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Insurance market update for the UK food and drink sector

Q2 2021

Risk & Analytics|Corporate Risk Tools and Technology|Risk Management Consulting
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April 9, 2021

Willis Towers Watson’s update on markets that matter to the food and drink sector.

The insurance market has continued to harden across all sectors for certain classes of business but is particularly difficult for businesses in the food and drink sector. This insight summarises insurers’ appetite and capacity, class by class, along with the impact of this on rating levels and premiums.

2020 saw the hardest insurance market conditions for 20 years and the food and drink sector was one of the worst hit. Market conditions for property damage and financial lines deteriorated significantly from March 2020 onwards.

Insurers fared relatively well in the 1 January reinsurance renewal season and sought ways to restructure their protection, to limit their own cost increases. As a result of this and the increased premiums now being charged, we expect a moderation in the pace of rate hardening in 2021. Whilst we still anticipate rates increasing in 2021, these increases should be at a more modest level than the tumultuous levels seen in 2020.

An important exception to this is those businesses who are emerging this year from long-term agreements put in place in very benign soft market conditions, who have not yet been impacted by last year’s hardening market conditions.

Tower
Property damage and business interruption
  • During 2020, we saw a sharp reduction in appetite amongst insurers, with many reducing the capacity they were prepared to offer and some insurers exiting the food sector completely. The drinks sector continued to be a more attractive option for insurers, but it also saw increases.
  • In addition to capacity reduction there were also significant pricing increases, made more complex with differential ratings amongst co-insurers. There were quite often higher than the lead insurer and on some occasions had different deductibles in place from the insurers on the schedule.
  • There was also a move from full value sums insured to loss limits, in most cases to limit premium cases, but in some, due to the unavailability in the market of full value cover. We are also now starting to see the introduction of differential policy cover and terms and conditions amongst insurers providing capacity, in particular in relation to COVID-19 and cyber exclusions. This could cause potential issues (coverage and/or claims settlement delays) in the event of a major loss. Willis Towers Watson work to ensure wherever possible that all capacity providers agree on rating and the wording of policy exclusions.
  • Given the rate increases that occurred in 2020 and a positive reinsurance renewal season, we are now starting to see the market hardening slowing. Insurers are still seeking increases, as they are tasked with moving the rate forward, but this is much more measured and in line with their portfolio strategy - requiring a rate growth of 5 to 15%.
  • The ability to evidence good risk management continues to be fundamental to the result achieved.
Scale
Liability
  • Appetite for food risks in the market is still strong but retention structure and claims performance is key.
  • Primary rates are increasing, even for policies claims with healthy claims performance. We are seeing increases of at least 5% to 10% for accounts performing within expectation. Increases of 20%+ are being sought by insurers where claims performance is below expectations.
  • Markets still consider multi-line deals including property damage and casualty, but the ability for each line to generate a profitable return is critical, meaning the economies of scale are reduced.
  • Profitability continues to be the key objective for insurers. Several insurers are reducing excess capacity which can lead to enforced structural changes which could also have an impact on pricing.
  • Allergies are a key underwriting consideration. Risk management information about how customers segment the workplace to ensure no cross-contamination will be required, as well as clarity about liability arising from mislabelling.
Truck
Motor fleet
  • The market has become more competitive, as a result of a good claims year for many insurers, with vehicles off the road in many sectors. Whilst this has not been the case for many businesses in the food and drink sector, we are seeing some competitive options for those businesses with a good claims history. Heavier HGV fleets are still more challenging. We are seeing holding insurers seeking rating increases of 5% to 10% even on good risks, based on Ogden / claims inflation and Motor Insurance Bureau (MIB) levy increases, but in many cases premiums end up being flat.
  • Claims cleansing and effective risk management are vital in achieving best terms.
  • Markets prefer multi-line deals including property damage and casualty. Some insurers decline to quote stand-alone motor business.
  • Following the UK’s exit from the EU, a green card and a valid Certificate of Motor Insurance must be carried to prove mandatory insurance.
  • We are seeing more interest in electric vehicles due to the benefit in kind (BIK) benefits offered to employees. These can be a challenge due the lack of repairers (causing delays), increased battery fire risk and vehicle values. Insurers are willing to accommodate but often at increased terms.
  • It is important on motor renewals for the next 12 months that we understand the impact COVID-19 has had on vehicle usage and miles driven. Good information will assist us to get best terms from the market.
Volume
Product contamination and recall
  • The market continues to harden, meaning higher rates and more defensive underwriting (lower limits, higher insured retentions and more narrow coverage).
  • Rate increases are being applied of 10% to 15% for claims free risks and 30% or more for companies with losses.
  • We are continuing to see a variety of claims for mislabelling and foreign body contamination. In general, product recall incidents appear to be rising in line with the trend for the last 10 years.
  • Some coverage changes are occurring, specifically with regards to recalls caused by cyber perils. As part of an overall market dynamic, insurers are reviewing the applicability of cyber issues to recall and are amending their offerings accordingly. Since 1/1 it is a requirement of the FCA (and subsequently a Lloyd’s mandate) for all policies to mention cyber, whether that be a full exclusion, an exclusion with write back or a cyber clarification clause. Willis Towers Watson's position is that the market should be covering recalls caused by ‘cyber’ issues, including manufacturing facility hacking, or the use of computer programmes to change product specifications with the intention of causing harm.
  • We have also started to see some flexibility with regards to the COVID-19 exclusion whereby some insurers are now able to remove this on food and drink risks, where previously it would have been a mandatory requirement.
