Insider In Full: London specialty rates accelerate further at mid-year
Specialty rate momentum is accelerating in London as Covid-19 uncertainty and the prospect of a fourth consecutive year of underwriting losses drive the market to push for better pricing...
Specialty rate momentum is accelerating in London as Covid-19 uncertainty and the prospect of a fourth consecutive year of underwriting losses drive the market to push for better pricing virtually across the board.
Rates were already strongly in positive territory at the start of the year, as the market reacted to the retrenchment of the US domestic market and the need to improve underwriting performance.
However, senior market sources canvassed by Insurance Insider reported a marked increase in year-on-year rate growth for their portfolios since January – with many also noting that acceleration had appeared to pick up since the end of April.
Due to huge differences in pricing by line of business, overall portfolio rate increases suggested by sources varied greatly by company and individual business mix.
However, the majority of senior underwriting sources who spoke to this publication pointed to a blended portfolio rate increase of 10-15 percent as of the end of May. A very small selection of executives – whose books tended to be weighted towards those classes registering the highest gains, such as property direct and facultative (D&F) and directors' and officers' (D&O) – suggested they had achieved a blended rate rise of roughly 20 percent in London.
Nevertheless, this is a distinct kick-on in portfolio-wide increase achieved by London carriers in January – when a similar canvass by this publication suggested a blended rate rise of mid-single digits to 10 percent for the majority, with top-end estimates sitting at 15 percent for those which did not write a treaty book.
Since January, the treaty market, where pricing has remained sluggish, has started to catch up on the magnitude of rate increases seen in insurance lines, with Florida a particular high point at around +30 percent.
Meanwhile, specialty insurance classes have continued with their forward momentum, with rates in some of the previously most challenged lines gathering pace, and some pockets which had proved stubborn to move in the past now starting to show increases.
With Covid-19 set to eradicate any possibility of a market-wide underwriting profit for 2020, the prospect of four consecutive loss-making years is strengthening carriers’ resolve to push for rate at this current opportunity.
“This is being driven by fear rather than pain right now – the fear of not making money,” one senior underwriting executive explained.
Most sources who spoke to this publication put the current rating conditions on a par with 2012 levels, although executives were unanimous that the market was still not trading at what they would see as good rate adequacy overall.
The mid-year renewals – when rate acceleration really started to take off in London last year – were expected to be a test of whether the market as a whole could book significant gains on accounts where clients have already had to pay big rises, although then no one could have predicted a global pandemic which has created huge uncertainty and fuelled further momentum.
However, there is optimism that this current surge in rates can continue through 2021, which has been underlined by significant equity raises at all three listed London players and headlines of multiple fundraising attempts by specialty market executives.
Rising reinsurance costs are expected to push specialty insurance rates on further next year, especially if the market has an active North Atlantic hurricane season.
Many sources also warned that, even though the pandemic has triggered some short-term “social deflation” – as claimants settle to secure liquidity – many carriers are still not reserved well enough for the severity and frequency of claims coming through on liability lines, which could drive further hardening.
Other key takeaways from Insurance Insider’s conversations are:
- Standout performers on rate increases include property D&F, D&O, downstream energy, excess liability and cargo.
- Accident and health, terrorism and political violence, political risk and surety still resisting significant rate changes.
- The market is divided on whether recent equity raises and private equity interest will extinguish rate momentum, although the historical record on this point is positive.
Rates by line
Many of the classes registering the more significant rate growth are those which have been the most distressed in the past few years, with D&F and D&O most frequently highlighted by underwriting executives as the two classes with the biggest rate surges.
Property D&F rates are up around 20 percent overall, with larger increases registered on poorly performing accounts. As previously reported, underwriters in London have called the onset of the “best D&F market since 9/11” as terms and conditions also tighten significantly in tandem with rate. The sector is now registering its third consecutive year of rate increases.
Meanwhile, D&O is said to be up 20 percent in the aggregate, although many sources indicated renewal rate increases of 50 percent and excess layers on distressed business can register triple-digit rate increases at renewal.
