MIKE NEWSOM-DAVIS: Thank you for tuning in. Today we're diving into the topic of liability within the energy insurance market. I'll be your host, Mike Newsom-Davis, Global Head of Liability for WTW Natural Resources. I'm delighted to be joined today by two esteemed guests, both from WTW, Blake Cohen, Managing Director and Head of liability for Natural Resources North America, and Bianca Bolt, senior liability broker from the Netherlands. I'm conscious we're spanning three different time zones with our presenters. So, Blake, I guess it's probably breakfast time in Houston. Thanks for joining us.
BLAKE COHEN: Yeah. Good morning. Good afternoon. Depending on where you are and I appreciate the time and happy to be here, Mike.
MIKE NEWSOM-DAVIS: Thanks, Blake. And, Bianca, it's probably almost happier in the Netherlands now for you. So thanks for being on the call.
BIANCA BOLT: Yeah. Thank you. Thank you for having me.
MIKE NEWSOM-DAVIS: Perfect. So in this podcast we wanted to draw out and discuss a few key themes that we covered in the WTW energy market review recently, most particularly social inflation. The three-speed market and liability limit adequacy. Another key current concern for the liability market is social inflation. This is particularly prevalent in the US, but has become increasingly an issue worldwide, most particularly in Europe, Canada and Australia.
According to the Swiss Re sigma report issued this September, describes the US as the epicenter of social inflation, and states that litigation costs have driven up US liability claims by over 57% in the past decade. Blake, how do you see this from the US perspective?
BLAKE COHEN: Yeah. Thanks, Mike. This has been an issue that the US carriers is most of the primary liability insurers as well as many of the lead umbrella and low down excess liability carrier for all natural resource businesses, something they've been dealing with for years. And it seems to be getting worse year after year after year. We saw a huge ramp up of this post COVID as claims costs have increased quite a bit and the amount of litigated claims as well.
And I think at its heart, social inflation in general, it really starts with what we've seen as a troubling change in attitudes and beliefs about entitlement for injury or loss and compensation around that, as well as people's willingness to pursue litigation. And as a result of that, what we're seeing and it's really driven primarily by US auto liability is a huge increase in the frequency of severity of claims and litigated claims in the overall marketplace.
We think this is driven by a few different things. One is third party litigation funding, which we've seen an increase in-- that's third party companies funding attorneys for getting a share of winnings in cases. With that, we're seeing advertisements all over the place. In fact, it was funny, I was driving back from the airport two days ago over the weekend and started counting billboards that I saw in Houston between the airport and my house. There were 22 billboards and 11 of them were literally injured at work or injured in auto accident and personal injury billboards.
To put this in perspective, growing up, that probably would have been maybe one billboard. So we've seen a huge advertisement as far as commercials as well. And then you combine that with-- we have challenges in the US, especially when we talk about the oil and gas business, we've got a huge increase in activity in the Permian Basin in the Midland-Odessa area. So we'll call it 60% of the new oil and gas activities taking place in one area that doesn't have an infrastructure for it.
So you've got a combination of more trucks on the road, you've got less experienced drivers driving, you've got more distracted driving and other issues behind that are leading to more accidents. And then you've got, litigation funding on top of it. So what we're seeing is a huge increase in frequency of severe claims and litigated claims going on top of that as well. We're also seeing it bleed in now. Now, auto has been a problem for, we'll call it, eight or nine years.
And US primary insurance carriers have been getting rate increases on auto liability because of this nine years in a row. Most of the time probably averaging between 9 and 12% up, up to 20% in some cases. And the combined ratios are still unprofitable. So the issue that we're seeing is they're not getting in front of it enough and it's really bleeding into the lead umbrellas as well now, as these claims are getting big.
And so the other challenge that we're seeing now as well is this is leading into third party bodily injury as well at worksites. So contractors being injured, fatalities and the amount of litigation going up in that by a third party action over claims and premises lawsuits. So we've got challenges all over the place with that. And it's just getting worse every year. And unfortunately, we haven't seen any tort reform or this litigation subsiding in any manner. So it is a challenge that really the US markets have been dealing with and continue to have problems with.
