Transcript:
Natural Resources market trends
0:03
Welcome to WTW's Global Marketplace Insights series, where our
experts bring you the latest risk and insurance perspectives.
0:15
Hi, I'm Marie Reiter and I lead Global Broking Strategy within
the Natural Resources global line of business here at WTW.
0:24
Within the Natural Resources business, we cover a number of key
sectors in upstream and downstream energy, power, mining and metals
and renewables.
0:34
As the key 1/1 insurance renewal season starts to swiftly come into
focus, I will be discussing the prevailing market conditions in
these sectors to give buyers a flavor of what to expect in the
upcoming renewals.
0:47
Firstly, the upstream energy market Capacity and coverage remains
stable following some minor adjustments earlier in the year.
0:56
The markets continue to focus on asset valuations within the
current inflationary environment and we're increasingly seeing
more disadvantageous pricing for clients who the market deems not
to have given adequate consideration to asset value inflation.
1:12
Over the last six months, pricing has softened slightly compared to
the beginning of the year when markets were reading from punitive
reinsurance renewals.
1:21
And we now see the most desirable accounts renewing at flat rates
or minor increases of up to 2.5%.
1:28
But smaller placements with less premium income are seen rate rises
of up to 5%.
1:35
However, less desirable placements such as offshore construction
and loss affected risks continue to see larger increases in
premium.
1:44
A recent sizable platform loss in Latin America that is currently
estimated at circa $750 million has yet to affect the rating
environment.
1:54
But we expect this to play a role coming into the one one renewal
season as loss estimates should become more concrete by then.
2:03
Moving on to the downstream energy market, in 2023, the market has
seen only a couple major losses so far.
2:11
However, 2022 was a very different story altogether and loss
deterioration has had a meaningful effect on the 2022 loss record,
where we now see over $5.5 billion of total insurable losses to
date for the 2022 year alone compared to a premium pool of
approximately $2.5 billion.
2:34
These losses span all major downstream occupancies and geographies
and will likely result in historic portfolio losses for many
insurers.
2:44
The market's focus on ESG continues, but we have observed some
retrenchment in insurers positions following the withdrawal of many
from the NZIA and also the continued pressure particularly in the
US.
2:58
As a result, the market is proceeding with some caution in firming
up their ESG stance and that's still no market consensus on
this issue.
3:08
From a pricing perspective, the three-tiered market continues with
well-engineered clean and well run risks renewing between a small
reduction and increases of up to 5%.
3:22
Other clean placements with lower premium income are seeing rises
between 5 and 7 1/2%, whilst loss affected programs face rate
increases of 10% or more.
3:34
As we move towards the end of the year, most downstream insurers
have already made their budgets which may well lead to increased
risk selection.
3:43
However, there will also be those carriers who will seek to
continue writing new business to exceed their budgets and help pay
for those 2022 losses.
3:53
In the power market, the traditional market cycle has come to a
halt as we see ongoing hardening of rates across the power
sector.
4:02
Plus there was a brief interlude of slight softening for tier one
business in late 2022.
4:07
This trend has once again reversed, and we now find ourselves three
years into a hardening cycle with little sign of the momentum
abating.
4:18
On the loss front, we're seeing increased frequency and
severity of natural catastrophe related losses including in some
unexpected areas.
4:26
For example, in New Zealand there was widespread flooding following
Cyclone Gabrielle in February and flood has historically not been
peril that was heavily rated for in New Zealand.
4:37
Whilst this is just one example, we're seeing the market take a
closer look at how they're modelling and rating for Nat-Cat
risk as a whole.
4:47
As Nat-Cat aggregate is often shared by multiple lines of business,
insurers are actively looking to divert their available aggregate
to the sector where they're obtaining the biggest returns, and
this may well lead to a reduction of available Nat-Cat capacity in
the power market.
5:06
Following another poor year for the North American power account,
we're seeing more insurers looking to diversify their books and
seeking to write international business.
5:16
This is even the case for the historically US heavy Lloyds Power
Syndicates.
5:21
Finally, from a rating perspective, the market remains trivocated
with tier one well engineered clean and well-run risks receiving
small rate increases of 2 1/2 to 5%.
5:35
Whilst clean but Cat exposed programs are seeing 5 to 10% rises,
loss affected programs are liable to see at least a 10%
increase.