Sources said they felt the increases were driven by the need to improve rate adequacy, but also as the result of capacity withdrawal, as carriers have sought to reduce their exposure to the class amid social inflation trends in full swing before the pandemic.
Other trends within D&O include substantial limit reductions from carriers, increased flows into London, the increased use of wholesale brokers to secure cover, and evidence of orders being scaled back to keep spending within budgets.
The excess liability market, which is also susceptible to social inflation trends and is said to be grossly under-reserved, is often registering rate rises of 50 percent, although there is a huge dispersal of outcomes.
Marine books overall are up around 20 percent, sources noted, although this is mainly driven by cargo where rate rises are compensating for slower increases in hull. It was suggested that marine hull business is now comfortably in the double digits after dragging along at single-digit rises at the start of the year, but overcapacity in the market is preventing surges in this line.
It was also suggested that aviation is up around 25 percent for all-risks business and as much as 50 percent for war. However, there has been a sharp premium drop-off in the market as a result of limited flight activity due to the pandemic.
Meanwhile, downstream energy is still reacting to a string of severe losses and rates are rising in the region of 20-25 percent – but from a very low base.
Treaty pricing was still lagging that of insurance lines in January but has since picked up significantly – with the 1 April Japanese renewal registering as much as 35 percent rate rises on loss-free wind business and the most recent 1 June Florida renewals recording 30 percent rate increases on cat covers in the aggregate.
On the other side of the spectrum, classes showing very little to no rating movement include accident and health, where rates are flat to up 5 percent at most, although sources interpreted the downwards pressure in commissions in that line as a positive sign of underlying change.
Upstream energy is also struggling to push through rate increases as the crash in oil prices curtails available premium spend. The most recent Gulf of Mexico wind renewals registered increases of up to 5 percent.
Terrorism and political violence are still registering flat renewals or small increases in rate due to overcapacity. Meanwhile, sources pointed to very slow momentum in the political risk market, which some said was concerning due to the significant potential for credit losses from Covid-19 – Lloyd’s itself estimated that 11 percent of Covid-19 losses would come from credit lines.
There was widespread consensus among those London executives canvassed that rate momentum would continue into 2021 – as the market looks to make next year the first to book a calendar-year underwriting profit since 2016.
The uplift in treaty pricing is expected to fuel further momentum in primary rates going into 2021, with the 1 January 2021 reinsurance renewals a key indicator of how insurance pricing will play out in the months that follow.
Sources also said Covid-19 losses would start to trickle through in the second half of the year, but the uniqueness of the loss event meant the pandemic’s impact on market loss ratios would continue to be felt across multiple underwriting years – providing another driver for rating momentum.
There has a been a bullish sentiment in the London market on the opportunity, with Hiscox, Beazley and Lancashire all issuing fresh shares to raise capital for growth, although some executives were sceptical that these raises were not partially a defensive measure to rebuild capital buffers after Covid-19.
With a string of headlines last week on former executives – including Martin Reith and Richard Watson – looking to tap private equity for potential start-up launches, there is growing discussion on whether an influx of fresh capital will dampen momentum.
Those speaking to this publication were divided on what the outcome of that increase in capacity would be, with some of the opinion that the amount of capital coming in was far below the amount which is likely to be destroyed by Covid-19 losses, and others concerned that private equity money was flowing into the space before any pain had really been taken.
However, there is a sense among London executives that the market should try to make the most of this opportunity, and not lose out to Bermuda like it did in the aftermath of 9/11 and KRW.
The record suggests that rating momentum can be achieved even as fresh capital is raised, with $20bn of new capital raised by December 2001 – even as rates continued to surge.
For Lloyd’s carriers there is the concern that the Corporation will not allow them the freedom to grow as much as they would like for 2021 – although Ark notably has been particularly bullish in its ambitions to double its Lloyd’s business, with a capital raise of up to $1bn.
CEO John Neal – who is also interim performance management director following Jon Hancock’s departure – has said price-driven growth would be welcomed in business plans for 2021. However, many managing agents will also be looking to increase exposure growth at a time of hardening rates.
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