An insurance perspective on the European Chemicals industry. Different clients. Different needs.

Transcription

1 An insurance perspective on the European Chemicals industry Different clients. Different needs. June 2018

2 Table of contents Section 1: European Chemicals market 1.1 Macro-economic trends Key industry trends How does the future look? Section 2: European Chemicals insurance market 2.1 Key insurance trends Property insurance market Key success factors for Chemical insurers Section 3: Effective client targeting in the European Chemicals industry 3.1 Distribution of the 100 largest European Chemical companies Final thoughts looking ahead

3 Introduction China is now a major player in the global Chemicals industry, having overtaken the European Chemicals market. The European industry is shifting gears to address this new challenge. is in a unique position to assist European insurers in maintaining their knowledge about local markets and distribution dynamics, finding pockets of growth, and sharpening their value propositions to compete effectively in this new environment. The European Chemicals Industry is a major manufacturing success story with a history of more than 150 years. Since the recession, it has faced increasing competition with emerging markets. China has become a major player in the global Chemicals industry whilst the European industry is shifting gears to address this challenge. This white paper provides the reader with macroeconomic views, fact-based insights in key trends and the future in both the European chemicals industry as well as the European chemicals insurance market. In order to be successful in this market, carriers are increasingly pressured to further segment their client approach and adjust their value proposition continuously to meet clients exposure and risk management needs. is in an unique position to advice carriers on their growth strategy, providing granular market and distribution insights, finding pockets of growth and sharpening their value proposition to compete effectively in this challenging environment. The preparation of this white paper has been made possible thanks to the insights provided by colleagues Lars Sorensen Director EMEA Life and Science, Luigi Sturani CEO Specialty EMEA and William Lynch, Business leader Energy EMEA. Last but not least a special word of thanks to Thijs de Boer, Strategy Director EMEA, who has led the creation of this white paper with support from colleagues in EMEA. Best regards, Michael R. Moran CEO michael.r.moran@aon.com European Chemicals Industry 3

4 1.0 European Chemicals market 1.1 Macro-economic trends The European Chemicals industry is a major manufacturing success story with a history of more than 150 years. As of 2016, the European Chemicals Industry was c. 507billion, with an impressive growth of 60% over the past 20 years. This represents c.15% of the 3.4 trillion of total global sales. The largest contributor in Europe is Germany with 145 billion in revenue, followed by France with 71 billion. 70% of the revenue is generated in the Top 5 European member states as shown in the chart below Exhibit 1: Largest Chemicals markets in Europe (% of total 2016 European revenue) In 2016, the global Chemicals industry output more than doubled in value compared to China s share of the market increased from 13% to c.40%, while Europe s share declined from 28% to 15% over the same period. Between , Europe gradually lost its premier position to Asia despite the fact that sales from the European Chemicals industry went up by more than 16% due mainly to strong demand from emerging countries. Exhibit 2: EU Chemical industry revenue and its share of the global market over % % % 14% 17% EU Chemicals industry revenues World share Germany France 10% 9% Italy Netherlands Spain Since the recession, the European Chemicals industry has faced increasing competition with emerging markets. In response to the global threat, the European Chemicals industry has been focusing on re-aligning itself in three major areas: sustainability, environmental impact and competition with emerging markets. 7% 7% 7% In the past 10 years, competition around the globe has been fierce with Asian Chemical production outpacing other regions with total revenue of 2.2 trillion. China is now a global leader with revenue of 1.3 trillion (2016), a position that was once firmly held by Europe. UK Belgium Source(s): Cefic Chemdata International; analysis Recently, Europe lost its leadership position in the Chemicals industry to China. Others Source(s): Cefic Chemdata International; analysis 1.2 Key industry trends Low cost of ethylene production outside of Europe Two dynamics are undermining Europe s competitive position. These include the integration of the downstream value chain in the Middle East and the rise of shale gas in the US. In the Middle East, the cost price of producing ethylene is less than half of what it is in Europe. Middle Eastern Chemicals companies are leveraging their access to feedstock to integrate downstream activities in the value chain. This along with the low cost of feedstock, proximity to Asia and local government support have made the Middle East a major competitor to the European Chemicals industry. In the US, the rise of shale gas has set ethylene prices at a structurally low level. The cost of producing ethylene in the US is about a third of what it is in Europe. Simply put, Europe cannot match these low prices coming out of the Middle East and the US. Consequently, more chemical companies are investing outside of Europe with some European companies shutting down their domestic production to invest abroad. 4 European Chemicals Industry

