WTW Mining Risk Review 2023
Notwithstanding the development of various competing factors impacting the International Liability market over the past twelve months, rate increases continue to prevail, albeit on a more moderated scale. This inflection point follows a multi-year cycle of hard market conditions, most likely sustained beyond its natural lifespan by a series of macroeconomic and geopolitical factors.
However, despite the continuing upward pressure on rates, the cadence of the market is notably different to before, as the more balanced negotiating environment can no longer be accurately summarised as a ‘hard market’. Following several rounds of compound rate increases, the push — and proffered justification — from insurers for ‘remedial’ pricing corrections is no longer as pertinent as it once was, which in turn is enabling policyholders to differentiate themselves more effectively from their peers in their quest for the most favourable policy terms and conditions. This reduced momentum to push up rates is coupled with a general drive from insurers to write more premium which has served, at least in part, to reset the equilibrium of the market.
While the change in cadence can in part be attributed to the drive for more business from insurers, a “cocktail” of numerous macroeconomic and geopolitical factors has created a complex and multi-dimensional underwriting environment for the market to operate within.
The base of the “cocktail” is a continued focus on rate adequacy, albeit on a less intense scale, due to prior poor underwriting results. This is often more pronounced for Excess of Loss layers, as these layers have historically been perceived by underwriters as requiring more rating remediation than the often more technically priced Primary layers, particularly when they are now required to meet new minimum pricing levels. As a result, Excess layers can often be subjected to a larger percentage increase than their primary counterparts.
As expected, ESG continues to be a factor that influences both risk selection and policy terms and conditions, underlining the importance for policyholders to differentiate their risks from others. To this end, insurer policies on ESG have become even more embedded within the underwriting process, with some insurers even retaining in-house ESG experts to assess policyholders’ ESG credentials in advance of placement negotiations. Where buyers do not meet minimum ESG requirements there have been instances of insurance capacity being withdrawn by insurers.
There is also a growing focus from insurers on a buyer’s adherence to the Global Industry Standard on Tailings Management which, while separate to general ESG requirements, can be interlinked in the form of local community engagement, land reclamation and water and waste management.
While some buyers, such as those with thermal coal exposures, will have less scope for overcoming ESG hurdles than others, it is evident that all insurers are motivated to look more favourably upon clients that are armed with strong ESG credentials and a compelling climate transition plan. Furthermore, while ESG requirements often exist in the form of thresholds, they are not always applied in the binary manner that one might expect, as demonstrated by the consideration that some insurers are willing to lend to the unavoidable delays in the delivery of ESG milestones experienced by some policyholders because of the conflict in Ukraine.
Notwithstanding this, insurer-imposed thresholds on ESG related exposures, such as thermal coal production, are generally becoming increasingly difficult to circumvent, leaving buyers with less room to manoeuvre in this domain during the placement process.
The effects of the Russia-Ukraine conflict adds a further layer to the mix, given its impact on underwriters’ premium income. A significant amount of premium exited the London market as a result of the sanctions and regulations that were imposed following the commencement of the conflict, meaning that underwriters are now redirecting their focus, both geographically and in terms of target sectors, when searching for more business. Ultimately, underwriters are increasingly more open to risks in (unsanctioned) regions of the world where they may have previously held less of an interest; the mining sector, with its not insignificant premium levels, is seen as a place for insurers to reclaim some of the dollars lost due to the Russian sanctions fallout.
An additional ingredient to the “cocktail” of market dynamics is the impact that inflation is having on insurers’ approach to pricing, both in the form of economic inflation and social inflation. In the case of economic inflation, underwriters are having to incorporate increased costs across all key elements of Liability risk into their underwriting models, including but not limited to bodily injury awards, property damage rebuild costs and pollution clean-ups. In the case of pollution, increasing hourly rates of technical and remediation specialists are driving up claims pay-outs, and the same logic can be applied to legal fees associated with Third Party Liability claims more generally.
The impact of economic inflation on the Liability market is compounded further by the effects of social inflation, including the significant increase in both litigation and average jury award costs as well as broader definitions of liability. While this is more pertinent in the United States than the rest of the world, the impacts can be felt worldwide.
In terms of the impact on pricing, while inflationary-factored pricing can vary depending on the attachment point, insurers are generally looking to apply a base inflation loading to their renewals of +7% to +7.5%, separate to any exposure base change calculation.
The garnish on the top of the “cocktail” is the pressure that the recent (i.e. January 1 2023) treaty renewals have applied on rates. While Liability treaty renewals appear to not have been as onerous as Property treaty renewals, single digit to lower double digit increases were the norm for Liability treaty renewals that were not particularly loss impacted. That being said, the average would likely have been even higher if insurers had not sought to mitigate increases by electing to retain more risk themselves as part of the treaty terms and conditions.
Nonetheless, the increases experienced, and their impact on direct market rates, are most likely to be lower than what some feared as we entered 2023. This will in part be due to the conflation of rising treaty costs with inflation generally and in part be a result of the drive from insurers to write more business (reinforced further by the fact that not all Liability reinsurance treaties will have renewed at the start of the year).
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| Title | File Type | File Size |
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| International liability: a change in cadence | .9 MB |
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