From a buyer’s perspective the market remains attractive albeit fragile.
There has recently been more serious interest in Long Term Agreements (LTA’s) and markets have been sympathetic to established customers hedging and locking in capacity at present levels. Insurers have been pushing their brands and their relationships with the distribution chain to ensure they maximise opportunity and market share in their chosen target areas.
Against this there is a challenging background canvas for insurers beyond the rating environment ranging from continuing expense control, reputational threat, regulatory compliance, and all the way through to an aggressive US sanctions policy against Iran.
It remains a transient and fascinating marketplace.
The twin strands of sustained superb loss ratio in the upstream sector and crushing effects of 73 individual commercial entities competing hard for a diminishing pot of premium has seen the second quarter of 2018 disappointing insurers’ hope for sustained rises. The quarter saw a steadily decreasing percentage increase set at from nearly double figures to a new norm of around plus 5%. However, post March there was evidence of a new push by brokers and clients to achieve ‘as before’ renewals or as near as possible to that.
Offshore Gulf of Mexico wind risks did carry rises in the range of plus 15% (which was weaker than the desired 20% or more requested for early renewals) and by the end of the buying season the majority of the aggregate available had been utilized.
The low offshore rig utilization (plus dramatic reduction in rig valuations), the disciplined way oil companies are now allocating capital expenditure, the fortitude of the captive insurance companies in supporting outside the consensus priced risks, the fierce competition between the brokers and the plethora of carriers willing to lead, all point to a continuing weakening in prices.
Clients can expect the listless market conditions to be available until upstream losses of serious note return and/or there is a reversal in underwriters’ appetite to duke it out with 73 competitors in a game of ‘Last Man Standing’. One can discern a negative shift in corporate management’s patience with the class but we predict the buyers’ advantage will endure for now.
Overall, underwriting discipline has remained firm through the 2nd Quarter with the majority of renewal business coming in between flat and plus 5 points on expiring rates. There are always exceptions with opportunist accounts or those with losses having their rates impacted or incurring loss loads; and conversely there have been reductions where regional markets (in particular SE Asia) continue to chase income and market share, or where business is hedged on LTA’s or carry significant premium to entice participants. Overall, however, most insurers will be seeing a marginal uptick in their rating margins year to date.
There has been some movement within the insurer offering with two entities withdrawing from class, another undergoing repositioning as a Fac reinsurer, two further insurers looking to merge internally and externally respectively whilst another is actively seeking a buyer.
All this adds up to some contraction in the market but as it stands this will only be a modest contributory factor to any further correction of the market. The other components interlinked being Nat Cat losses and Treaty impact.
Without the latter components we see a market bumping along close to or at the bottom of a very elongated cycle.
In relative terms to 2017 losses to date have been light. To most markets this is welcome relief on the back of last year. The losses that have occurred have been as diverse as normal from earthquake in Papua New Guinea to refinery fire and explosion in the US. Overall at this point the total is running around USD 1.2bn to the commercial market with some impact to OIL, and a significant amount of customer self-insured retention.
The Gulf of Mexico Windstorm season is underway and for whatever occurs there over the next four months this remains a critical component to the year’s sector profitability. At this point sea temperatures in the GOM are below normal suggesting at least a benign start to the season. Other global Nat Cat exposures also have significantly acute propensity to change the market status quo due to potential impact on diminished reserves post 2017 in both Direct & Facultative and Treaty markets.
There are positive opportunities for all parties with the continuing growth of LNG globally and the increase in oil prices ensuring further generation of midstream infrastructure through internal or external acquisition and development and the optimisation of processing and logistical assets.
U.S. domiciled clients are experiencing ‘flat’ renewal rates, with underwriters charging increases in premium in line with any upward exposure movement. This is consistent with the internationally domiciled clients, who are also experiencing the same rating environment, however there is an international market recognition that capacity is still abundant in this particular sector.
The Canadian Oil and Gas portfolio continues to be a pocket of hard market (following losses in this subsector), with more markets pulling away from the business either on a primary basis or completely.
We now have a slightly confused and somewhat split Marine Market as London, and Lloyd’s in particular, continues to try to drive premium rates upward wherever possible. This push, which started just after the late 2017 Hurricane losses and then quickly faltered, has been given renewed impetuous by the Performance Management Directorate at Lloyd’s who have in the recent weeks been quietly advising all syndicates that they must, in short order, improve their overall performance and in particular demonstrate significant turnaround in consistent loss making areas such as Marine Hull.
However, with no such whip to the backs of the Marine Underwriters in the American, Scandinavian or Far Eastern markets they remain on the softer side of the line and as a result a clear differential is opening up between London prices/terms and its overseas competing markets.
Obviously, Owners and Operators should bear in mind that invariably what London does today other less dominated markets eventually reciprocate, but it could take at least one renewal season for this to occur and as such there are possibly short term gains to be had by either changing markets or blending placements with a mix of world-wide capacity, where fleet size and exposure allow.
Notwithstanding the above generalisation there are still exceptions to the rule and well run Brown-Water and Offshore fleets remain attractive to all markets.
The Marine Liability market remains a stable ship in choppy waters, and whilst London Underwriters will wherever possible push for higher prices, they too are well aware that when compared to, say, Hull product lines, the results for Marine liability have been generally good and are still prepared to offer a pragmatic and workable level of negotiation.
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If you require any further information, please contact John Cooper, Managing Director on +44 (0)20 7466 6510 or email firstname.lastname@example.org.