European Union: Food And Beverage Insurance Market Update 2023

Find smarter ways to position your risk to markets using the latest insights on multiple insurance lines, including property, motor fleet, D&O, cyber and liability.

While there is a sense the market is considerably less volatile, following four years' of hard market conditions, we're still seeing limited rate increases for certain classes, albeit with significant improvements in several classes of cover and a moderating of rate increases for property damage/business interruption cover.

While it is too early to predict a return to soft market conditions across the board, it does appear an element of competition is returning, even for more challenging classes of cover.

ESG is increasingly part of the underwriting review process, and the areas in scope can be very broad. We're also seeing a requirement from clients to demonstrate the ESG credentials of potential insurer partners.

Property damage/business interruption

Drinks businesses can now expect to see rate increases in the low single digits from their lead insurer, with the possibility of rate reductions for some. Lead insurers on primary layers are still generally seeking an increase in the 5%-7.5% range for food manufacturing businesses, but it is now possible to reduce overall premium rating by taking advantage of the increase in capacity from new and existing food markets by restructuring layers of cover and proportions of capacity attached to the insurers participating in the programme.

We're also now starting to see competition for lead lines, and for well-managed risks it may be possible to achieve a reduction by switching lead insurers. Quality of underwriting and risk management information and clarity of placement strategy remain key to successful outcomes. Early engagement with existing and potential alternative insurers is essential. Demonstrating progress on risk recommendations continues to be an important factor in driving insurer appetite.

In terms of reducing overall premium costs, insurers necessarily applying significant inflationary increases to sums insured is a challenge. Insurers are focused on ensuring declared values reflect building costs inflation sufficiently. Businesses need to apply a robust valuation methodology to avoid potential issues on future claims and insurers applying restrictive policy language.

Given the proportion of overall premium spend attached to this cover, clients are unsurprisingly exploring ways to mitigate cost by retaining more of their risk, whether by increasing deductibles, or simply not purchasing capacity they view as overpriced. We are exploring all available options to achieve our clients' objectives, including alternative programme design options, tailored coverage limits and sub-limits, as well as alternative risk transfer options and using captives for larger organisations.

Having a detailed business interruption review is fundamental to bringing challenge and being confident your policy loss limit is adequate. Having a thorough understanding of your organisation's recovery ability provides more accurate quantification of estimated losses and recovery times, which also supports a more positive premium rating of the business interruption component of cover.

Liability

Appetite for food and drink risks in the market has improved further over the past six months, subject to positive claims performance and evidence of high-quality risk management standards.

We're now seeing occasional significant rating reductions.

Regarding product liability cover, client turnover may be increasing due to inflation, with no equivalent increases in production. Underwriters need to be educated where turnover is aligned to an increasing cost base rather than to an increase in product exposure, to prevent premiums from being inappropriately increased.

Poor claims experience will still lead to premium increases. Profitability continues to be the key objective for insurers. Risk management information in support of claims performance is essential in achieving the best results.

Markets still consider multi-line deals including property damage and casualty, but the ability for each line to generate a profitable return is critical, meaning economies of scale are reduced.

We anticipate market conditions improving further in 2024. Accounts performing within expectations and backed with positive risk management stories may expect to achieve double-digit reductions.

Motor fleet

Motor insurance in 2023 has been dominated by claims inflation, with insurers looking for rating increases even on well-performing risks, to combat the effect of social and claims inflation.

Average increases of between 5-10% have been recorded in all quarters this year. Given this is against a background of widely publicised inflationary percentage increases of 12-15%, we expect the drive and pressure for rate increases to continue and even increase into 2024.

Added to this is the upcoming Ogden rate review. The Ogden discount rate, which is the mechanism for calculating awards for serious injuries or fatal accidents, is due to be reviewed in 2024. Speculation over the outcome of this is driving uncertainty with reinsurers and impacting insurers' treaty renewals, with many buying reduced cover at increased cost. This is inevitably being factored into pricing, and then driving underwriters' requirements to achieve rate increases.

Additionally, we are seeing insurers looking to increase accidental damage excess levels where they are considered low, reflecting the increased cost of repairs.

Claims cleansing and effective risk management are vital in achieving best terms.

Electric and alternative fuel vehicles continue to become more prevalent. These can pose challenges due to the lack of repairers, which causes delays, and the increased fire risk from damaged batteries. Insurers are willing to accommodate, but often at increased terms or excesses.

Product contamination and recall

Market conditions within the London Market in the food and beverage space continue to soften following new entrants into the market over the past 18 months. The highly competitive pricing environment in the U.S. has also had a knock-on effect within the London Market, leading to both new and existing clients receiving very competitive pricing.