5 The clustering of Chemicals parks outside of Europe Emerging economies such as China are becoming more and more self-sufficient in petrochemicals. Driven by an increasing demand from China s considerable population growth, the Chinese Chemicals industry started a decade ago with construction of Chemical parks around consumer industries. The capacity expansion in Asia is expected to continue and to grow fast, reducing dependency on imports and building a strong, advanced and competitive industry. This will diminish export opportunities for other regions including the Middle East and Europe. Commoditization versus specialty Chemicals As Asia is picking up its manufacturing to meet the demand for chemicals, the concern is that the European Chemicals industry could lose their premium customer base, their products become commoditized and their margins erode. Many European companies are therefore shifting downstream to more value-added applications such as agrochemicals, food packaging and pharmaceuticals where they can realize higher profitability. Further, the chemical industry from a holistic view has been gravitating towards life sciences which is perceived to be more profitable and less cyclical. The uneven global playing field for European Chemicals companies is due primarily to stricter regulation in their home countries. Increased regulatory pressure Regulatory costs in Europe have doubled over the past 10 years with major drivers being the introduction of the European regulation on REACH in 2007, CLP in 2008, Seveso in 2012 and ETS Phase 3 in The EU Commission CCA report (2016) has estimated the total cost of legislation for the European Chemicals industry from at 9.5 billion per year, representing 30% of the Gross Operating Surplus profit (a proxy for profit). The strict regulation of the European Chemicals industry is taking both personnel and capital resources away from innovation and production, adversely impacting the profitability of European companies. 1.3 Industry outlook Global Chemical sales are expected to grow to the level of 6.3 trillion in 2030, with faster growth in the emerging markets following the same current trend. Europe is expected to take the 3rd position by that time with a volume of 750 billion. To ensure that Europe s Chemicals industry s future is viable and attractive, the Chemicals industries needs to address the following issues: feedstock prices and a consistent European regulation framework that does not hinder Europe s competitive position compared to the world and that allows the industry to maintain its current investment levels. Europe is facing many challenges in improving its competitive position Innovation is a must if Europe is to maintain its competitiveness in the world. Another element required to secure the future is investment in Research & Development (R&D). Wide variations are seen in R&D across the world s chemical industries. Over , the ratio of R&D spending to sales (R&D intensity) in Europe was 1.6% on average, about a rate similar to that of the US. Japan, however, doubled its intensity to 4.0% in the same period, while China s R&D intensity is one of the lowest in the world at 0.8%. The R&D intensity landscape provides an indication of the production of commoditized and high value-added products by geography. Notwithstanding Europe s declining share of global production, its Chemicals industry is still a world leader with traditional European Chemicals companies contributing a significant share of revenues in regions outside of Europe through their global operations. It is important to note that these companies have also benefitted from competitive US natural gas feedstock as they have large US operations themselves. So, European Chemicals companies should continue to expand globally and maintain investment in R&D to meet future challenges. Tightening of the CO 2 emission reduction targets and energy efficiency objectives are also likely to further increase regulatory costs. It will therefore be more difficult for the European Chemicals industry to compete with China and other areas where regulation is less ambitious, resulting in an uneven global playing field. European Chemicals Industry 5

6 2.0 European Chemicals insurance market 2.1 Key insurance trends The insurance market for the Chemicals industry differs in many ways from other industries. Key differences include the risk exposure size of Chemicals companies and the complexity of the risk given the long supply chain and host of interconnected industries and suppliers. To control risk exposures, many insurers offer loss prevention services as a way to enhance risk management. Given the high level of complexity in the risks being placed and the domination of the industry by large Chemicals companies, the majority of the risks are placed via brokers (including in-house brokers who most often operate independently) - a major feature of the German business environment where apart from core services, insurers also provide risk assessment and captive management services. 2.2 Property insurance market The six largest Chemicals producers in Europe spend an estimated 910m on their property insurance, excluding any companies from the upstream Oil & Gas sector. Germany is the market leader in Europe, with c. 400 million followed by France and the UK. The insurance market for Chemicals property is worth c. 910 million with Germany accounting for 44% of the market. Exhibit 3: Distribution of Property premiums across major European countries Belgium 30m Netherlands 60m UK 90m Germany 400m France 250m Italy 30m Spain 50m Source(s): analysis 6 European Chemicals Industry

