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Insider In Full: London specialty rate gains at 1.1 trigger 2020 optimism

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London market specialty insurance rates modestly accelerated at 1 January, with most senior underwriting executives expecting further momentum in the mid-year renewals...

Catrin Shi

A canvass of senior underwriting executives in the London market by The Insurance Insider flagged the higher pace of rate rises at 1 January, with capacity withdrawal and a resolve to address underperformance the key drivers.

The need to book meaningful rate-on-rate gains is underscored by the likelihood that Lloyd's will book its third calendar-year underwriting loss in a row, although the market may record some year-on-year improvement.

However, due to huge differences in pricing by line of business, overall portfolio rate increases varied greatly by company and individual business mix.

The range of portfolio-wide, risk-adjusted rate increases for January ranged from mid-single digits to around 15 percent in this publication’s market canvass, with those carriers more heavily geared towards treaty and delegated authority business sitting around the lower end of this range.

Nevertheless, the majority of London market underwriting executives said their “gut feel” was that overall rate increases were accelerating, and they were hopeful that a further bump could come at the major renewal dates of 1 April, 1 June and 1 July.

The above range is also greater than the 5 percent risk-adjusted rate increase Lloyd’s had estimated during 2020 business planning, but would bring the market closer to 2014 levels of pricing, when looking at Lloyd’s H1 pricing data.

The London market continues to benefit from the retrenchment of carriers with large US books – including AIG, FM Global, Swiss Re and Zurich – with brokers having to work harder to get business placed.

However, there is a unanimous recognition across London that this is not yet a hard market, and rates must increase further if the market is to get closer to rate adequacy and a healthier state of profitability.

The majority of executives questioned by this publication felt that rate momentum would accelerate during 2020, before losing pace in 2021 and plateauing in 2022.

However, these kinds of forecasts will depend heavily on market forces playing out “as expected”. There is no degree of certainty on above-average cat-loss activity nor on the brewing casualty crisis – as just two examples – and these could influence rates over a three-year trajectory.

It is difficult to get a full view of rate changes for specialty lines at 1 January, with some lines renewing only a small part of their portfolio at this date.

January also tends to heavily feature the renewal of delegated authority arrangements, which can typically show a lower level of rate change compared to open-market business.

The mid-year renewals – when rate acceleration really started to take off in London last year – could also prove to be a test of whether the market as a whole can book significant gains on accounts where clients have already had to pay big rises.

Other key takeaways from The Insurance Insider’s conversations are:

  1. Standout performers on rate increases include downstream energy, space, cargo, open-market property, construction, aviation and large corporate directors’ and officers’ (D&O).
  2. Disappointing lines include treaty reinsurance, accident and health (A&H), terrorism and upstream energy.
  3. The rating picture is driven by lacklustre results rather than reinsurance costs – with most executives estimating the Lloyd’s market calendar-year 2019 combined ratio will fall between 101 percent and 103 percent.
  4. There are hopes that rates in London could get a further boost in Q2 following full-year results disclosures, the potential for reserve charges on casualty and higher cat reinsurance pricing at mid-year renewals.

Line by line

The rating picture in London varies widely by line of business, emphasising the extent to which the marketplace has fragmented, with those lines with severe loss experience booking some of the largest rate increases.

The space market is registering rate hikes of anything between 100 percent and 300 percent after a heavy loss year in 2019, although rates had come down to a fraction of the levels of a decade ago before they spiked. Losses of $620mn from two incidents alone outstripped an expected 2019 premium income of $400mn-$450mn, which has forced insurers to take action, according to Gallagher.

Similarly, downstream energy accounts are renewing 20-40 percent up due to a number of new losses in 2019, as well as deterioration on existing claims.

Meanwhile, large corporate D&O accounts have renewed with increases of 50 percent or more as underwriters attempt to account for increasing claims frequency and severity, and a recognition that risks are still priced far below rate adequacy.