The broadening of coverage from U.S. insurers, such as coverage in respect of mould and rancidity, has resulted in some insurers in the London Market broadening their coverage. We anticipate this trend will continue over the next 12 months as insurers seek to remain competitive. However, this additional coverage will be considered on a case-by-case basis and is unlikely to be a blanket approach.

Frequency and severity of product recalls are increasing because of continuing inflationary rates in transport, labour, storage and raw materials, which in turn are being passed on to the consumer. We expect current conditions to remain consistent over the next year in line continued inflation globally.

There has been a large increase in the number of recalls on the U.S. food and beverage side, where the Food and Drug Administration (FDA) has already reported more recalls in 2023 to date than the whole of 2022 and they are now back to pre-pandemic levels. This has been contributed to by auditors being granted access to manufacturing facilities post-pandemic and an influx of inexperienced staff who were recruited during the pandemic.

Across the world, allergens are typically the primary cause of a food recall and the number one cause in the U.K. Triggers include cross-contamination and mislabelling including vegan products and 'free from' products.

Directors' and officers' liability (D&O)

Competition between insurers in London and other regions has been strong in the latter part of 2022 and first half of 2023, which put pressure on the London D&O market to reduce rates. Also influenced by lower claims notifications and U.S. Securities Class Actions is the significant softening in rates in Q2 2023.

In Q2 2023, most of our clients saw decreases in their renewals: 83% of clients saw their primary layer renew with a decrease on last year's premium, while 89% saw their excess layers renew with a decrease.

Insurers have also continued to soften policy terms and are increasingly willing to underwrite business using WTW's proprietary wording (DARCstar), a new version of which has just been launched this year to incorporate the latest improvements.

Following a period of significant decreases in the volume of claim and circumstance notifications between 2020 to 2022, notifications in H1 2023 have shown a marked increase compared with 2022.

According to the Stanford Law School/Cornerstone's Securities Class Action Clearinghouse U.S. Securities Class Actions for 2021 and 2022 were down from the historic highs of 2017-2020, with 2022 being even lower than 2021 (and the lowest level since 2014). If the securities claims made so far in 2023 are annualised, then it seems likely they will hit the levels of 2021 and be up slightly from 2022.

Looking forward, we continue to see strong competition in the GB D&O insurance market, and we expect this trend to continue for the rest of 2023. Q3 has seen 'any one claim' limits returning to the D&O market, with insurers offering this for some U.K. public and private companies, often for little or no additional premium.

DARCstar 2023 and DARCstar private equity 2023 have now been released, with CRIMEstar 2023 and a new Side A DIC facility due to launch imminently. We're also excited to be working on our next Directors' and Officers' Liability Survey, which will be launching in October 2023.

 Cyber

We've seen very favourable buying conditions throughout Q3 2023, with such conditions heightening towards the significant end-of-September renewal period, resulting in reductions of 15-45% becoming more commonplace for large businesses. For smaller businesses, reductions were often still available, but were more commonly in a range of 10%-30%.

We are now seeing strong competition from insurers to deploy capacity on both primary and excess layers, with a notable increase in the number of insurers targeting primary business.

Market conditions have also provided existing cyber insurance buyers with a range of options to purchase increased policy limits.

In light of favourable cyber insurance market conditions, businesses currently exploring risk transfer with the purchase of cyber insurance will find premiums more appealing when compared with the last 24 months.

For those clients with an existing policy, working with your broker to consider additional options – such as differing self-insured retention levels, additional limits and broader business interruption coverages – will ensure your business achieves optimum value from the insurance cover purchased.

In terms of self-insured retentions, insurers have generally been willing to provide alternative lower options/structures, particularly where they are competing to secure new business.

Ransomware frequency increased significantly in Q3 2023 relative to H1 2023. Across 2023 we continue to see higher ransomware frequency than in 2022. Severity of all claims has remained stable, cyber claims remain as costly as ever.

Several insurers have seen an uplift in social engineering losses, resulting in a loss of funds. Notwithstanding this, coverage for 'cybercrime extensions' to cyber policies, which provide coverage for this type of loss, are still widely available subject to a sub-limit. Clients should continue to think about whether this extension is appropriate to cover their exposure, or whether a standalone crime policy is more suitable.

WTW's Global Head of Cyber Coverage Andrew Hill has authored the report "War exclusions in cyber policies: the important details" which examines 'traditional' war exclusions vs Lloyd's model war clauses and more, including the WTW war exclusion.

Marine cargo

The marine cargo insurance market is at what could best be described as a 'tipping point'.