7 2.3 Key success factors for Chemicals insurers As the market continues to stay soft with flat or downward trends on rates and a high variance on deductibles, gaining profitable market share is the key challenge for insurers. There are several areas where insurers can gain market share: A. Truly understanding your clients needs As in any market, different clients have different needs. For the Chemicals market, the large clients (> 1billion annual revenue) tend to have a unique set of buying behaviors compared to the mid-sized clients ( 0.5 billion - 1 billion annual revenue) in terms of the type of insurance program. Large clients tend to have global, multi-layered programs that include their local subsidiaries and potentially a captive structure covering the first layer of the program. These programs feature centralized decision-making. Mid-sized clients work with regional or local programs that rely upon market and excess layer capacity and utilize a decentralized decision-making which requires support for loss prevention capabilities. While the needs of Chemical clients can be categorized based on the difference in their size, it is still important to remember that each large Chemicals company is distinct. This means that insurers must be adaptable and prepared to work closely with clients on wording, placement structure and risk management. For example, many clients require bespoke coverages - in particular, to effectively wrap around the OIL mutual. In this situation, insurers need to have a specialist team of experts available to work with clients and brokers - e.g. engineers/ cyber analysts/ claims underwriters/ wording resources etc. Successful insurers understand this difference in dynamics and are therefore flexible and agile enough to serve the specific local demands in structuring and financing the program. Captive structure within chemical companies A captive s goal is to control costs, improve cash flows and drive operational efficiencies within the total cost of a risk framework. In addition, Chemicals clients also want to ensure prudent financial management. Specifically, large chemical clients can access Oil Insurance Limited (OIL) which is a mutual insurance fund that insures almost 3 trillion of global assets for its 50+ members who are engaged in energy operations. The company provides its members with up to 400 million of per occurrence (only PD) limits which serves as cornerstone capacity for their global insurance programs. Another benefit of a captive is that large companies can better control the placement process by distributing part of the layered program into their captive and thereby avoid any unexpected changes coming from insurers such as fluctuating rates, stricter terms and conditions, etc. In some cases, if the market does not provide the desired price and service levels, large companies may decide to transfer more capacity into their own captive. Successful insurers with extensive captive knowledge can position themselves as a natural partner and become involved in the re/insurance panels of the captive. These panels provide fronting services to support captives if the insurer is a lead insurer. So, although pricing, coverage, limits and network are crucial parts of the value proposition, an insurer can use their captive capabilities as a differentiator in this market. Mid-market clients are limited in their ability to use captives due to Solvency II and compliance regulation, administrative burden and loss of tax exemptions. European Chemicals Industry 7

8 B. Navigating through the distribution landscape Due to the size and complexity of Chemicals risks, most Chemicals companies seek insurance coverage via multinational brokers to leverage their local insurer network, to look for additional capacity from the Lloyd s markets and for the additional requirements of the program. As most programs have a quota-share, brokers seek insurers that show a long-term commitment to the market with an ability to provide ~10%-15% lead capacity or ~1%-3% follow capacity for large chemical companies on a typical program using broking or lead insurer wording. Large clients, predominantly in the German market, have in-house brokers managing the program. The objective for an in-house broker is to provide their parent company with similar services as an external broker while also providing their owners a more direct line to the insurer market. In-house brokers tend to maintain control over their risk portfolio and direct a part of the risk into their captive which can subsequently be reinsured. Multinational brokers support in-house brokers with their advisory capabilities on placement dynamics. Chemical clients are seeking services which apart from providing the adequate coverage can also support them on their need for operational and financial stability. Successful insurers build long-term relationships with multinational brokers to access the broad premium pool of clients on a quota-sharing basis. They can grow their follow-share by providing capacity, showcasing capabilities in captive fronting services and advocating their wording. In addition, in-house brokers tend to work directly with insurers based upon longstanding relationships. Exhibit 4: Key items of client segmentation Type of insurance program Large companies (> 1bn revenue) Multi-layered program with captive structure for corporate pooling layer Mid-sized companies ( 0.5bn - 1bn revenue) Multi-layered program with market (and excess) layer Type of risk allocation Co-insurance Co-insurance Share distribution Dominant distribution approach In-house loss prevention capabilities Internationalisation Lead share: ~10%-15% Follow share: ~1%-3% per insurer Germany: in-house broker Other European countries: Multi-national broker Very Strong Global programs (incl. subsidiaries) Centralised decision making Always looking for international insurers 100% placement possible Otherwise lead share ~30%-40% Follow share: ~15%-30% per insurer Multi-national broker Average for companies with 1m- 5m annual premium Not relevant for companies with < 1m of annual premium Global/regional/local programs Also local decision making Mostly looking for international insurers Source(s): analysis 8 European Chemicals Industry

