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Insider In Full: ‘Frustrating’ D&F market shows marked deceleration at 1.4

Property direct and facultative (D&F) underwriters in London have described a “frustrating” market in the run-up to the key 1 April renewals...

Catrin Shi the magnitude of rate rises has declined more sharply than expected.

Sources told this publication that increased competition in London via new entrants, well-capitalised existing players and Lloyd’s carriers with bigger D&F budgets to fill was putting pressure on the class, which is now entering its fourth year of consecutive rate rises.

It also appears that the US domestic market is nearing the end of remediation efforts and is now showing more interest in North American open market property risks, which is adding to competitive pressures in London.

A canvass of London market D&F players estimated the average risk-adjusted rate increase in the run-up to 1 April at around 10%, which compares with rate rises of around 20% achieved in the April 2020 renewals.

There is variance in the magnitude of rate increase by account, however. Generally loss-free business is attracting rate increases in the mid-single digits, while loss-affected business can renew with rate increases well in excess of 10%.

“It is still a rising market,” one underwriter said. “And we expected lesser rate increases this year compared to last but we didn’t expect competition to ramp up this fast.”

A quick call round of active underwriters concurred with this view, with all saying that rates in D&F were coming in far lower than what was anticipated internally. Some suggested that D&F rates in 2021 were so far in line with the “low ball” estimate they gave Lloyd’s in their 2021 business plans.

One CUO said he was concerned that the sluggishness in rate rises on loss-free D&F accounts pointed to a marked slowing in underlying rate momentum.

One D&F underwriter said that some players – particularly in Lloyd’s – seemed to be playing what they called “catch-up”, putting down larger line sizes and competing harder for business this year after having asked Lloyd’s for more budget for 2021.

“But they are behind the pricing curve,” the person said. “And it’s taking away any of the remaining leverage this market had. It’s very frustrating.”

Market participants in D&F described a flight to quality taking place on accounts, with some saying it was markedly more challenging to get onto new business coming in from the US.

Meanwhile, hanging over the market is uncertainty around the extent of losses from storm Uri, which plunged Texas and some of the surrounding states into deep freeze in February. Concrete loss information from the event has been slow to come through, with one of the few pieces of information revealed by this publication – a $50mn-$100mn loss from the collective damage to Texas schools.

As such, discussions on Uri for loss-affected accounts have been pushed into next year’s April renewal.

Conversations between the London D&F market and this publication also revealed:

Renewed interest in property E&S business from the US domestic carriers, after a number of years of retrenchment

Concerns that the current level of rate increase is not keeping up with elevated loss-cost inflation

Many sources are expecting a loss for London market property for 2020, even ex-Covid, following a string of painful mid-sized losses last year

The property D&F market was one of the first classes of business to show rate improvement as large-scale remediation on the part of major US writers (including AIG’s Lexington, FM Global and Zurich North America) led to a flood of business coming into London – tipping the supply-demand balance in London’s favour.

At the same time, D&F had been highlighted as one of the worst-performing classes in Lloyd’s under the Corporation’s performance gap process, resulting in a number of class exits and remaining players’ ability to write the class constrained.

The London market has now enjoyed three solid years of rate gain in D&F, with the first signs of acceleration becoming apparent in Q4 2017 – immediately following hurricanes Harvey, Irma and Maria.

Marsh data shows a drop-off in US property rate momentum in Q4 2020. This publication also flagged in February that there were early indicators of downwards pressure on D&F, and the actions of the US players – particularly when they would start to get re-involved in the market - would be a major influence on the trajectory of the class.

Sources speaking to this publication in recent weeks said although it appeared that some remedial work was still ongoing on the other side of the Atlantic – with some multi-year deals still running off - there were signs of more interest from the major US writers at this renewal, which tends to be focused on North American large accounts.

“That is a notable change. [The US carriers] seem more bullish, whereas 60 days ago they were still being defensive,” one source said.

However, any involvement from the US is tentative, sources said, and the market had definitely not seen a return to the large quota-share structures previously favoured by these carriers.

“It’s pretty unfashionable these days to write too much of any one risk,” one London underwriter said.

However, some in London questioned how the US domestic carriers would react to the Uri loss, which was unmodelled and has the potential to be painful for D&F writers – particularly those which write habitational and commercial property accounts.

So far, losses coming in have been small individually but great in number – due to the sheer geographical spread of the loss – meaning that Uri looks set to join the string of mid-sized and largely retained cat losses which have occurred in the past 12 months.

Sources said a flurry of new business into London and requotes in the past week showed some nervousness around the loss on the US domestic front. Some also said they expected Uri to start showing some impact on rates at the 1 May renewals.

Loss cost trends and profitability

While many in the D&F market anticipated that 2021 would see a slowing of rate momentum, there is some lingering concern that rate increases are starting to taper before real adequacy is reached.

The return profile of the class is indeed much healthier than in previous years – one London market player previously said in February that they believed their book this year would generate a 20% return on equity in a normalised loss environment. But there is some worry that rising loss costs mean that what was deemed adequate 10 years ago is not necessarily so in 2021.

Furthermore, some underwriters expressed alarm that rates in London had not held up better at this point in the year after a 2020 which will likely be loss making for London market property, even without Covid.

Last year brought the most active hurricane season for named storms on record, with D&F carriers taking a string of mid-sized but largely retained losses from landfalling storms, as well as losses from events such as the Midwest derecho, Californian wildfires and the civil unrest in June.

Uri in particular has shown how unmodelled perils can impact the market, sources said.

As this publication has previously flagged, there is latent risk in the cat market – with negative surprises being a frequent occurrence for cat writers in recent years.

On Uri, the divergence between model output and reality looks substantial, with dated models pointing to extreme loss potential in the high single-digit billion range for winter storm.

As reported by this publication earlier this week, there is growing optimism amongst (re)insurers that the Texas winter storm loss last month will cost less than $15bn, pointing towards a loss at the lower end of initial $10bn-$20bn expectations.

“The rise in attritional losses is unmistakable,” one D&F underwriter said. “And I am not sure that we are pricing adequately for increased instances of mid-sized losses, unmodelled events, or the fact that the cost of these claims inflate post event.”

 It is widely expected that D&F carriers will see creep on losses from Uri, with adjusting and repair delays due to Covid restrictions and rising cost of materials adding to the loss bill.

The impact of Covid on inflating ultimate losses has been largely ignored in recent D&F pricing discussions, sources said.

“The inflated loss environment is worse in 2021 than I have seen for the past decade,” one senior D&F underwriting source said.


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