Pulp, paper & packaging
Property damage and business interruption placements
Pulp & paper buyers experienced significant tightening of terms for their PD/BI placements in the past twenty-four months, driven by withdrawals from large capacity providers, the most relevant of which was Factory Mutual (FM). While not fully exiting the sector, carriers such as AIG, Allianz, and Zurich have shown more caution, recently reducing quota share capacity to a fraction of their previous participation levels or moving to an excess of loss position. For clients involved in significant chemical processes, accounts have been re-allocated to chemical underwriting teams, for example at Chubb and AIG, exposing these clients to often more expensive underwriting models. Despite these market changes, overall policy limits purchased have not reduced. Instead, rate and retention increases have moved significantly enough to attract new capacity from the general property market to replace departing capacity. Figure 27 shows the rate change range for loss free and loss active accounts. The data set includes five of the top 10 pulp and paper companies globally and consists of clients from Canada, Europe, Asia, Australasia, Latin America, and the US.
Fig 27: Rate change range
Pulp & paper clients often require large limits in excess of USD 1 billion. This brings capacity challenges, often most acutely felt in the middle and excess layers, which do not offer the primary rate on line structures that entice new opportunistic capacity. Middle and excess layer capacity will also depend on whether machinery breakdown is sub-limited below attachment points. This placement dynamic being the same as the metals and mining sectors. For Asia-based clients, often excess of loss capacity shortage is less of an issue, particularly if ownership is wholly or partially Chinese, Japanese, or South Korean. Total per risk global capacity of USD 2.6 billion is available, excluding the Asian market, which is USD 1.8 billion.
- Over 40% of our clients experienced an increase in self-insured retention levels over 2019 and 2020. This was particularly evident with the ongoing demand towards time element self-insured retentions to levels not seen before, in some cases up to 21-45 day waiting periods.
- There has been a rise in new captive start-ups, and around half of our pulp & paper clients now have captive involvement. This trend is set to continue into 2021, particularly for our clients who have recently exited from FM deals and have high levels of confidence in their own risk management.
- Due to increased levels of self-insured retention, either through captives or not, there is increased interest in specific protection for elements of these retentions where both traditional and alternative risk transfer mechanisms are being considered.
- Top-end clients continue to spend a large amount on Capex and risk management. Leading companies in the sector are matching annual depreciation numbers with equal or higher Capex expenditure, so no reduction in risk quality is happening and is an industry differentiator.
- A global ‘stay at home’ mandate resulting from the COVID-19 pandemic has led to more home deliveries and increased demand for packaging products. BI values for paper and packaging companies have increased, which has added to increased maximum loss estimates and closer analysis by markets on net retention capacity levels.
- Many of the largest pulp & paper clients have a global production footprint, and there has been a reluctance (especially in Europe) to front for such programmes, partly due to the improved rating environment enticing carriers to focus their efforts more on net retention and risks further down the risk profile scale, which is customary in a hard market.
“Over 40% of our clients experienced an increase in self-insured retention levels over 2019 and 2020.”
Aon’s and carrier claims data for 2020 indicates claims activity in the pulp & paper sector was below average. As pulp & paper generally falls into the general property book, this positive result will further improve international property underwriters’ 2020 combined ratios, many of which will be well below 100%. On the other hand, FM’s stance for 2020 and 2021 continues to be one of taking corrective action to its paper and forestry products book, following years of poor loss ratios (particularly in 2018/2019). There is no overriding cause of claims in the sector. Fire is the most common loss peril, but there is a general trend to closer examination of losses, particularly for boiler and machinery losses, with deeper scrutiny of potential wear and tear or poor maintenance issues.