9 C. Offering a comprehensive value proposition Insurers in Europe should start thinking about the consequences of the above industry trends on the needs of their clients. As European Chemicals companies become increasingly global, insurers should improve their offerings such as fronting capabilities, licenses in multiple territories etc. Further, as the industry moves away from bulk commodity chemicals to more value-added applications, it presents both a challenge and opportunity for the insurance market. Chemicals companies are starting to require insurance programs which do not fit the narrow definitions of property or energy insurance products. Historically, insurers have segmented their portfolio into distinct classes of business to reflect their reinsurance treaties. But due to this trend, the insurance market needs to develop new integrated insurance products which truly reflect the client s exposures and needs even if this involves bringing multiple insurance product lines together into one policy. The focus should therefore be on offering products which reflect the client s activities and that are not based on how the insurance market has historically organized itself. Another trend that is thus far unaddressed is the need to examine Business Interruption (BI) exposures and interdependencies more closely. An insurer who can offer detailed BI studies may be more appealing to large and medium-sized chemical companies due to their larger than average contingent BI exposures - e.g. truly industry-leading insurers should be able to work with clients to fully determine where in the value chain the revenue/margin is earned. A thorough study of BI can avoid a lot of issues in long and complicated claims settlements. Given the exposure, complexity and the financing structure of Chemicals risks, clients are looking for insurers with a strong market commitment and an ability to bring all of these crucial elements together into one single competitive offering. Exhibit 5: Key elements of a competitive offering International footprint Ensuring international footprint in case of multi-national clients Take-up risk Leading or following a quota-share panel Sufficient capacity Providing sufficient primary (and reinsurance capacity) Key elements of a competitive offering Flexible wording Ability to work with the wording of either company or broking Captive capabilities Offering captive fronting capabilities Over and above these elements, best-inclass insurers have a fast time-to-quote to (in-house) brokers, combining PD/BI deductibles and a local presence in at least the key European markets which are an essential for long term success. Source(s): analysis Loss prevention services Supporting clients with loss prevention services if needed European Chemicals Industry 9

10 3.0 Effective client targeting industry European Chemicals industry 3.1 Distribution of the 100 largest European Chemicals companies Deploying a successful value proposition in the Chemicals insurance market starts with understanding the distinct nature of each client: its operations, size and footprint. Assessing these parameters determines the best approach for insurers to be competitive in the European market. The following exhibit shows the 100 largest European Chemicals companies based on their degree of international footprint and their average premium spend. Exhibit 6: Distribution of the 100 largest European Chemicals companies based on international foot print and average client premium spend Mid-sized companies Large Chemicals companies Degree of international foot print European Global Local DACH (Germany, Austria, Switzerland) 6 This bubble represents 3 Large chemical UK companies from CEE Southern Europe (Spain, France Italy and Portugal) Larger chemical companies tend to have a wider global footprint 10 Benelux (Belgium, Netherlands, Luxembourg) Nordics CEE (Central and Eastern Europe) m 1m 2m 4m 6m 9m Avg. client GWP spend Source(s): analysis 3.2 Final thoughts looking ahead Growth in the European Chemicals industry is impacted by issues ranging from slowing European growth to increased costs of regulation. To remain competitive, brokers and insurance companies can do their part by supporting risk and capital management programs that provide comprehensive and innovative solutions to current and emerging risks from Environmental to Cyber. It is also important to involve all stakeholders in the process of understanding this changing and complex environment to ensure that all parties are adequately prepared for the uncertainties in the future. 10 European Chemicals Industry

11 Contacts Michael R. Moran Chief Executive Officer The Aon Center, 200 East Randolph Street, Chicago, IL 60601, USA Robert Woods Group Managing Director EMEA The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, EC3V 4AN, London, UK Antony Ainsworth Group Managing Director Americas 199 Water Street, New York, NY 10038, USA Marguerite Soeteman-Reijnen Chief Marketing Officer Admiraliteitskade 62, Rotterdam, Netherlands Giselle Walther Group Managing Director APAC 80 Collins Street, Melbourne, VIC 3000, Australia giselle.walther@aon.com Paul Galvin Global Leader, Carrier Solutions The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, EC3V 4AN, London, UK paul.galvin@aon.co.uk Thijs de Boer Strategy Director EMEA Admiraliteitskade 62 Rotterdam, 3063 ED Netherlands thijs.de.boer@aon.nl Luigi Sturani CEO EMEA Specialty The Leadenhall Building 122 Leadenhall Street London, EC3V 4AN United Kingdom luigi.sturani@aon.co.uk William Lynch Business Leader Energy Commercial Risk The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, EC3V 4AN, London, UK william.lynch@aon.co.uk Lars Sorensen, Ms.BA & Com. Law Director EMEA Life Science & Pharma 200 East Randolph Street 9th Floor Chicago, IL 60601, 9S17A, USA lars.sorensen@aon.com Varun Challa Senior Associate Admiraliteitskade ED ROTTERDAM Tel Varun.challa@aon.nl European Chemicals Industry 11

12 About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.