The upstream, downstream, casualty and marine sectors in recent years have very much tracked similar trends, and have been driven by the same dynamics. Now for the first time in many years we are seeing the individual sectors running at different speeds.
Upstream is facing the headwinds of surplus capacity stubbornly refusing to go away, whilst downstream rating has tailwinds of year-on- year losses to the overall market for the past two years. Meanwhile casualty, in general, does continue to track upstream in the most, whilst marine is going through a sea change with capacity shrinking, driven by Lloyd’s profitability “decile ten” (bottom 10%) reviews.
We are pleased to report upstream clients continued to encounter a benign purchasing environment in the first quarter of 2019. Insurers have chased 5% rate rises but these initial offers were often amicably bargained down to plus 2.5%.
In a limited number of examples “as befores” have been achieved but usually due to some extenuating circumstance.
However, on pure “like for like” renewals, with incumbents we still see no ability to gain any reductions. In fact many clients recognising the underlying fragility in the market have strategically elected to accept the slight upward inflation rate trajectory. Capacity is still plentiful but it is certainly becoming more cautious.
One can definitely discern cracks appearing in the upstream sphere. Attrition has picked up in the book after a very good loss experience for the 2018 year of account. Luck played no small part in the good profitability seen in the last two years. The first significant new loss estimate to the commercial market in the last two years has been reported offshore Canada in the amount of around USD 100 million.
In a number of areas prices have actually severely spiked up. The main culprit being North American onshore oilfield equipment which have suffered very poor claims records.
Offshore construction definitely has seen a sea change as insurers appetite to chase down rates has evaporated.
The number of high profile out of work underwriters seeking posts has stubbornly persisted as consolidation continues. Furthermore, the exit of Standard Club and now Skuld from Lloyd’s shows the creeping effect of the Lloyd’s Performance Board strictures.
Two factors worth noting include:
(a) the business plan limits Lloyd’s Performance Board has imposed on the medium to smaller syndicates in respect of the premium income they may write (which will likely cause a tightening later in the year as they are constrained by said limits to accept new income).
(b) the primary reinsurance capacity underpinning some insurers underwriting is diminishing and becoming much more limited in choice. The previous buyers market in this sector is changing for the worse.
There continues to be a healthy desire to buy North Sea business interruption which paradoxically has the potential to cause a market changing price environment due to huge limits at risk.
We very much continue to recommend insureds buy longer term period policies wherever possible. The book remains fragile.
Following on from the poor sector underwriting results in 2018 downstream practitioners and customers have been watching the market with considerable vested interest through 1/1 and the 1st Quarter.
Regional dynamics and the continuing over supply of capacity has ensured a broad bandwidth of rating movement across the global market. There have been a number of downstream operational incidents throughout the 1st Quarter and whilst these incidents have been serious events, in the main they look unlikely to impact the commercial market materially.
However, the response from underwriting management has been to question whether the frequency of incidents over the last few years are outliers in context of the longer term or whether the drive for continuing synergies, improvements and economies of scale within the sector mean this is the new normal.
With this in mind and a widely held perception that current rating is not sustainable senior insurer management are challenging their underwriters to prove in 2019 that they can write the class profitably.
The underlying steel in this is that should 2019 sustain insurer losses close to the levels in 2017 and 2018 without a material uplift in rating and performance then it can be expected that capacity will withdraw and jobs will be lost.
Should we get to that point we can expect that the upward rate movement will accelerate and new capacity will look to fill the vacuum. However, key to the rejuvenation of capacity will be the time line of such deployment and how much of that capacity is deployed on a sustainable basis and how much is deployed on an opportunist basis.
Rates have moved on in the 1st Quarter. As the market processed 1/1 renewals global spreads in the main showed upward movement of between 5% and 20%.
As the 1st Quarter progressed the top end of the range has remained within tolerance but there appears to have been a shift at the lower end with single digit increases becoming more difficult to achieve.
There are a number of underlying drivers to this which include insurer strategies to start the year modestly and then harden their positions; more insurer management focus; a hardening of Facultative Reinsurance rating; the continuing frequency of incidents and most importantly more confidence that there is strengthening peer discipline within the underwriting fraternity.
