Posted in News on 17 Oct 2019

Dislocation, New Submissions, Convective Storm, Underwriting Discipline, Valuation, Premium Income and Aggregate Limitations

The Property direct and facultative (D&F) market is continuing to see rate increases for client renewals, as well as many new opportunities due to the overall dislocation within the global insurance marketplace. Many in Lloyd’s have been restricted by premium income restrictions within their approved business plans during 2019, although many have revisited and gained Lloyd’s approval for increasing premium income levels to a higher amount, whether that has been pre or post-July 1st.

There would not appear to be an issue with premium income restrictions for clients renewing their policies during Q4 but new business is considerably more challenging with higher barriers to entry in terms of deemed adequacy for price, limits, and retentions being in place by individual carriers.

Global carrier market dislocation , whether part of a shared and layered property program or 100% from carriers such as AIG, FM and admitted carriers is having a significant increased pricing impact on the property market . This process, started in 2019 is expected to continue into H1 of 2020. All carriers are reviewing the individual clients’ metrics within their portfolio and the adequacy of pricing, deductibles, limits, coverages provided and overall loss performance. Occupancies such as multi-family residential, hospitality, food and rail are just examples of such sectors which are considered to be producing less than satisfactory returns in recent years.

This potential new business is creating an increased choice for carriers and pressure on individual carrier aggregates (and premium income levels in respect of Lloyd’s) as they assess where they wish to deploy their capacity going forward. Many of these new opportunities have exposures to ‘convective storm’ perils, although certain business sectors continue to struggle to find reasonably priced capacity on coastal exposed risks. Percentage deductibles on clients with locations exposed to wind/hail are now starting to become commonplace with amounts varying between 2-5%.This has also meant that underwriters’ resources are being challenged due to the major increase in submission count.

These circumstances are now starting to create choices for underwriters in respect of their renewal book versus new business, thus putting further pressure on terms being offered across the wider marketplace. Underwriters have always had a percentage of their portfolio which they would consider to be opportunistic in nature, but 2019 has been the first year of many where underwriting discipline is challenging both the adequacy of the terms that they are prepared to offer for both their existing clients and the new business that they are being offered by brokers. Underwriters, despite operating in an improved market environment, are faced with increased treaty reinsurance costs and minimal / no profit margin for property D&F in the event of any large catastrophic events during 2019. After a long period of rate reductions between 2013-2017, 2018 renewals were mainly focused on achieving higher pricing levels - 2019 was certainly focused on achieving significantly higher rating levels in conjunction with ensuring that they have the appropriate deductibles in place.

However, whilst underwriters are now seeing a slight improvement in their attritional loss performance, for many, their non-catastrophic losses do not appear to have improved significantly. This is due to an increase in wind and hail losses during 2019, in addition to some major losses from flood and all other peril losses (other than wind and hail) for risks in the food and rail sectors, to name but two. One syndicate advised that around 50% of their 2019 losses have originated from the perils of wind and hail, despite percentages deductibles now widely being applied to locations exposed to these perils. The losses were related geographically and not necessarily focused on one particular occupancy class.

Whether this remediation work by carriers continues into Q1 and Q2 2020 remains to be seen, but early indicators are that in the near-medium term, there will continue to be a level of dislocation on some client program renewals.

LOOKING AHEAD TO 2020, WHAT SHOULD WE BE AWARE OF?

  • 2019 Carrier results – both in sector and overall are going to have an influence.
  • Treaty Reinsurance/ Retro renewals – Adhering to the highest standards of moral and ethical behavior
  • LCM 5 –This focus is on individual underwriters 1:200 capital ratios in respects of catastrophic events from:
    • US Wind
    • US Earthquake
    • Japanese Wind
    • Japanese Earthquake
    • European Wind.
  • Lloyd’s premium income limitations – this will continue to be a factor if rates continue to increase and underwriters continue to see the same level of new submissions. Some markets are utilising their company market stamps (S&P / AM Best ‘A-rated’ security) to ensure that they continue to provide clients with capacity where they are limited by premium income restrictions.
  • Underwriters are going to be continuing to look for rate increases. This may take the form of pure rate or a combination of rate and/or deductibles and /or amendments to sub-limits.
  • Adequacy of Deductibles verses individual account loss performance whether that is ‘AOP’ (all other perils) or %amounts in respect of wind / hail perils (‘convective storm’).
  • Valuation is becoming a larger issue due to catastrophe claims ‘loss creep’. Margin/ co-insurance clauses are becoming more common-place in some sectors without regular appraisal program in-force / valuation justification.
  • As a new carrier entrant, Convex have a 2020 budget of USD1.8bn across all product lines and they should become a significant participant.  [1]

FOR MORE INFORMATION, PLEASE CONTACT

Mark Hubbard | Managing Director, Wholesale Property
T +44 (0)20 72 04 62 38 | E. Mark_hubbard@alescorms.com




   
About Alesco




Alesco is a specialist insurance and risk management business located in the heart of the City of London. Founded in 2008 by a team of experienced professionals, we provide a wide range of risk-management services and insurance solutions which are fundamental for protecting organisations. We work closely with underwriters in the London markets, in key global insurance centres, and with local broking partners in 150 countries.


 


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