Year
Cause
Region
Total USD
2013
Pit Wall Failure
North America
800,000,000
2013
Machinery Breakdown
North America
300,000,000
2013
Buried Longwall
North America
180,000,000
2014
Earthquake & Fire
Africa
200,000,000
2014
Flood - breach of sea wall
Australasia
200,000,000
2014
Fire in a benefaction plant
Australasia
120,000,000
2014
Fire - hot work failure
Asia
65,000,000
2014
Tailings Failure
North America
25,000,000
2014
Machinery Breakdown - belt failure
Asia Pacific
15,000,000
2014
Machinery Breakdown to a SAG mill
Asia Pacific
10,000,000
2015
Underground Collapse
Africa
2015
Conveyor Fire
Latin America
2015
Leach Tank Failure
Australasia
outstanding
2015
Furness Loss
Asia Pacific
outstanding
2015
Machinery breakdown
Africa
outstanding
2015
Fire
Africa
outstanding
100,000,000
60,000,000
Source: Willis
Market Research
While there have
been some notable
mining losses in the
last two years, none
have been significant
enough to halt the
overall softening
dynamic in the
market
As our chart above shows, operational losses continue to erode underwriting profits but not enough to threaten the
overall profitability of this class. While difficult to isolate and identify individual insurer profitability in the segment, it
is broadly accepted by market practitioners that the segment continues to be profitable, as it has been for the last five
years since the Queensland Floods of 2010/2011.
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 8
General property insurers put pressure on specialists – but no withdrawals anticipated
The softness of the insurance market is underpinned by a highly competitive reinsurance market and we do not see
this changing in 2016. The interaction between surplus insurance capacity, lower insurable assets, lack of construction
projects and a relatively benign claims picture continues to underpin the softness of the market although the extent of
rate decreases may be curtailing in certain areas, particularly among the specialist company markets. The effect of this
may be a reduction in market share by the specialists who are predicting a bottom of the cycle in favour of the general
property insurers who remain active in the segment.
While insurers share a common dislike of the soft market, there continues to be some discernable differences in
approach. Specialist mining insurers, with a single focus on this sector, seem more closely in tune with their clients,
although there have been some recent statements from the specialists that rates are starting to fall significantly below
the “technically justified” rate. However, this kind of “exposure” rating philosophy tends to be overridden by a positive
claims experience from the mining industry; we therefore do not anticipate any specialists leaving this market for the
foreseeable future, providing the loss record remains relatively benign.
US market remains competitive
In the United States, the mining insurance market remained very competitive for the first half of 2015 and relatively
stable from an underwriting capacity perspective. Overall capacity is still plentiful and underwriters are desperate to
hold on to their premium income as rates stay low. Property renewals are seeing 10% - 20% rate reductions which are
causing some to move from traditional “sweet spots” in layered or quota share programs in order to maintain gross
written premium volume while Casualty lines are holding closer to flat or less 5%. We still note a variation in pricing as
underwriters favor those buyers with the strongest engineering story, track record of industry leading safety performance,
stable management teams and more importantly, strong balance sheets. Strong, long-term relationships between mining
company executives and key underwriters have led to insurance transactions that bridge the gap between opportunistic
and long-term insurance program viability.
Movements in London market
In the Lloyd’s Property market, Jonathan Gray has now departed from the Beazley syndicate which may lead to
a change in appetite for leading coal accounts, but so far they remain committed to this sector. While Berkshire
Hathaway sent ripples through the market upon their entrance in 2013/2014, their stringent financial underwriting
of mining business has led to their losing some account renewals and outright declination of others. From a Casualty
perspective, this has created opportunity for Ace, AIG, Zurich and others to regain some market share that was
initially lost. Ace and AIG in particular seem to be getting very aggressive on mining business, both on the Property and
Casualty lines.
However, as in some of the other Natural Resources industries Underwriters remain cautious in respect to deductibles,
waiting periods and contentious areas of coverage such as for tailings dams, complex supply chain exposures, cyber
threat and actions by public and regulatory authorities such as the Mine Safety & Health Administration (MSHA).
They also remain concerned that the high level of spending on Risk management issues that has been evident in the
Mining industry over the last few years should be maintained in the future.
Market outlook
Barring a market moving event, we see the balance of 2015 playing out in much the same way as earlier this year, with
carriers more active on the business development front in an attempt to differentiate themselves from other insurance
carriers. While the US and global operating environment remains challenging for miners, the insurance marketplace
is presently a safe haven of sorts, where creative thinking, strong relationships, quality and reliable information and
an innovative, aggressive broker strategy can help miners achieve the balance sheet protection and cost reductions
necessary to remain competitive.
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 9
Power & Utilities – attritional losses can’t prevent the onset of further softening
Introduction – losses continue, especially wildfire-related
The Power market is experiencing similar trends to the wider property market in that there remains an overabundance of capacity and consequently renewed downward pressure on rates.
However, the underlying trend of attritional property losses in this industry remains, putting an additional strain
on carrier profitability. Machinery breakdown losses remain in focus, particularly around Gas Turbine technology,
which means that the market remains cautious with regard to unproven technology or certain models with poor
track records. In North America, western US wildfires continue to be a major concern, given the continued drought
in California, the Pacific Northwest, and other Western U.S. States. Wildfires continue to occur at a rate and severity
exceeding historical averages/norms. We are unaware of any new wildfire losses alleged to have been caused by utility
company activities, but the risk of more frequent and severe wildfire exists. Meanwhile in Australia one of the class
actions relating to the Black Saturday fires has now been settled for circa AUD480m, acting as a reminder of the
potential for the activities of utilities to cause bushfires.