It should also be recognised that the 2nd Quarter premium flow is critically significant to the market and therefore positioning is all important in achieving annual rating targets. Noted that more mid-sized customer accounts are being shopped around and markets such as Bermuda are seeing considerably more business opportunity than they have for a number of years.
They have become the beneficiary of the current rating trend coupled with a changing appetite of two large insurers in terms of the quantum and structure of their capacity deployment.
As the underwriter discipline firms, a number of lead markets are also focussing more on policy form and whereas at this point there is no drive to restrict coverage grants there is a will to tighten up loose policy language and ambiguities which have crept in through complacency by some market practitioners during the soft market.
So where do the customers stand? Focus is on the now and although most customers have enjoyed benign insurance rating conditions for a number of years, feeding double digit rate increases into growing asset and earning values produces a significant lift in premium spend.
Factoring these increased costs into the corporate budgeting processes can be challenging. Increased retentions or reduced coverage scopes are a mitigating option but as insurers’ sums are currently not adding up (which is their primary focus) it may be prudent to keep these options within the cupboard for the time being.
US, International and Canadian markets are all looking for market rises of between 2.5% - 5% before factoring in exposure changes at present. A lack of new entrants or insurers not increasing their capacity at renewal has added increasing upward pressure on premium rates.
Some insurers are even reducing their exposure on certain risks like Utilities, whether Wildfire exposed or not, and Midstream.
From an international casualty perspective, whilst capacity remains abundant, the internal impositions of minimum premiums and the concerns regarding the Lloyd’s Decile 10 review process has resulted in an upwards shift in Oil and Gas rating. Any perceived reductions are being rejected by the market.
The London Marine Insurance Market shows no realistic signs of settling down as we near the end of the 1st Quarter.
However, as brokers and protagonists begin to familiarise themselves with this shifting environment as best as they can it is becoming clearer who are the consistent and steady underwriters versus those who are still rabbits in a car’s headlights acting inconsistently or tariff Underwriting at the behest of senior management.
At this time, it should be noted that the recent intervention of the Lloyd’s Performance Management Directorate was not a one-off event and they have been at pains to point out that quarterly monitoring of all Syndicates in order to ensure that they are adhering to their agreed plans will be undertaken and enforcement action taken if they are seen to be deviating.
In other words, Lloyd’s is not relaxing and will continue to drive for better underwriting results throughout the year, especially in those classes which were seen to be loss making, Hull and Cargo amongst them.
What is also becoming clear is that the overseas markets are now reacting to the situation, whether driven by marine insurance losses that are now readily manifesting in their results or the simple opportunity driven by market forces to raise rates on several classes, there is a definite perceivable hardening of underwriting views.
In the US markets, well run and highly regarded brown water fleets can still secure favourable terms but clients who find themselves outside of these parameters are seeing significantly reduced appetites and hardening rates accordingly.
The Middle East and Singaporean markets, who are widely supported by London satellite operations/MGAs, are having capacity withdrawals and a resultant significant tightening of Underwriting discipline; Scandinavian markets remain relatively stable but are keen as with the US markets to chase good risks and squeeze underperforming accounts.
Pockets of a soft market still remain, especially in geographies like those in South America, which are reliant on significant treaty reinsurance capacity and where the influence of that reinsurance capacity can only really be applied at renewal of those treaties.
This results in an element of business as usual until these reinsurers can digest the annualised results and/or revise the terms of their reinsurance backing.
The Marine Liability market remains relatively stable but as suggested before, those Underwriters who invariably sit alongside their Hull brethren are certainly trying to hold an underwriting line and opportunities for reductions have all but dried up.
Ultimately from a broker’s stand point the market would seem to be, from a geographic stand point, equalising and calming albeit into a more consistent harder environment, but then again it could simply be that we are becoming used to operating in what most outsiders would still view as a chaotic and inconsistent environment.
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If you would like to talk about any of the issues raised in this article, please contact John Cooper, Managing Director -Technical on +44 (0)203 394 0464.
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