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Asia natural resource market outlook 2019

Corporate Risk Consulting
N/A

May 28, 2019

Vast changes in the natural resources industry have created significant opportunities and new risks. Willis Towers Watson provides the insightful perspectives on what to watch out for in 2019, and help determine which risks need to be mitigated and where innovative risk management can provide new opportunities.
  • Downstream energy is experiencing 1 minimum 10% increase
  • Upstream energy remains stable with rates flat to 10% increase
  • “There is a change of mood amongst underwriters from both Lloyds’ and company markets – it is no longer about meeting ambitious premium income targets – the focus is on underwriting profitability.”

Change of mood

  • Lloyd’s Performance Management Directive, under the leadership of John Hancock, has begun a process that is designed to bring significantly more rigour to the examination of individual syndicate business plans, following the overall underwriting loss made by the corporation in 2017.
  • This development has led to the withdrawals of CAN Hardy from Asia and other syndicates to stop writing specific lines – putting a brake on individual syndicates’ attempts to compete in the market by driving down prices in order to achieve increased premium income streams.
  • Company markets, on the other hand, can no longer differentiate themselves by continuing to offer increasingly competitive terms to buyers next year, as major company markets have been hit more severely by last year’s natural catastrophes. It is understood that their underwriters are under a similar pressure form senior management to scale back on premium income expansion and ensure that they ‘hold the line’ on rating levels and other terms and conditions.
  • Capacity withdrawals have also be extended to the Middle East, with Mena Re, Aspen Re, Talbot and Partner Re exiting from Dubai in 2018.

Upstream

  • An improving loss picture has occurred during the last four years, with 2018 set to perhaps eclipse 2017 in terms of a further reduced level of overall quantum and number of losses. One of the reasons for this loss improvement must be put down to the reduced levels of exploration and production (E&P) activity due to the lower oil prices of recent years. Now that the oil price has recovered, and new E&P activity is anticipated, it will be interesting to see if this loss record can be maintained.
  • Deep water projects in Asia have continued to be attractive to insurers, and the deeper water accounts have generally been renewed at the same terms as last year.
  • Although losses have decreased, so has the upstream premium income pool. As a result, insurers are nervous that it would only take a modest upturn in claims for today’s profitable portfolio to become unprofitable. It is for this reason that upstream insurers are keen to stick to management instructions, to avoid further reducing rating levels.
  • Upstream construction is definitely seeing a revival, with some major projects coming to market in 2019. The market remains competitive for upstream construction due to its previous scarcity. We recently saw a couple of mid- to large-size projects in the Middle East not being placed at the quoted tender terms but at much higher terms, especially with captives not supporting the original quoted terms.

Downstream

  • 2017 has now overtaken 2008 (the year of Hurricane Ike) as the second worst underwriting year on record after 2005 (the year of Hurricanes Katrina, Rita and Wilma). From the losses already recorded in our global database, together with market intelligence that we have discerned in recent weeks, it may be that 2018 won’t be far behind 2017 when the final figures mature.
  • We are therefore seeing a modest but distinct turnaround in this market. Not only are rating reductions out of the question for the time being, we are now seeing a market that is quietly insistent on a rating increase on virtually every piece of business (again there are always exceptions to this general rule, particularly for programmes with little or no natural catastrophe or business interruption element).
  • Every insurer underwriting this class of business has been affected by the recent losses; it is therefore becoming increasingly challenging to identify any leaders that have the wherewithal and commercial desire to undercut existing placements and to differentiate themselves from their competitors.
  • The very notion of ‘abundant capacity’ has started to become somewhat obsolete. We would like to carefully point out that the maximum theoretical capacities produced by the insurers themselves are never able to be accessed together in practice; instead we always suggest a maximum realistic level that can be obtained for a given programme. So this is a realistic contraction in supply – the first for many years and probably the first for a number of market practitioners, including underwriters, brokers and risk managers.
  • A number of market withdrawals are still expected in 2019, and underwriting discipline is the way forward with minimum increases at 5% to 10% on clean accounts. Willis Towers Watson will assist clients to firm up preagreed terms and navigate through the challenging market with the following advice:
  • Prepare for your renewal earlier than usual. In the more challenging market conditions it is inevitably going to take longer to negotiate optimum terms and conditions.
  • Ensure that your underwriting submission is as professional as possible. In this market climate, every last detail may be critical in mitigating against the general market upswing. Up the specification on your underwriting submission, don’t let the clock run down and make sure to get your broking strategy in place with the right priced leadership.
  • Ensure that your broker builds your programme from a secure base. It is now more important than ever to ensure that leading markets that can offer the most competitive terms are accessed first, so that your programme is built around solid foundations.
  • Risk analytics and site surveys are the minimum tools required by your broker and risk advisor to smooth the renewal process, which Willis Towers Watson excels in providing as an added value to our clients and prospects.
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