MIKE NEWSOM-DAVIS: Thanks, Blake. Sounds like the perfect storm. And of course, it's not just the amount, it's the quantum of the claims too. I think there's a new expression, thermo. We were talking about nuclear claims, but there's a new expression, thermonuclear claims. Some of the largest claims coming out of the United States now are pretty humongous. That's true, isn't it?
BLAKE COHEN: Absolutely. And more and more of them, I mean-- a good example is though out my career, somebody had a workplace fatality. We'd probably call that between cost $700,000 and $2 million in compensation. We're seeing those claims regularly go now for over between $5 and $10 million. So it's just it's adding up in that sense, but also the huge verdicts have been outstanding and increasing quite a bit, especially over the last two to three years. Now, I will say we see the verdicts. We don't see the settlement amounts. So they do get lower. But if you're starting at a $300 million verdict, you could assume it's probably still going to settle out at $70 to $80 million, which impacts all insurers.
MIKE NEWSOM-DAVIS: So, Bianca, interesting view from Blake about social inflation in the US. And we've referenced that this is spreading globally. I know we've done a few renewal placements recently. What would you say the issue is and how is the continental European market seeing this social inflation threat?
BIANCA BOLT: The social inflation problem from the US coming to the European markets and there's also some litigation changes. So you have more class action possibilities also in Europe. So that's, yeah, being used by consumers in the European countries. So that's also driving costs for the claims. There are more claims. And yeah, it's also like in the Dutch markets and the US market it's a different market.
But in the Dutch market, the employers liability is a part of the general liability. Then we have the problems that's in the past. Fatality was just a few 100,000 euros and now it's, yeah, more than 1.5 million or 2 million. Not close to the US numbers, but also very much increasing. So also insurers are very critical to these kind of risks.
MIKE NEWSOM-DAVIS: And I guess we've got two conflicting dynamics here. On one hand, we're seeing a bit of increase in market capacity, certainly in the European market, which is good and healthy. On the other hand, insurers are increasingly concerned about adequacy of reserving and deterioration of past reserves. So there's a bit of a conflict of interest there. I guess just that thing informs-- as a risk manager I would be saying, well, what does this all mean to me about pricing and what can I expect to see from my forthcoming renewal? So just shifting to the next topic then, we call it a three-speed market.
My first bike I think was only one speed. And then I think went up to three speeds. These days there's a lot more than that. But in terms of gearing for the liability market, I think it's a good description. People say what's happening in the market? It really depends on the sector you look at. So when we talk about three-speed market for international business, we're talking about three different sectors really. I'd say for international policies which have low liability limits and can be placed in local markets, there's abundant competition. One of the underwriters referred it as springtime for the local markets.
A lot of markets are coming new or back to casualty offering a lot of capacity. So there's good competition and there's fairly flat premiums or in some cases we're actually seeing premium reductions. So it's pretty healthy for local policies in local markets where they don't need substantial capacity. I'd say the second tier or second gear would be major insurers who do require substantial limits. Limits over $50 to $100 million up to best part of $1 billion, they need to come to the International market, including London and continental Europe, Bermuda.
There we're seeing probably the default would be low single digit price increases. And these are markets who are responding to competition but are aware of social inflation deterioration in prior years and are trying to hold their line. So pricing is much better than it was in the last couple of years. We're probably seeing, as I said, low single digit. The final speed of this international bike, as we call it, is for those insurers with US exposures. And interestingly, we're starting to see a bifurcated rating process.
So for those insurers that have some international exposures and US exposures, the International exposures, we're seeing flat to low single digit, but actually they're applying double digit rate increases to the US elements. And that's really in reflection of social inflation and some two or three major energy and chemical losses coming out of the US recently, which focused insurers minds on it. Bianca, I know we've worked on a few renewals, would you say that's your experience as well?