5:47
We've just recently published our power market review, which
gives a more detailed overview of the issues facing this sector and
you can find this on the WTW Natural Resources Internet site.
5:59
Now moving on to look at mining of metals.
6:01
The global insurance market capacity for mining is stable at around
$1.25 billion U.S. per risk of course.
However, we are seeing a notable flight of quality with insurers
looking to deploy disproportionately more capacity on the very best
business.
6:19
Despite this, we still see hardening of rates right across the
market with even tier one clients with exceptional loss records and
risk management longstanding positive market relationships as well
as significant scale on premium volume continuing to pay rate rises
of approximately 5%.
6:37
Tier 2 clients are seeing rate increases of up to 10% and loss
affected programs even larger at 15 to 20%.
6:47
Some customers are facing a double hit as both pricing and claims
recovery coming under pressure with insurers seeking to impose
average co-insurance or value limitation provisions where buyers
have been unable to provide recent independent asset valuations
and, in some cases, even arbitrarily inflating their premiums to
reflect perceived under insurance.
7:12
This highlights the ongoing importance of ensuring ingoing
insurance values are accurate and independently vilified.
7:21
Strong commodity prices are impacting business interruption
projections across the mining sector and can have a
disproportionate effect on composite rates.
7:32
It's crucial for buyers to evidence, a strong maintenance
regime and critical spares policy to assure underwriters of their
superior risk quality and to mitigate any effects on pricing.
7:47
In the renewable sector, there's a strong appetite for
renewables business from insurers, particularly those looking to
support the energy transition.
7:54
However, there's still only limited appetite from markets to
lead this business.
7:59
Insurers are increasingly focusing on technical underwriting and
the number of carriers have recently employed specialized
renewables engineers within the underwriting teams. Essentially, to
further their technical capabilities in this field.
8:13
And this could lead to a strengthening of the leadership options in
the near future.
8:19
Markets continue to focus on substantial technical submissions and
strong partnership with their core client base.
8:27
For the most favored clients, we've seen these relationships
being utilized to achieve between a 5% and 10% discount from the
standard market position.
8:36
This is quite a meaningful difference considering rates in the
sector are still increasing between 10% and 15% and it highlights
the benefits of substantive market engagement.
8:48
From a coverage point of view, there is a renewed focus amongst
insurers and the LMA to strengthen the effect of the serial loss
clause, which seeks the limit claims from multiple losses of a
similar nature.
9:01
By introducing a sliding scale of indemnification, markets are
trying to accelerate the gradient with which recovery falls away as
well as bringing business interruption coverage within the scope of
this provision.
9:14
We are of course resisting the strengthening of such a punitive
provision which could curtail clients claims recovery especially on
the BI component where clients do not have the ability to fall back
onto manufacturers warranties to cover any shortfall.
9:29
Until now we discussed the property market conditions for the
Natural Resources occupancies.
9:35
Let's now look briefly at the Liability position.
9:38
The total realistically available liability market capacity
continues to sit just above $1 billion and where program limits can
be placed multiple times over, surplus capacity is driving a more
competitive rating environment than we've experienced in recent
years. Particularly as we see insurers shifting their focus from
rate movement to rate adequacy.
10:02
Insurers are still generally seeking to apply premium increases,
which is a position predominantly underpinned by the inflationary
pressures we've seen both social and economic.
10:14
This leads to the average renewal being a mid-single digit increase
prior to any adjustments made for exposure changes, losses or
attachment point movements.
10:24
However, whilst insurers continue to push for rate increases, the
momentum has moderated somewhat as rate changes are increasingly
being considered on a case-by-case basis in view of the overall
risk quality and rating adequacy with some insurers even
considering flat renewals or discounts on accounts that they're
keen to continue participating on.
10:48
In conclusion, whilst most of the markets across our Natural
Resources occupancies are still looking for rate rises, albeit more
moderate than earlier in the year, insurers are displaying a strong
desire to increase their participation on the best placements which
should give clients a glimmer of hope.
11:06
It will be those clients who openly engage with the market and can
articulate how the operations and risk management philosophy
differentiate their placement and who are able to substantiate the
risk quality for in depth engineering that will be able to achieve
the most favorable terms in the upcoming renewals.
11:26
I hope this quarter's insights have been helpful and if you
have any questions or would like more detail on any of these
topics, please do reach out to us.
11:34
Thank you.
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