Overall, our view in the short term is that the market outlook for buyers remains good with the potential for any significant market hardening quickly abating as there are no signs of any significant reduction in capital. Any meaningful premium increases are likely to be restricted to a few narrow sectors, but underlying these more favourable conditions the market remains in a fragile condition so the potential for volatility remains.
Lloyd’s have issued their 2017 annual results this week which, due to challenging market conditions and a significant impact from natural catastrophes , for the first time in six years Lloyd’s is a loss – the aggregated 2017 market result is a loss of £2bn. The Energy sector in Lloyd’s made a profit in 2017 with a combined ratio of 86.6% on a calendar year basis masking a 7.7% loss (combined ratio of 107.7%) on an accident year basis, only saved by 21.1% prior year reserve improvement.
It is now fifteen months since the upstream commercial insurance sector has suffered a serious claim -only one loss, a sub-sea production system failure, with a market reserve of circa USD 100,000,000 is of material note as the great moderation in loss activity continues. This is good news for clients and enabled underwriters to survive on the meagre premium income that has persisted due to lack of offshore construction projects, a circa 50% utilisation of drilling rigs (whose values have halved from their peak in 2014), reductions in platform values, and reduced drilling activity.
The Lloyd’s Energy premium figures set out below starkly demonstrate the decline in the premium base, although 2017 has not matured fully yet and there will be some upward adjustment for drilling activity etc:
- 2014 USD 1,817,583,805
- 2015 USD 1,315,289,893
- 2016 USD 1,046,916,875
- 2017 USD 617,866,734
Source Lloyd’s as of December 2017
The aspiration that underwriters might be able to force double digit percentage rises post last year’s hurricanes have been whittled down from plus 10% on clean accounts to nearer plus 5% now.
Buoyed by the recognition capacity is not exiting or sitting on the side lines, brokers are now minded to attempt to target flat renewals.
Counter to this attitude by brokers, many carriers insist they must receive a positive percentage in renewal negotiations, but the overall trajectory from initial predictions is definitely down.
The only bright spot for insurers has been the Gulf of Mexico wind book where underwriters are holding the line and achieving rises of up to 20%, but down from the nearer 50% predicted.
The confidence of senior corporate management to support the upstream class continues to wane. The decision by Exor, the owners of Partner Re, to sell their renewal rights to the NOA Lloyd’s syndicate is a good indicator of the general lack of confidence in the sector.
The bid by Axa to buy XL Catlin (who have the second largest offshore capacity worldwide) will probably by next year take out a potential leader in Axa who were building a strong energy presence.
Whilst renewal premium has plateaued, the sheer number of markets willing to lead business means discipline is fragile, which enables customers to dictate minimal disruption to their budgetary processes for now.
At the close of the 1st Quarter 2018 we see three significant factors affecting the market.
Firstly, the 1/1 treaties provided no significant increased cost impact to direct and facultative markets and the 1/4 reinsurance renewal book looks to be shaping up to be similar, secondly, supply continues to outstrip demand, and thirdly, there have been no significant losses to the market, year to date, aside from undeveloped reports of earthquake activity in Papua New Guinea.
These factors are not indicative of a hardening marketplace. Clearly there is tangible disappointment amongst insurers that the correction which occurred in the 4th Quarter 2017, and stopped the downward rate spiral, hasn’t been progressive into 2018 with rate movement remaining similar to the 4th Quarter 2017.
Currently the broking community is recognising the oversupply and testing the market for rate reductions; in the main, to date, these have been largely rebuffed, but this looks like delaying the obvious. Some business (regional and otherwise) and those less prone to Nat Cat exposures are likely to see rates come off as we progress into the 2nd Quarter.
Insurers will be looking to hold the line as much as possible through to the 3rd Quarter when 80% of their annual business volume will be done. Nevertheless, the market positioning is probably less robust than the perception and we are now seeing some withdrawals either in whole or in parts from the class. In addition we have a large scale M&A proposition that combines one established downstream practitioner with another that had recently been a new entrant to the sector. In this case in terms of capacity deployed it’s almost certain that there is overlap and that 1+1 will prove less than 2.
We anticipate that the dynamic of withdrawal may see some momentum as what many regard as unsustainable rates are clearly being sustained by the oversupply of capacity. There is focus from a number of clients on the long term and this will assist a number of markets to sustain positions. A number of 2017 corporate annual results have been released from insurers and in the main these have been poor (taken in context with previous years) and much of this has been related to Nat Cat losses within the general property sector, the skinnying down of reserves either strategically or as a fiscal requirement and the attritional level of rates. Another costly year on Nat Cat and the needle will move on the market dial again with more severe consequences.
For US domiciled clients, the energy casualty market is quoting ‘as before’ before taking into consideration the rating for exposure increases/decreases, with some markets pushing for a nominal market rise within their final premium numbers. No premium reductions are being given in the offshore sector, even if exposures are still showing a decline. International (non US) casualty is still essentially flat with capacity still over-subscribed, other than for Canadian E&P business where the London casualty market is looking for rises to correct the book following further pollution, fire and explosion claim notifications.
Bermuda is a similar story to London, no reductions, and essentially flat unless there is an increase in exposure base.
The Marine Market continues to try to drive, wherever possible, premium rates upward; although the momentum which prevailed just after the late 2017 Hurricane losses is clearly faltering. Whilst the commercial marine market was relatively unaffected by the hurricanes the underlying market statistics for marine insurance as a stand-alone class do clearly show that this sector is lossmaking for the majority of Underwriters and, as a result, most Underwriters were simply using the hurricane losses as a justification to force through a change in the Hull & Machinery markets’ downward rate trajectory.
The result of the above is a very fractured and inconsistent market with over capacity remaining a dominant theme. Nonetheless, Underwriters are now showing clear signs that, for Blue water business at least, they are prepared to walk away from even good fleets if unwarranted reductions are sought. This is creating lots of churn on renewals with clients, who are prepared to break loyalties with long standing Underwriters, and still able to achieve very minor reductions or renewals as expiry.
Brown water and offshore fleets remain attractive to the market with Underwriters on well-regarded fleets pushing for larger lines and increased market share as they shun this Blue water churn. However, it should be noted that the reductions and long term agreements seen at the peak of the soft market in the Autumn of 2017 are no longer achievable.
The Marine Liability market remains relatively flat, with, compared to Hull & Machinery, consistent loss activity. However, Liability Underwriters operate in a sub class of Marine where capacity is not the biggest market factor and London remains dominant in terms of both line size and breadth of coverage and Underwriters are as ever more than willing to hold the line and not concede reductions.
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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email email@example.com