Our latest market update addresses the on-going issues of the COVID-19 outbreak, current market environment, as well as the key advice on what will be necessary in order to help us to secure the best terms for you.
An update on COVID-19
On Thursday 19th March, Lloyd’s rang the Lutine Bell to mark the temporary closure of its trading floor. The bell was rang once to signify a disaster, and they promised for it to be rung twice to signify triumph, when the floor is re-opened. Whilst the trading floor may currently be closed in order to protect us and our colleagues from COVID-19, the insurance market continues to be traded both electronically and via telephone. The industry is keen to show that it is open for business and trading as usual, ensuring it’s markets can continue to support throughout this period of turbulence.
This is the first time in the institutions history that brokers and underwriters have not been trading face-to-face. The cargo market has responded with flexibility, understanding the need for us to work quickly and cohesively in order to maintain excellent service for our mutual clients and also to manage the hurdles that all parties will no doubt face in the coming weeks.
The outbreak is going to have a wide reaching impact on many businesses, from lost market, disruption to supply chains, shrinking of demands, right down to the logistics of operating as normal. We understand that some of our clients may experience some difficulties obtaining information and businesses are having to fully adapt to how they operate, potentially altering their models and how they transact over the coming months. The cargo market has always designed their policies for flexibility and the changing nature of business and we will do our best to maintain this for our clients.
If for any reason you, your business or your client’s business is affected in any way, please get in touch as soon as possible so that we can work with you closely and find a suitable solution.
The picture at the start of 2020
The prediction at the start of 2020 was that risks renewing in the first half of the year would continue in the same vein as the second half of 2019: reducing limit stretches being provided, increases in rating, deductibles, and by limiting conditions. This was as the market reacted to certain losses, with efforts to push themselves back into profitability. Resultantly, this had started to create an element of stability and predictability. During the second half of this 2020, we expected to see that underwriters remediation work was beginning to show some elements of increased flexibility, albeit still with increased prices and wording reviews.
However, it appears events of the 3rd March are going to shape the rest of 2020. Both London and US cargo markets have suffered significant losses as a tornado tore through Nashville, Tennessee. Nashville, as a geographical hub for the US, was host to many logistics operations and storage sites. Whilst final numbers are not yet confirmed, the estimates are staggering for an occurrence, which will not be considered a market-wide incident. The numbers are still climbing but are already purported to be larger than cargo losses incurred by Harvey, Maria and Irma combined.
What can you expect to see on renewals going forward?
We have listed below, some of the areas that insurers are focussing on, where you can almost certainly expect to see change going forward and also, what information will be necessary in order to help us to secure the optimal cover for you.
Locations definitions
A typical stock throughput had defined a separate location as being more than 50ft away from another. There was already some change in this regard, but it was not considered universal. After the Nashville Tornado losses, we expect that underwriters are going to look much closer at locations that are in the close proximity of each other, and it will be more clearly defined to which locations are considered to be single or multiple. This is so insurers can manage their line size, and sideways protection. We can see this potentially impacting the excess market as more exposure is pushed into these layers. Together, we need to ensure that our presentation is clear and concise, when defining values per location so that there can be no dispute with insurers in the event of a loss.
Fire Protections
Insurers need to ensure that insureds have adequate fire protections. In order to analyse this, we will need to provide carriers with detailed underwriting information.
Underwriters appetite to non-sprinklered locations is limited. We understand that in some instances it may not be possible to install whether it be because the insured does not own the building, the local legislation does not allow it on certain types of construction, or because it is cost prohibitive or sprinklers; may do increase damage to goods. If any of the aforementioned applies, to the insured and they do not have sprinklers on larger locations, please be sure to include an explanation which will help us to demonstrate that the insured has satisfactory firefighting capability, for example: fire hydrants, high pressure fire hoses, oxygen suppression systems, staff training on fire-fighting, automatic fire alarms and distance to fire station.
In the event that insurers are uncomfortable with the level of fire protections in place, they may respond by:
- Increasing fire deductibles
- Sub-limiting/ aggregating fire
- Excluding fire entirely at that location
Processing
There have been market-wide amendments to the previous “standard” stock throughput processing exclusion clause. Unless processing risks were specifically included, the intention of the of the exclusion clause is to provide coverage for goods whilst undergoing process, provided loss and/or damage is not caused by the process itself.
This seems straightforward, but the language used was not definitive enough to exclude what insurers considered product recall and business interruption losses, which cargo underwriters had never intended to cover.
Some markets are excluding coverage with the exception of the named perils of FLEXA (fire, lightning, explosion and aircraft). However, we have worked with our markets and most insurers will agree to specifically naming exclusions, whilst still maintaining consistent coverage across the supply chain, so that goods on a production line have similar and/or the same coverage as goods in a warehouse. We believe that this is a better solution as the new clause now responds in the manner that underwriters have always intend it to do.
Excess Layers
In both 2018 and 2019, policies with attritional claims activity took a heavy hit with regard to rate and premium increases - there is an element of understanding from insured’s as to the reasoning behind this. However, one of the biggest challenges in 2019 has been on excess layers. Prices for such layers increased every quarter as the year progressed and we believe that this trend will continue through 2020, given the reduction in capacity and the losses to this type of risk within the sector. In spite of these increases, it should be noted that in most cases, purchasing coverage for excess stock in the cargo market remains the most cost effective solution for buyers. This is especially true when considering the CAT limits which our market continues to provide.
Updated Cyber Exclusion Clauses
In 2019, the UK’s Public Regulatory Authority (PRA), which is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firm, raised concerns surrounding cyber coverage across sectors. They were critical of the industry’s approach to modelling and stress testing.
The PRA advised that potential losses from cyber events could be comparable to that of major natural catastrophes and stated that insurance companies were not doing enough to ascertain / manage their exposures to cyber-losses, issuing a warning of the severity of the risks in failing to do so.
The result is that from 01 January 2020, all cargo / stock throughput policies now carry a mandatory cyber exclusion clause being either the LMA5402 or LMA 5403 cyber clauses. Gallagher Cargo are using LMA5403 as this excludes malicious cyberattack, whilst LMA5403 excludes all losses as a result of cyber. This clause replaces the Cyber-attack exclusion Clause CL380 where applicable. In many instances our policies were silent and did not carry the CL380 exclusion. Please feel free to get in touch should you wish to discuss the implications further.
We expect that the next few weeks and months are going to be turbulent. We would like to re-iterate that we are here for you. We hope you are all safe and well.
Please be assured that Gallagher is operating ‘business as usual’ and the quality of service, claims and negotiation of terms and conditions will remain as comprehensive and robust as ever.