Graph
Directors & Officers (D&O) liability
  • The hard market is expected to continue through 2021, with premiums and retentions continuing to increase (significantly for those risks that did not see the largest of the 2020 rises, which are likely for renewals until May 2021). Listed companies have seen the largest increases in 2020.
  • Exposure for D&O continues to increase; from the ‘MeToo’ movement to climate change to increased regulatory scrutiny. Insurers continue to write on the basis of reduced line size, increased premiums, tightened terms and, in some cases, withdrawing from this market entirely.
  • COVID-19 has only made this position worse. While there were a flurry of initial notifications to D&O policies, they were mostly precautionary. Notwithstanding the fact that the claims impact from COVID-19 has so far been low, insurers continue to anticipate the potential for a significant impact on D&O policies.
  • We remain hopeful that 2021 will see a calming in the D&O market, with the potential for new entrants to offset some of the withdrawals. The expectation remains that rates will continue to increase in 2021, but indications from the market are that the increases should be at a more moderate level than the extreme levels seen in 2020.
  • We are increasingly working with clients to review the structures of their D&O programmes.
  • Arrangements purchased in a soft market may no longer be appropriate and/or achievable in a hard market. We are seeing.
    • An increasing focus by clients on Side A coverage.
    • Increasing willingness by clients to take on significant retentions for Sides B and C to reduce the overall premium and/or to increase the number of insurers willing to participate given the higher attachment.
    • Increasing use of captives to replace holes in programmes where insurers have withdrawn from the market or where insurers are seeking to impose unsustainable premiums or exclusions and some use of co-insurance (where only part of a layer is insured, and part is uninsured).
    • We are working with our clients to develop alternative solutions where the commercial market is unable to meet their needs.
Crime
  • We have seen premiums increasing anything between 25% and several at 100% during the latter half of 2020 and early 2021. Larger businesses and PLCs have seen the most extreme increases.
  • Given the rate rectification that took place in 2020 and the first quarter of 2021, we are anticipating lower increases for renewals from Q2 2021 onwards.
  • Insurers continue to review the capacity they provide and seek co-insurance. Increased deductibles are being applied as a matter of course. In many cases these increases are substantial.
  • There is continued review of the level of social engineering cover provided.
  • Again, increased underwriting is being undertaken, including COVID-19 question sets requiring to be completed.
Lock
Cyber
  • Insurers’ strategies on attachment points in relation to capacity offered are under constant review with some reducing primary line sizes and looking for co-insurance participations to manage their exposure. Limited new/additional capacity entered the market in 2020 and we expect this to continue in 2021. Insurers are undertaking greater due diligence on risk selection.
  • Coverage extensions to cyber policies have been subject to increasing levels of scrutiny, more extensive underwriting information requests and are attracting additional premiums. Key areas of focus continue to be cyber extortion (ransomware), “unplanned outage” (system failures not related to a cyber-attack or human error) causing business interruption, war and terrorism, physical property damage, infrastructure and outsource service providers.
  • Expectation of increased use of sub-limits and/or co-insurance by insurers to manage exposure or insureds to manage cost. The knock-on effect/interplay between primary and excess layers in this area is key, especially for core coverages such as cyber extortion/ransomware, with excess insurers expected to push-back on requests to drop-down over such sub-limits.
  • Ransomware and cyber extortion events are a significant concern for insurers due to large increases in both frequency and severity. As a result, we have seen insurers requesting specific information from insureds to assess potential exposure to this event. We expect the number of claims will continue to rise and as a result, insurers will take a more proactive approach to managing claims costs. Attacks will continue to be more sophisticated and we expect ‘people risk’ to remain the largest ultimate root cause of losses.
  • During Q4 2020, we saw increases in the range of 15% to 30% on renewals for organisations with strong cyber risk management and upwards of 40% where there has been claims activity or historical pricing is considered too low.
  • Insurers are operating with stricter pricing and retention guidelines and will avoid risks if poor cyber maturity is evident or where gaps have not been addressed; this can also apply if engagement is limited through the underwriting process or insufficient amount of underwriting information is put forward.
Yatch
Marine
  • The marine cargo insurance market continues to present a challenging and dynamic trading environment. 1 January 2021 reinsurance treaty renewals generated additional expense for insurers, particularly those with poorly performing portfolios. We therefore anticipate continued upward pressure on rates, as a result of this and also the impact of the increased frequency of windstorm, flood and wildfire losses, as well as the unprecedented implications of the COVID-19 pandemic. Wide ranging pandemic exclusions are being imposed.
  • We anticipate continued rate rises in the region of 10% on businesses with a high-quality risk and the potential for significantly higher increases on distressed business or those on the periphery of risk appetite.
  • Selective risk appetite, restrictive cover and the need for more detailed underwriting information are measures we anticipate insurers will continue to impose throughout 2021. In addition, increased deductible levels are often being imposed.
  • Where risks include stock exposures exceeding GBP1m any one location, insurers will require COPE (construction, occupancy, protection, exposure) information. Insurers are adopting an increasingly selective risk appetite.
  • To limit the impact of these market forces, it is essential to:
    • Initiate the renewal process early.
    • Provide clear and detailed risk exposure information, particularly in respect of storage risks.
    • Provide location risk surveys/completed storage questionnaires for locations of stock storage exceeding GBP1m limit.
    • Demonstrate the implementation of lessons learned/loss prevention measures, particularly where there is a history of significant losses.

If you would like to know more, please contact a member of your client service team, or your account manager, or contact our Food and Drink Practice Leader, Sue Newton.

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