The portfolio changes made by insurers in recent years through selective risk appetite, the implementation of disciplined underwriting measures, the scaling back on insurance coverage and premium price increases have resulted in most insurers' cargo insurance portfolios returning to profitability. The resulting profitability is now leading to some insurers looking to increase their cargo premium income, and when this is considered alongside the growth in recent years in the number of available cargo insurance markets (because of new cargo insurance teams at some insurance companies and managing general agents) the result is the potential for increased competition between insurers.

Although profitability and increased competition will help to avoid the market-wide increases seen in recent years, insurers are still likely to be seeking increases of circa 5% across their portfolios.

There will, however, be more room for price negotiations with insurers and for some accounts with, for example, significant premium, good loss record, limited natural catastrophe exposure, price reductions may now be available.

In terms of coverage, insurers have continued to impose exclusionary language relating to Ukraine, Russia and Belarus due to the ongoing conflict, often due to such exclusions having been imposed on insurers by their reinsurers. Also due to the escalation within the Middle East, some markets are applying exclusions for war and strikes risks within Israel, Gaza and the surrounding area where there is an identified exposure in the region.

Other than this, insurers will not generally be looking to make changes regarding insurance coverage. During the challenging market conditions of the last two to three years, coverage extensions that were of concern to insurers (considered too broad in either coverage or limit) were either scaled back or stripped out of cargo policies.

It may now be possible to review some of the coverage that was previously restricted/removed, but insurers still have a reluctance to re-introduce such clauses across the board, so this will be considered on a case-by-case basis in return for additional premium.

Trade credit

The generally benign market conditions experienced by trade credit insurers during the COVID-19 pandemic and its aftermath, mainly as a result of global government-backed support schemes that included specific trade credit insurance support schemes, came to an end in the latter part of 2022 and the hardening of market conditions continued at pace in 2023.

The current increasing global geo-political volatility and uncertain financial environment will mean the protection element provided by trade credit insurance will be increasingly sought. The impact of inflation and higher interest rates has been a factor for some time now, but the ongoing profitability squeeze will continue to affect liquidity and solvency and the availability and likely increased cost of financing due to higher interest rates will affect all, but particularly those with higher debt burdens such as zombie companies that may find time has finally run out for them when they come to refinance.

Despite these challenges, there remains a healthy appetite for new business from trade credit insurers in the food and drink sector, particularly in areas where the impact of inflation, higher interest rates and energy price volatility can be passed onto customers. Insurer appetite on some heavily insured names in the wholesaler and grocer segment is becoming more pronounced, following on from capacity issues that have been developing since 2022. Top-up solutions help facilitate the coverage in limiting gaps to meet customer exposure requirements, whether this is because of new business or through inflationary-driven increases for existing customers. There are now many insurers in the trade credit market geared to writing this sort of cover.

The policy structures that provide non-cancellable credit limits and higher levels of policyholder discretion, such as excess of loss solutions, continue to gain in popularity and there has been a noticeable increase in the activity of top-up providers.

The ability to use trade credit insurance cover as a tool for growth and to give a competitive advantage by enabling expansion into sectors and territories organisations may not have entertained without insurance, is also increasingly popular and understood. The use of trade credit insurance to facilitate improved funding terms by utilising a company's trade receivables has been one of the main drivers for growth in trade credit insurance and this trend continues as companies and banks look to the product to protect and enhance their financing options.

Supply chain finance programmes underpinned by trade credit insurance are expected to grow in popularity as a means of enhancing a company's supply chain by offering early settlement options based on the financial strength of the purchasing company rather than the supplier, giving that supplier access to better terms than they themselves could have obtained.

Environmental impairment liability insurance (EIL)

Few industries depend more on natural resources than food, beverage and agriculture. With tightening environmental regulations and mounting public concern over pollution and biodiversity loss, there's an increasing focus on how the sector uses resources, from land and animals to water.

As well as the risks from chemical processes, refrigerants and fuel storage, natural products such as milk can cause serious damage if they leak in large quantities. Examples of incidents that have caused harm include:

• A fire at a dairy plant that caused melted butter to flow into a nearby river, resulting in large-scale biodiversity loss
• Over-abstraction of groundwater by a brewery that caused groundwater levels to drop, killing plants and degrading soil in an environmentally protected area
• Toxic wastewater from a chicken processing plant that caused an algal bloom, which killed fish and flora in local rivers.

The global EIL market has started to see a marginal increase in rates over the past twelve months, with insurers looking for between 2.5%-7.5% on renewals. The market has remained stable with two new entrants to the market in the past 12 months. Increase in rates on other lines has meant take-up of EIL where cover is not compulsory or contractually required has been low.

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^*The percentages have been presented as rounded figures for ease.

All rate changes are for guidance only and vary depending on risk profile and individual circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.