Following our last cargo market update in July 2018, we have since seen further market changes including the anticipated acquisition of JLT Specialty by Marsh & McLennan. I read an article shortly after the announcement stating that sometimes two heads are better than one and our two businesses aim to combine and draw upon the best of both companies as we enter into a new era for Marsh and JLT Speciality.
With the hardening market predicted last year due to some capital partners withdrawing London market capacity we certainly saw the tide change pace and then change direction in the last quarter of 2018. Although it was a difficult (but interesting!) trading environment and in some cases dampened with client disappointment, the market correction was overdue considering the prior years of losses.
As we reported last time, several syndicates were under review by Lloyd’s of London and they were asked to re-write their 2018 and 2019 business plans. This difficult period for insurers is now behind them and those insurers now have clear business plans to execute in 2019. In many cases these plans look to reduce the amount of working capacity available and in most cases demand a portfolio rate rise. It is prudent to refer to a ‘rate’ rise because premium can be seen increasing in some areas by the partial recovery in commodity prices and general positive business development and growth for some clients.
Naturally some business segments, based on past loss experience, have been scrutinised by insurers more than others. The general market appetite is lower for pharmaceutical, commodity (specifically around misappropriation risk) and automobile lines although major placements are still being placed and won by the London cargo market.
Other factors such as heavy stock exposure, retail stock or standalone stock are now harder to place. Most buyers recognise the challenges and work with us to prepare their renewals and information early so we can engage with markets at an early stage.
Lloyd’s in particular are suffering with their ‘acquisition’ cost which has been reported by other sources, as a general figure, to be circa 40%.
So what’s next?
- There continues to be a significant drive by the market for business transformation and in particular in respect of electronic trading platforms. PPL, unlike several versions thereof in prior years, seems to have sufficient traction that even the most cynical broker has to admit it is most likely here to stay. As a step forward and as a mechanism to handle and manage smaller market placements and everyday endorsement activity the use of PPL (or similar) is an absolute must to help reduce market expense(s).
- The London cargo market needs to be mindful not to discourage buyers by having robotic new underwriting guidelines. The market has a long trading history of being a deal making and solution driven market. Any new management or actuarial guideline should only be considered as an aid in redefining their market portfolios rather than the rule book. Without being too rude we have, in isolated areas, seen a blanket change in insurer appetite and as such some business has moved to other insurers and international markets. The London cargo market needs to remain relevant through this trading period and we must continue to offer nimble and sophisticated product solutions which have historically been the success and backbone of the London cargo market.
Looking at 2019
It is an educated guess but we believe that a number of London cargo insurers are looking to reduce their premium portfolios by 15% - 25% which considering the general rate rises achieved by the market in late 2018 means reducing portfolios by 25% - 35% to achieve their premium targets.
With the acquisitions of XL Catlin (by AXA) and Validus Re (by AIG) now legally and operationally complete we will start to see appetite (geographical and business line) and line size changes take hold in 2019. This creates opportunities for other insurers to be offered lines on business that has previously eluded them giving the market a broader spread of risk.
The reinsurance renewal season of 01.01.19 saw a softer corrective process which is often viewed as the driver for the direct terms, clauses and conditions. Personally I believe this is a bit misleading in recent years because insurers have been managing their outward reinsurance cost(s) by taking higher and alternative structured reinsurance cover(s) over recent years so an increased amount of losses remain in the insurance market rather than making their way to the reinsurance market.
It is anticipated that the market will maintain its current underwriting approach for the duration of 2019 because Lloyd’s will be reviewing the underperforming sectors on a quarterly basis to ensure they are keeping to their agreed plans (risk selection, line structure and rating targets).
How to navigate around this changing trading environment?
To reiterate from our previous market update the key to trading success is:
- Early renewal preparation, availability of detailed exposure overviews, including NatCat exposures and strong risk management plans are now as important as ever
- Strong market relationships with underwriters at both client and broker level
- Working with well-established brokers who have diverse and balanced global cargo portfolios.
The current market has presented broking challenges but JLT Specialty’s cargo team has continued to maintain its renewal client base and continued to grow and develop its portfolio despite the headwinds of trading change.
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