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Insider in Full: The London PV market and the inwards-outwards mismatch

In the throng of the 1 January renewal season, the provision of reinsurance cover for the political violence (PV) and terrorism market was thrown into the spotlight as an area ripe for dislocation...

In the early stages of the renewal, discussions centered around the availability of limit, and how much cedants would be able to pay for protection which had, for many years, essentially been thrown in for free as part of bundled composite treaties.

However, after 1 January it is clear that the challenge has been less around limit, although this was restricted, and more around the impact of coverage changes.

And as things stand, it seems that a mismatch in the inwards and outwards coverage for PV means the London market is running far more risk net than previously.

While every cedant will have negotiated different terms, here are just a few of the commonly cited discrepancies in coverage gathered in our conversations with the PV and terrorism market.

In terrorism, reinsurers have imposed radius wordings (for example, 250 metres) to exclude coverage of all losses incurred outside of blast zones. However, on the insurance side, denial of access and loss of attraction coverage linked to such events is still being written on far wider radii – even if on a sublimited basis.

A mismatch in the inwards and outwards coverage for PV means the London market is running far more risk net than previously

For strikes, riots and civil commotion, reinsurers have again restricted event definitions down to as little as 1km or by city – whereas previously this was defined by country or territory.

However, these definitions are not necessarily mirrored in the insurance coverage granted – meaning that where protests for the same cause occur in multiple cities in the same country (such as after the death of George Floyd), insurers are now looking at a multi-retention loss, rather than an aggregated loss which would trigger reinsurance recoveries.

Meanwhile, in the PV market, sources noted they had seen instances of reinsurers refraining from reinstatements in country of loss. With war occurrence clauses also decreased from a previously typical 30 days to 14 in many instances, the result is cedants being on the hook for net losses for longer.

While claims from the ongoing conflict in Ukraine should be covered under old treaties, the concern is surrounding the net position of the London market for any losses coming down the line.

Those losses are already on their way. The current riots in Peru – where the London SRCC market has typically held substantial exposure – are expected to generate losses which will benefit from less reinsurance protection than before.

Many market participants have previously flagged Turkey as an area poised for upheaval, and now even more so given the devastation wreaked by the recent earthquake.

The PV and terror market is also keenly aware that the world overall is more volatile than it was even a year ago – and the protests in the wake of the death of George Floyd have highlighted how the rise of social media has amplified the world’s ability to collectively react to one event, creating systemic risk in the system.

Supporting the idea that the world has become more febrile, the World Economic Forum also identified a number of societal and geopolitical risks in its most recent survey which were perceived by respondents as likely to have the biggest impact over the next two years, overtaking more general risks such as climate change.

It is this amplified risk profile in the class which has added to underwriter frustration that pricing dynamics have not moved as dramatically as they believe is warranted.

While PV rates are up significantly and terrorism rates are up in the double digits (unheard of for many years now), there is a sense that pricing is far from risk adequate given the elevated risk profile.

One source mentioned they had recently seen a Peruvian risk quoted at a “shockingly” low rate on line given the current situation.

The anticipated withdrawal of capacity and pressure on facilities has also not materialised – instead existing facilities have renewed, and a new one spawned.

Sources highlighted that this misalignment of coverage is all the more concerning in a market which is heavily facilitised. While some facilities have moved to a prior-submit structure for following markets, there are some where follow capacity still does so automatically.  

Lloyd’s performance management directorate flagged as early as December that it would be homing in on misalignment of inwards and outwards coverage after 1 January.

It asked for reinsurance submissions to be handed in on 19 January and it is understood the Corporation is still doing that work – with a focus on tail risk resulting from T&C mismatches on PV and terror.

The sentiment from the 11th floor seems to be that it is unlikely to be tolerant of poor underwriting in focus areas Lloyd’s specifically highlighted to the market ahead of time. However, how far Lloyd’s is willing to go in enforcing said intolerance remains to be seen.

In Lloyd’s push to keep a lid on market volatility, it is unlikely to look upon significantly increased net positions in any given class favourably.

While PV and terror is a small class in relative terms within Lloyd's, it’s worth remembering that the class often creates capital diversification benefits for cat writers.

As such, exits from the class could lead to an outsized impact on the market. Those which choose or are forced to exit would likely need to find more capital in an exceptionally tight market for Funds at Lloyd’s.

At time of writing, this publication had not seen any evidence of exits from PV and terror, although that is not to say they aren’t still to come.

However, how this class adapts to this elevated risk position could have wider implications for the Lloyd’s and London market.

 

Insurance Insider delivers global wholesale, specialty, and (re)insurance Intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.

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