Striking the right balance – how are carriers responding?
The balance that insurers are striving to achieve is therefore between trying to recoup losses and standing firm on
rating on the one hand while at the same time retaining their existing portfolio, a tricky juxtaposition given the number
of alternative carriers waiting in the wings. In North America, industry consolidation continues to shrink the pool of
large utility companies to be insured; this is putting pressure on carriers as they have a shrinking pool of customers.
The power insurance market has therefore continued to be tested, with broker tenders and thorough remarketing
exercises exacerbating the natural pressure on rates brought about by over-capacity.
Carriers are responding to these threats in a number of ways. We are seeing some insurers offer increased lines on
renewal business and also try to dictate the discussion around potential signings at an early stage. This can only be
successful if their market is offering something different to their peers, for example by providing lead terms early
rather than being just another capacity provider, or showing flexibility by offering different limit or deductible options.
In this competitive environment, strong relationships with brokers and clients naturally become ever more important.
So in general terms rating levels have continued to fall, with typical Property rate reductions ranging between 10%
and 25%.
“
In North America, industry
consolidation for utilities continues
to shrink the pool of large utility
companies to be insured; this is
putting pressure on carriers as they
have a shrinking pool of customers
“
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 10
London market movements
In May of this year AEGIS London lost their Managing Director, Stuart Davies, who moved to Canopius to become
Group CEO. Additionally, AEGIS London’s entire London based cyber team, led by Rick Welsh and including Joe
Hancock and Daniell Car, left AEGIS for Argenta. In July AEGIS hired Dawn Simmons and Ho-Tay Ma in New Jersey
to replace the London cyber team. All Utility and Energy Member cyber business will now be written out of New Jersey
and only non-member cyber business will be written by AEGIS London.
Meanwhile we have seen the emergence into the operating market of the Tokio Marine Kiln engineering team. This
team is well established as a construction team, but as of July have started writing excess of loss operational power.
Also new to the market is Priority Underwriting Limited, a Managing General Agent that has now been given approval
by Lloyd’s on a primary basis. Finally Sciemus is awaiting positive news around their binding authority; they have
secured open market support from QRe on a case by case basis.
FM Global continue to dominate
In North America, FM Global continues to remain the most aggressive market to write property business for Utilities
with limited catastrophe exposures. Excess Liability and Auto markets continue to see slight to moderate premium
increases due to the industries’ overall poor loss performance. In particular, AEGIS’s Excess Liability rate increases
appear to be moderating, with most accounts with good loss experience expecting to see only inflationary rate
increases. Those with continuing loss experience will see rate increases of 10% and higher.
Meanwhile in Australia FM continue to engage enthusiastically and provide solutions if needed directly with customers
and have been successful in securing a major T & D organisation in the last quarter. With the movement of staff between
a number of the insurers, we are expecting the incumbents to jealously guard their existing business and at the same time
the new players to compete aggressively, particularly on those accounts which are well known to them.
Retentions remain firm
With few exceptions, discipline around deductibles remains generally firm particularly for the larger Gas Turbine
technologies and the peril of Machinery Breakdown, and for Business Interruption. However, there is now an increased
appetite for deductible buy-down options from clients and carriers alike and we have successfully placed a number in
the recent months.
“
in Australia FM continue to engage
enthusiastically and provide
solutions if needed directly
with customers and have been
successful in securing a major T & D
organisation in the last quarter
“
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 11
Use of drones grows in North America
Utilities in North America have begun to evaluate and test the use of drones for power line and other facility
inspections. Carriers are evaluating the exposure impact and coverage for drones and other unmanned aerial devices
“UADs” with many adding exclusionary language to Excess and Umbrella Liability policies to ensure their intent that
UADs are covered under Aircraft Liability policies. The primary hindrance to more widespread UAD adoption has been
the delay in licensing and operation procedures by the U.S. Federal Aviation Administration.
New renewables target in Australia
In Australia, the government has now established a Renewables target so there is a heightened expectation that some
of the Wind and Solar projects which have been on hold will now commence construction. This will naturally lead to
additional business being placed into the market initially for construction activities and then operational into 2016.
Market outlook – more M&A activity for 2016
In the absence of a significant market changing event, we foresee the trends mentioned above continuing through
2015 and 2016. Insurers will need to respond to protect their premium income and we welcome discussions around
innovation and product improvement in order to facilitate these aims. One area we are seeing is increased Merger
and Acquisition (M&A) activity on both the broker and insurer sides of the market and this will continue if the market
continues in the same vein.
Conclusion – further market consolidation inevitable in 2016
As we move towards the January 1 2016 renewal season, it seems clear from our analysis of each sector that the
continuing glut of reinsurance capital will continue to produce softening pressures in each of our markets – regardless
of individual industry loss records or portfolio profitability. Whereas once insurers could simply elect to “ride out” a
softening market, there seems to be no end in sight to the macro economic factors that are keeping capacity levels at
such record levels.
FP1945 14630/09/15
To survive this market environment, we believe that those insurers that have the capacity and the bandwidth to offer
something different - an integrated suite of risk transfer and risk consultancy services that truly match client needsmust focus more clearly on providing such an offering. The alternative - continuing to compete on price while offering
only the same products available today – can only result in eventual premium starvation in the longer term. And as
further mergers and acquisition activity develops in these markets in the months ahead, there can be no doubt that we
will face a more consolidated market in 2016.
NATURAL RESOURCES MARKET REVIEW NEWSLETTER 12