These are turbulent times for the insurance market. Capital remains plentiful, but we are now seeing a persistent upward trend in pricing, with a number of lines of business showing clear signs of hardening.
Price increases in the wake of catastrophe losses in 2017 were not as widespread as insurers had hoped for and upwards pressure soon lost momentum early in 2018.
However, at the close of 2018, a more sustained market hardening was gathering pace, suggesting that buyers could face a more disciplined insurance market in 2019.
This latest phase is being driven by the weight of losses. Losses in 2017 laid the foundations for today’s market, which has since experienced an above average combination of catastrophe, large and attritional losses in 2018.
Swiss Re estimates that global industry catastrophe losses totalled $79 billion in 2018, the fourth-highest figure on record. Hurricanes, cyclones and US wildfires have cost billions of dollars.
Provisional figures released by Munich Re in November estimate global insured tropical storm losses for 2018 at $25 billion, twice the long-term year average of $12 billion.
Driven by loss experience, insurers have reviewed their portfolios, looking to identify loss drivers and weed out unprofitable business.
This has led to some tough decisions and some decisive action. A number of carriers have withdrawn or pulled back from certain classes, in particular where they believe there is little or no opportunity to make a profit.
Insurers’ appetite for certain risk appears to be reducing and capacity has reduced in some lines of business, namely aerospace, construction, cargo and professional liability.
Underwriters are also looking to address profitability issues through a range of measures, including price increases, reduced line sizes, increased deductibles and risk engineering.
They are also beginning to examine terms and conditions, in particular, where wordings might provide unintended cover, such as with cyber-related losses.
Lloyd’s has led the way in terms of addressing loss-making or poorly performing business. The market’s performance review, led by Jon Hancock, Director of Lloyd’s Performance Management Division, looks to rectify what Lloyd’s perceives as endemic unprofitability in the Lloyd’s market.
Over the three-year period from 2015 to 2017, 60 per cent of Lloyd’s syndicates have been unprofitable while the three- year unweighted average combined ratio across current active syndicates is 109.5 per cent.
The review is in part influenced by growing regulatory pressure on insurers in the London Market – early in 2018 the Prudential Regulatory Authority wrote to the CEOs of all London-based insurers, including Lloyd’s, to ask what measures they were undertaking to address poor-performing classes.
Lloyd’s has been the public face of the market’s response to regulatory concerns, but concerns appear to be shared within the wider London and international insurance market.
Lloyd’s response has been robust. Through the syndicate business planning process, it has called on the worst-performing syndicates to draw up remediation plans.
In a similar vein, Lloyd’s has required syndicates with the worst-performing portfolios, or those exposed to poorly performing classes of business, to demonstrate a credible near-term route to profit.
Lloyd’s will now monitor syndicates’ performance and adherence to the commitments made in syndicate business plans. Lloyd’s actions are expected to result in an overall reduction in gross written premium in 2019 of around 5 per cent.
The review has led syndicates to withdraw or pull back in many classes, which has, understandably, caused some anxiety among clients and brokers that rely on the London market. However, Lloyd’s actions should be seen in context and should even be welcomed.
Lloyd’s is being proactive in protecting the financial strength that underpins every policy.
Its actions are intended to ensure a robust and sustained market going forward, with a reduced chance of a knee-jerk reaction in the future.
The measures taken by Lloyd’s Performance Management Division are also less drastic than some media reports have portrayed.
JLT analysis of Lloyd’s syndicates predicts that Lloyd’s stamp capacity is likely to fall around 3 per cent in 2019, a modest reduction yet still the second-highest level on record.
Research carried out by JLT Specialty’s Insight and Carrier Management team has also shown that, while syndicates have cut back in some classes of business, they continue to expand into new markets and/or target areas for growth.
By mapping changes in risk appetite by class of business, JLT's Insight team analysis has revealed a much more nuanced picture of market appetite.
Lloyd’s actions have mostly affected the peripheries of the market and are likely to enhance the market’s specialist focus. The core expertise and specialist underwriting is very much intact – not a single class was discontinued following the review.
Commitment to innovation
The market is also entering 2019 in a position of strength. Under the leadership of Chairman Bruce Carnegie-Brown, CEO John Neal and Jon Hancock, Lloyd’s continues to build on its platform for speciality and general trading risk.
Lloyd’s has also reiterated its commitment to innovation and the need to address the emerging risks faced by its customers.
In 2019, we are likely to see a reduction in risk appetite and capacity among some insurers for risks that are considered under- priced or too volatile.
That is not to say that capacity is likely to be constrained or that insurers lack appetite – industry capital remains close to record levels.
Yet it is fair to say that growth is likely to be more controlled, with a greater focus on profitability.
In a hardening market, partnering with an agile insurance broker can make all the difference. Presentation of risk and the selection of insurance partners will be critical going forward.
Underwriters may take a cautious view when looking through a historical lens, but the broker’s role is to educate and inform insurers how a risk will perform going forward, especially where clients apply technology and risk management to improve their risk profile.
For more information, please contact ClientFirst@jltcanada.com.
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