BIANCA BOLT: Yeah, that's correct. It's local continental markets with small limits or smaller limits. It's more like a flat. But when there's a US risk, then underwriters start to get nervous. And they also if there's a substantial turnover in the US or if there's a big fleet in the US, underwriters also have to contact their referral for approval of their quotation. So additional information is requested. And yeah, underwriters are very keen on that part of the risk. For the rest of the world, it's more like not really an issue. But the US at this moment is really a, yeah, trigger for underwriters.
MIKE NEWSOM-DAVIS: Yeah, we've definitely seen that recently. So thanks, Bianca. Because we talked about a bifurcated market. Blake, in your section of the energy market review, you talked about a nice Dickensian title, a tale of two, not tale of two cities, but tale of two casualty markets in the US. Do you just want to elaborate on that?
BLAKE COHEN: Absolutely, Mike. I mean, I think from the theme of what you all talked about before, we're seeing US rates are going up and think that's the case for really all risks in the US from a primary and an excess liability standpoint. I guess the dividing line is how much? And think you've got-- we've talked about two different markets. You've got industries assuming accounts that are relatively profitable and loss-free, like upstream. We see a lot of capacity in that market. We see low single digit increases in that, so really not going up a lot.
Midstream and downstream we see probably mid to high single digit rate increases as well. Again, manageable, but up a little bit to offset some of the claimed inflation in industry losses they've seen. And I think that there's a little bit of-- I would say competition between the domestic carriers for the better risks. So the risks with lower severity potential in the sense of lower auto fleets or not in the second tranche, we're going to talk about, which is oilfield service.
Carriers are looking to write more of that business. They need to keep their liability premiums up to help offset the tail claims that they're paying. And so we've got the other side of it, which is your oilfield service companies for the most part, as well as accounts with large auto fleets and/or losses that have happened in the last few years that have impacted the excess program. So those markets are really-- those segments are really seeing higher increases from markets and markets trying to react in the sense of, how do we continue to write this business that's challenging?
The oilfield service side is getting hit from general liability action over claims from workforce injuries, as well as the auto liability component, and many times at the same claim with an employee injured in an auto accident. And so they're struggling. The carriers that write that are struggling on, How can we continue to write this profitably? So it has been higher rate increases. It's been a little bit of a flight from the less quality risks that they may have some underwriting issues with as well as shortened limits. So you see more $5 million lead umbrellas, as well as higher price and rate online for those.
So it's a little bit different between the two marketplaces, but accounts that have low autos, more premises, exposure, your chemicals, your midstream, your downstream, some of your others for power generation, renewables. There's quite a bit of competition out there. And with marketing efforts, you can probably get reductions.
MIKE NEWSOM-DAVIS: So Bianca, thank you for that. Thank you, Blake. So the third topic I wanted to cover is limit adequacy. What are the common questions we're asked as brokers is what liability limits should I buy? Liability, as we know tends to be something of a dark art compared to the property insurance programs where exposures can be more readily quantified by valuations EML and business interruption studies.
So one method is to benchmark, but it's not always a true reflection of liability exposure. Interestingly and counterintuitively, as the Swiss Re alluded to in their recent report, average liability limits have actually declined by 40%, 50% in real terms over the last 10 years. Bianca, what would you say to this? We've had some experience recently on some liability renewals. Are you seeing limits having reduced over the past few years?
BIANCA BOLT: Yes, we do. At a contract we just renewed, there has been a big decrease in liability insured limits in over the last few years. And that's mainly to do with the lack of capacity because insurers are signing down, yeah, due to the US exposure. And they really have to bring back their capacity for these kind of risks. And then it's quite difficult to replace them, especially because in the past industry insurance companies were very keen to write high capacity values like $100 million or something even more. Now, as we also discussed previous in this call. Yeah, this is being reduced until $30 or $50 million for their share and that's, yeah, that has a very big impact.
