Insider In Full: Stand-off in Lloyd’s as casualty XoL reinsurers push for rate hikes
Lloyd’s writers of US excess of loss (XoL) casualty treaty are in a stand-off with cedants in their 1 January renewal discussions as pressure for higher pricing weighs on negotiations...
Worsening losses in the primary market have already led to capital withdrawal and a toughening of underwriting discipline. In reinsurance, capacity has not reduced to such a meaningful extent, but sources speaking to The Insurance Insider reported delayed renewal processes as cedants push back against rate rises and reinsurers begin to turn down business.
London is primarily an XoL market for casualty reinsurance, with only a small amount of quota share business written. Lloyd’s is the largest writer of US casualty treaty in London.
Within the small amount of quota share written by Lloyd’s players, sources expected only modest reductions in ceding commissions, driven by outsized losses in the past two years.
In XoL, however, reinsurers as well as brokers predicted significant rate increases, with some expecting double-digit percentage rate hikes and even the dawning of a multi-year pricing correction.
In particular, sources anticipated rate increases in any reinsurance that involved bodily injury, such as general liability and auto, while rocketing directors’ and officers’ (D&O) pricing was likely to increase rate in professional and financial lines treaties.
The 1 January renewal is significant for Lloyd’s carriers, for whom between 50 and 60 percent of their casualty treaty book will renew, with clients ranging from smaller regional and specialist cedants to a handful of larger players such as Chubb and AmTrust. As well as the exposures above, accounts renewing at 1 January will also cover lines such as workers’ compensation, medical malpractice and umbrella.
Pressure in primary
There have been dramatic developments in casualty insurance over the course of this year amid loss deterioration, a worsening tort environment and claims inflation in the US.
Several carriers in Q3 took reserve charges related to the changing loss environment in US casualty and earlier this month, Moody’s warned that US insurers had been underestimating the scale of historical general liability and commercial auto reserves.
TransRe CEO Mike Sapnar predicted two or three years of US casualty insurance pricing improvement thanks to worsening claims inflation alongside low interest rates. The latter are demonstrated in 10-year US Treasury bond yields, which have fallen from a 2019 high of 2.784 percent in mid-January to 1.791 percent as of 22 November.
Primary carriers have already received price increases in Q3 or held pricing almost flat, depending on line of business. Figures from Marsh published earlier this month showed that US general liability and workers’ compensation insurance were down 0.7 percent - reverting back to a negative trend after a 0.8 percent rise in Q2.
Meanwhile US financial lines and professional liability insurance rates were up 11.2 percent, marking the sixth consecutive quarter of rate rises.
Price increases in primary are expected to continue. Retail broker USI this month predicted that US D&O rates were likely to increase by between 25 and 50 percent over Q4.
The impact on reinsurance
The extent to which pricing momentum in the primary market will affect the reinsurance sector is yet to play out in Lloyd’s, though there is a marked change in sentiment since the half-year mark.
Price increases at the half-year renewal were muted and highly loss-dependent, but sources say there is growing evidence that reinsurers will achieve price increases across more lines of business and regions at 1 January.
Both broking and reinsurance underwriting sources reported a stand-off with US casualty XoL cedants so far.
A Lloyd’s underwriter said they usually aimed to have quotes out by Thanksgiving – the last Thursday in November – but that at this stage they were unlikely to meet this deadline as a generation of buyers unused to hard markets baulked at price increases.
Cedants are attempting to argue that because they themselves achieve price increases on the business they write, reinsurers will automatically receive a slice of the rate hike. In non-proportional reinsurance, however, the transfer of rate increases from primary carriers to reinsurers is less direct – a counterpoint reinsurers are pressing.
A Lloyd’s reinsurance underwriter described a “climate of fear” among reinsurers that they had been “too optimistic about loss development trends”. Another said over the course of the year, they had revised loss trends significantly.
This revision has a large impact on severity, which affects XoL to a greater extent than quota share business.
Moreover, carriers buy XoL as volatility protection, whereas they buy quota share cover as a form of second-tier capital. As capital is generally in plentiful supply, reinsurance sources said primary carriers currently seek quota share protection as it is “cheap” and ceding commissions are high.
While quota share, therefore, is useful but not completely necessary, reinsurers argue that XoL is essential – an argument they believe strengthens their hand in pricing negotiations.
Losses and capacity withdrawal
Historic casualty losses over the past two years are another factor in the 1 January pricing negotiation.
Casualty insurers faced a total loss on MGM Resorts International’s $751mn casualty tower after an agreement was reached to pay survivors of the 2017 Las Vegas mass shooting between $735mn and $800mn.
Primary carriers also took another significant hit as claims landed for the NiSource gas explosion in 2018, in which the insured exhausted its $800mn general liability tower.
Both losses had a significant impact on XoL reinsurance covers, further strengthening underwriters’ calls for rate increases.
Lloyd’s reinsurers also spoke of a tightening of capacity at 1 Lime Street this year that could “make all the difference” when it comes to pricing.
Several pointed to the closure of Vibe and Acappella’s syndicates as well as Hiscox’s decision to drop all casualty reinsurance business.
At the same time, the focus at Lloyd’s remains on underwriting discipline, as the Corporation maintains tight control of growth in certain classes and syndicates aim to build on their work towards better profitability.
A number of syndicates have reduced or kept flat their capacity for US casualty XoL treaty, and are demonstrating their willingness to walk away from underpriced business.
“We are in a position to say no. We have a plan. If we don’t reach the top line, we will get the bottom line,” one source said.
Another underwriting source said that while the reduction in capacity was nowhere near that seen in primary casualty, in which major players such as Swiss Re Corporate Solutions had dropped US general liability, “people are actually pulling out” in reinsurance, as players refuse to renew accounts without price increases or drop the class altogether.
“We’re not at the point of absolute opportunity yet, but we are quite close,” they said.
Meanwhile, some underwriting sources spoke of increased demand, with AIG’s coming to market for an XoL cover for its $4bn financial lines book a prime example.
A number of indicators – not least the agreement of both reinsurance underwriters and brokers – point towards a significant correction in US casualty XoL treaty.
Sources concur that double-digit percentage price increases at 1 January are possible, but the question remains as to whether the class will see the sustained quarter on quarter increases it will need to cope with fast-deteriorating losses.
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