spRING 2011 GlobAl MARKETs INTERNATIoNAl - Willis

5
Average Global Rate
0.45%
0.40%
0.35%
0.30%
0.25%
0.20%
0.15%
0.10%
0.05%
0.00%
‘06 ‘07 ‘08 ‘09 ‘10
Average Global Rate (%) 2006-2010
CoMModity PRiCe
The anticipated super cycle in commodity pricing is partly a
consequence of a current supply and demand disparity. The credit
crunch saw demand fall, witnessed by steel mills around the world
reducing output. The consequent reduction in supply saw numerous
mines, particularly the most capital intensive and least profitable
ones, being put into care and maintenance. The recovery in the global
economy has seen a swift rebound in demand, for example with
construction in China and India increasing. However, the costs of
reinstating a mine back to production, and the time taken to do so, have
seen suppliers struggling to meet the pace of demand. This supply gap
has yet to be filled.
The closing of this supply gap has been hampered around the world
by strikes and bad weather, seen particularly in Queensland where
recent flooding has caused many mines to suspend operations and
invoke force majeure. Consequent price inflation to coking coal has
resulted, with demand shifts turning to the U.S. and other coal sources.
In addition, the desire to protect against the effects of quantitative
easing and currency debasing in the G20 economies has compounded
any increase in demand, by encouraging investors to seek value in
commodity-backed instruments.
The impact of commodity price rises has significant consequences
for Business Interruption exposures. With target output increasing
due to rising commodity prices, there is pressure for machinery to be
pushed up to maximum tolerance, thereby increasing the likelihood
of interruption due to machinery breakdown. Equally, the rise in
commodity prices is ramping up Business Interruption values and
therefore Maximum Foreseeable Loss (MFL) estimates are rising too.
Consequently, despite a softening insurance market, buyers need to
evaluate their limits of indemnity to cover increased exposure.
As a result, the top layers of insurance
programmes – increasingly exposed to MFL
estimates – are likely to be more expensive
relative to previous renewals.
NatuRal CatastRoPhe
Nat Cat exposure in 2010 was highlighted by the
Chilean earthquake which is estimated to have
cost the (re)insurance market USD 8 billion.
The impact was felt in the local market with a
40% – 70% increase in Nat Cat reinsurance rates
in July. At the time of printing, the recent flood
events in Queensland and their effect on clients
and insurers is not clear. The impact of these
events will unfold during the course of 2011
and may influence renewals.
CaPaCity
New arrivals, and the reopening of some
(re)insurers’ mining books, have lead to an
increase in capacity available to underwrite
mining risks. In line with this expansion,
estimated mining capacity has increased
marginally from USD 1.75 billion to
USD 1.8 billion. The signs are that capacity will
remain sufficient but due to the high profile
that mining underwriting attracts internally,
underwriting discipline will remain.
suMMaRy
Over the course of 2011, we anticipate relatively
benign underwriting conditions for mining
clients, particularly for those in the top 10%
of risk quality, but this is dependent on the
consequences of the recent Queensland floods
and other potential major loss scenarios.
However, in the longer run, we believe the
market will remain highly sensitive to the
frequency and severity of both Machinery
Breakdown and Nat Cat losses, and will become
increasingly mindful of the impact of Solvency
II. We suspect a key feature of the market in
2011 will be the reassessment of programme
limits in light of higher Business Interruption
and Machinery Breakdown exposures as
commodity prices continue to rise.
Willis | Mining Market Review 2011 |