MIKE NEWSOM-DAVIS: It's a really interesting dynamic you pointed out actually, Bianca, and we mentioned that in the energy market review. I think we refer to it as the surface is relatively unchanged, but there's a lot of dynamic movement beneath that. And what we're describing is what you alluded to is that some major carriers have reduced their capacity from $100 million or $75 to $50 or $40 million or less. Equally, we've seen one or two new carriers come in MGAs and some markets increasing their capacity.
So there hasn't been an overall massive change this year, but we have seen a bit of an influx in competition, which is good. But you're right. From my perspective too, is same as yours. I think over the last four to five years, we've seen capacity reducing from accounts which could have readily bought $1 billion to $750, $600, et cetera. That's starting to increase a little bit now. We've also seen for those markets that haven't visibly reduced that limit, that's because actually they've been taking a lot of self-insured retention and increasing their captive participations.
I think we're now seeing a slight push back on the more benign risks and accounts. We are able to push back and increase capacity. But it's certainly true what you say. We've seen a net reduction over the last few years, particularly fueled by US concerns. Thanks, Bianca. Blake, interesting to get your views from the US market. Is there a massive capacity out there? An easy job for you just to browse into the market and pick up a few lines.
BLAKE COHEN: I think from a capacity standpoint, we had a real adjustment in 2020 and 2021 for US domiciled risks and global capacity. I would say since then when we had a pretty decent amount of reduction as well as some pretty large increases in pricing, especially on the higher ends of excess liability towers and minimum price per millions that it's been pretty stable since then. The real question is more does the client choose to buy more or less? And so I think the availability is there.
But the biggest challenge markets, which is really the oilfield service companies don't historically buy a lot of limit anyway. They could be buying from $10 to $50 million unless they're working offshore. And so not really impacted by a lack of capacity and limit. But a lot of times it's a function of cost for those companies. Are they able to afford to buy the new price as there is less competition within that first $50 million of excess liability programs for those services?
And then as far as clients go it's really interesting because we get the question all the time. Should I buy more? Should I buy less? And it's really difficult thing to answer is kind of a risk management advisor in the sense of there's two schools of thought. There is buy as much limit as you feel is a good trade to protect your balance sheet, or the attorney is going to ask for whatever limit I buy as the starting point in negotiation. So do I buy less? So we don't get an outlandish. They realize I buy $200 million of insurance.
So the initial demand is $200 million. If I buy $50, do they start at $50 and trying to get it a little bit lower?
So client have two different schools of thought on that. And it's really hard to predict what is right. I've never buy less liability limit because the issue is you're at the mercy of plaintiff's attorneys and juries and so the sense is do you buy less? It's hard to say no to that because something may happen. So it's really interesting.
MIKE NEWSOM-DAVIS: OK, so interesting on those three topics, I've got a couple of just bonus questions, I guess, I want to ask, probably from a risk manager's perspective. And one cheeky one. So ESG, not an issue anymore? I mean, there's focus on social inflation, pricing, renewals. Surely it's gone out with the energy security concerns. What would you say, Blake?
BLAKE COHEN: I would say the domestic markets that don't have as much of a concern anymore as it used to be, we'll say are major focus. When you gave a renewal presentation to a market now it's more of a box check. But I think we still see pressure from some of the European markets and others that still want addressed. I think it's more people assume you are doing it and you need to check the box than it is. Let's focus our entire presentation on it, at least with our markets.
MIKE NEWSOM-DAVIS: I would agree and I think it's less of a burning issue. Everyone needs evidence and articulate that they have an ESG plan and they are also enacting it. Bianca, I guess, just checking with you on that similar position. How are you seeing the ESG issue?