Those accounts with exposure to the US public markets can receive increases far higher than 50 percent, with the trend of US social inflation and rising jury awards very much front of mind at the box, it was suggested.

Other liability classes, including international liability and international professional indemnity, are also booking gains of around 10-15 percent as underwriters react to a withdrawal of London market capacity and attempt to regain years of lost ground on pricing.

Meanwhile, those lines which were first movers in the overall market correction have continued momentum going into 2020.

Property direct and facultative (D&F), one of the biggest beneficiaries of the collapse of the 100 percent line from US domestic carriers, is recording 10-15 percent increases on the whole. However, January is not typically a big renewal date for major accounts, and 1 April will be the first substantial test of whether D&F rate momentum has been sustained.

US property binders are renewing with increases of around 10 percent, with additional pressure on commissions.

Meanwhile, aviation is showing continued upwards movement, with 20-40 percent increases on airline renewal business and as much as 50 percent hikes on general aviation accounts.

Engineering and construction as a class is estimated to be up around 20 percent, with some individual areas like projects having increases of around the 40 percent mark.

Cargo is also registering rate increases of approximately 15 percent, although there is the feeling that this could rise into the 20s as the year goes on.

The hull market, which has lagged the wider market momentum to date, has now “got its head out of the sand” and is recording low-double-digit increases, although the class overall still suffers from overcapacity and is still far below rate adequacy.

The cyber market is also firming, although rate increases are not uniform across the market. Terms and conditions are tightening in response to increased attritional losses, and anecdotally it has been suggested that pricing on excess layers is hardening more quickly than primary.

Although the movement in most classes is broadly positive, there are still some classes which are remaining stubbornly resistant to the broader trend.

Terrorism and A&H business are described as flat, while upstream energy is recording a few points of rate increase at best, sources said.

Most London market executives described treaty reinsurance as disappointing at 1 January, the international cat renewals were broadly flat, and the US market ultimately settled flat to +5 percent.

However, there is optimism that the Japanese renewals at 1 April could lift the international book, as reinsurers demand more from cedants in the wake of claims from typhoons Hagibis and Faxai, as well as substantial Typhoon Jebi deterioration.

The impact of retrenchment in retro capacity from Florida and US wind exposure overall should also be more broadly felt at 1 June, sources said, suggesting further uplift for the treaty reinsurance book could come mid-year.

Drivers and sustainability

The consensus among London market executives is that the current rating momentum is driven by a broader market push to remedy market performance, which is still recording an inflated attritional loss ratio by historical standards.

Even though there have been expectations of a treaty pricing uplift to drive primary momentum further, hard evidence is yet to come to fruition.

Within London alone the sense is that the market is still way below where it needs to be in terms of rate adequacy, and there is still work to be done on underlying profitability to bring the market back to better health.

It is assumed among the senior market executives that Lloyd’s will book another calendar-year underwriting loss for 2019, with most estimates for combined ratio falling in the 101-103 percent range – even though 2019 man-made and natural cat losses of $56bn were well short of the 10-year average of $75bn, according to Swiss Re.

Another calendar-year underwriting loss would mark the third in a row for the Lloyd’s market, bringing further questions for global carriers on the economic viability of running a Lloyd’s platform in current market conditions.

“This rate momentum has to continue into next year, otherwise there are big questions around the sustainability of the whole business model,” one senior Lloyd’s executive stated.

Most of those executives canvassed noted that full-year results disclosures – which have only just started to trickle through – could show reserve deterioration and general poor performance for a cat-light year, which will influence market dynamics from the second quarter on.

It was suggested that rate-on-rate gains will be booked during 2020, but momentum could start to falter going into 2021 – although rates will remain in positive territory. There is a feeling that by 2022, the current wave of rate momentum could peter out.

However, it should be said that this whole three-year rate trajectory can be influenced by a number of variables – including cat losses and the scale of claims inflation in US casualty books – which make it extremely difficult to predict.

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