Cargo London market roundtable

03 June 2015

To discuss the latest developments in the cargo market, we invited senior cargo underwriters Dave Allen from Aegis and Gavin Wall from Ascot to join Nick Peck and Daryl Mackay from JLT Specialty’s Cargo team. 

What is the current climate in the cargo insurance market?

Dave: According to Lloyd’s, cargo is averaging between 20% and 30% a year profit, which is why so many people are coming into the market. As a result we have massive overcapacity and whenever that happens, rates tend to go down. Another issue that overcapacity brings is a lack of underwriting expertise because there simply aren’t enough experienced underwriters to fill all of the available spots.

Gavin: There is a tiered market now within the cargo market. There are traditional insurers and alternative capital, which – if it’s a pension fund or similar – can actually hit a 4% return on capital. Traditional insurers can’t do that because of the additional overheads, which are becoming more onerous. Plus while the new start-ups are not generally looking to lead business, they can provide support, which is reducing our share of existing business.

Dave: We also have to invest in big claims teams, and these new start-ups don’t have to as most of them will not be leading business 

Nick: It will be interesting to see how long the new capacity providers are prepared to stay in the market. If they slash their rates to win business, they will inevitably build a book based on clients who are more inclined to move based solely on price.

Gavin: That’s right. When you have a mature book, you know what your expense ratio is and how much your reinsurance costs are. So you know automatically, in theory, for every piece of business what the loss ratio needs to be better than to be accretive to your bottom line.

Daryl: Despite the competitive climate you’re operating in, your retention levels must still be fairly high?

Dave: We budget to lose 10% a year through natural wastage, mergers and acquisitions, competition from other markets and so on. But this year I think it will be higher than that; I’m probably going to lose 15% to 20% of my existing book.

Gavin: Our renewal retention rate is between 80% and 85%. The real challenge for us going into 2015 and beyond is to remain relevant to the brokers in a very crowded market place.

Nick: Brokers also have to decide whether to become a general, cheapest price wins-type broker or a broker that stands shoulder to shoulder with markets and strives to provide the best service to customers. We try to differentiate the leaders in the market, emphasising the price of not only having expert underwriters, but also expert claim services.

What is the appetite of capital providers towards the cargo market? What are their expectations?

Dave: For Lloyd’s overall, the average return on capital is 14% – way more than you can achieve in any financial field – so a lot of venture capitalists are coming in with a lot of money to spend.

Nick: Do you think that investment is going to be short term, if it is hedge fund-based?

Dave: Yes, it has happened many times before. Once they see the losses they exit the market, but at the moment the losses are quite benign. Also, because of the spread of business now, even what we would consider a big loss is only going to affect a certain number of people. We have suffered some big losses in the last couple of years, but they were not big enough to change the market, unfortunately.

Nick: For the capital looking in, they see a predictable short-tail class of business that turns them a profit, year after year.

Gavin: Our return on capital was 28% for cargo last year, versus a budget of 26%. Cargo is still a non-correlating attritional class of business. So if you are writing a portfolio of classes – which most syndicates do – cargo is still very attractive because of capital relief and it helps with business plan returns to Lloyd’s. 

What is the profitability outlook for the London cargo market?

Dave: After four quarters, 2014 is at 65%, according to the current Lloyd’s figures. At the same point, 2013 was at about 40%, so I think 2014 will be a loss year.

Gavin: I agree. 

Dave: As for 2015, my guess at the moment is that it will be 85% or 90%, which is still a profit – but not as good as previous years. 

Daryl: What about whether the market will harden? I don’t see it hardening in the sense that we remember previous hard markets. 

Dave: I don’t think we are ever going to see 25% rises again. Plus if you look at the cumulative rate reductions of the last few years, they are unbelievable. If you have been on an account for 10 years and look back, you are probably on 30% of the original rate now. To be fair to the clients, however, some of them are taking on more risk themselves by taking higher deductibles or even setting up their own captive companies. 

Gavin: A final point regarding reinsurance: some people are buying less to try and improve their bottom line as the market softens – and there have been some large reserve releases, which have buoyed some of the results that have been posted.

Will there be more consolidation in the insurance or broking sectors? 

Daryl: Certainly on the insurance side, yes. 

Dave: If you can’t grow organically from within, the only way you can grow is by acquisition. And that is exactly what seems to have happened with Catlin and XL. In my view, that will notnbe the last one. 

Gavin: I agree. With the increased obligations of PRA, modelling, Solvency II and so on, there is a very simple way of getting around those additional costs and that is through mergers and acquisitions. 

Nick: For similar reasons, there have been pretty significant mergers happening in the broking market, including the Willis/Miller merger. A pure wholesaler trying to achieve scale is extraordinarily difficult and the larger broking houses are now actively looking at the attractive third party independent broker space – which they can’t access because not everyone wants to be with Marsh, Aon or Willis – so there is bound to be an increasing likelihood of further mergers. 

Are there any trends in claims activity? 

Gavin: We have seen some large car losses, both in transit and storage, which is partly due to the recovery of the car market. A fundamental problem with car accounts is that if there is a loss, it tends to be a total loss because of the manufacturer control of damaged goods clauses. Apart from that, we have seen an increase in Brazilian fire losses, as well as some issues with warehouse operators in China. Such issues will continue as long as Lloyd’s exposes itself to these emerging markets, where there are different risk management standards. Hopefully as a market we can learn and improve with the cedents and clients, helping them to improve their risk management processes. 

Dave: The issue I have on claims is the number of general average advices. For any figures you look at, there are probably up to 50 general averages included that are probably reserved at zero at the moment – as it is very difficult to set reserves for them. 

Nick: Another trend we have noticed is that the amount of legal activity is increasing when a claim hits a certain amount – maybe half a million upwards. That’s a factor we are conscious of when advising clients; sometimes they should be paying a little bit more to be with people who are actually going to do what the insurance contract is all about, which is to pay valid claims without fuss and without delay. 

Dave: In terms of paying claims, our view is that we should try to pay claims as quickly as we can. I think most of the market has come to that view too. Also, most of us are quite happy to give brokers claims authority because you tend to have very good claims people working for you and it makes the process quicker

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For further details, please contact Nick Peck, Chairman of Cargo, Specie and Fine Art on +44 (0)20 7466 6511