BIANCA BOLT: Yeah, the same. But also insurers are checking. And during one of the renewals for a natural resource company, we found out that one of the insurer was just checking on the internet if there was some ESG issue and there popped something up, and the insurance manager really had to provide some additional information. And in the end, it was a tick in the box. But it was a question and they needed it be confirmed by the client that it was already solved, and that they took care of all the measurements. So they had to take care of-- it had to be done and had to be confirmed. So it was a kind of a thing. It popped up because we didn't expect to. But yeah, it was there. So also still insurers are very keen on the ESG topic.
MIKE NEWSOM-DAVIS: So necessary exercise. What will be interesting and we've seen it a little bit, but not in great detail yet is if there's any differentiation in terms of price. And the theory is that as insurers have to carbon cleanse their portfolio, and they have more latitude to make judgments, but they want to differentiate between good insureds and more challenging insureds, should we say, from a carbon reduction perspective, if and when we start to see some price differentiation. And I think we're starting to see that certainly, although insurers are more flexible in terms of how they underwrite risks, they do favor and we have a lot easier renewal process for those clients that can articulate their ESG exposures positively. So I think there's certain benefit from it and what will be interesting if that morphs into tangible pricing benefits in the future.
Second question, I guess, from a risk manager's perspective is travel. A lot of risk managers will be planning their travel schedules and budgets for 2025. Blake, Bianca, Blake, first to you, is there a real value in clients meeting liability markets, visiting Europe, continental markets, Bermuda, and domestic markets, or is this just a nice to have?
BLAKE COHEN: No, absolutely. I think it's key at this point in time and probably more important than ever. I think we've spent a lot of this podcast talking about the challenges that liability markets are facing by social inflation. And so one of the most important things that you can do and have your broker do with you is you need to differentiate your risk. You need to be aware of the drivers, whether it's MSA limits, whether it's auto safety controls, whether it's motor vehicle reviews, NVR reports. It's those things that you need to understand the underwriters concerns and address that in a presentation format to them. So that's key.
But also, as we see probably less and less capacity from individual markets, even though some come in and offset capacity that may leave, you need to develop relationships with these carriers. It's crucial because as things get more difficult, more difficult, and if a severity claim happens, you want to have an actual relationship with these markets so they understand that it was a freak occurrence. And you can continue onward. So I would say it's always been important, but it's more so than ever as I don't foresee the market getting any easier when it comes to US domiciled risks.
MIKE NEWSOM-DAVIS: Totally. I fully endorse that. And actually, the markets have always preached continuity. But actually, as you said, we've seen some instances with some major market claims where carriers have continued to insure a client if they have a good relationship with them and there's a good story. So it's a real tangible benefit from our perspective. Bianca, what would you say from your perspective as well. Obviously, you've got some continental clients. They use the London market, particularly also some of the Bermuda market. Do you see value in them visiting London, as well as continental carriers?
BIANCA BOLT: Yeah. We see a lot of help from these market meetings due to the fact that underwriters can just speak to the risk insurance manager and just have personal contact. That's highly appreciated by the client in display, but also by insurers. And so there's always kind of-- the company is disclosing their information and underwriters want to be informed and they want to hear. And as one of the last renewables-- one of the underwriters said to me they really love the way that the insurance manager disclosed the information and was honest about the problems he was facing and taking the underwriter in their way of thinking to manage this situation.
And they felt very confident by the way the client expressed how they were handling the issues they had to solve. And it was very well-organized several meetings. And in the end, I think it always it's a big benefit because underwriters go also to other companies. And we also saw that on one of our accounts that they changed from one underwriter to another. And if they love the risk, and they did in this case, they will just go to the new company and then they say, yeah, we also want to add to this risk. And they supplied some capacity to the program. So that's also, yeah, a great benefit of having this personal relationship with the risk and insurance manager and the market-- the people on the market.
MIKE NEWSOM-DAVIS: Perfect. So in short, trust, transparency, and travel to your market's key. OK, well, Blake, Bianca, thank you very much. That's pretty much all we've got time for. I hope that was a useful dive into the waters of the energy liability insurance market. That's it for this issue of The Risk Circuit and thanks for listening.
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