The environment for buyers remains attractive although there is a level of merger and acquisition (M&A) activity in all areas from clients to insurers and the distribution chain.
There is a significant possibility of further M&A activity which may provide some headwinds in terms of premium dollars lost to the market, a tightening of discipline in the market and a reduction of options for clients in terms of their distribution chain.
Windstorm activity in the US Gulf has been subdued so far which has been encouraging for insurers although the lateral storm activity around the globe remains significant.
Benign market conditions have continued into the third quarter of 2018. Loss severity and frequency has been eerily low especially taking into account the increasing industry activity worldwide. Many upstream insurers are in fact reporting their best loss ratio percentages ever. Furthermore, the two largest outstanding contentious losses in the market (both North European offshore claims) have now been closed out by insurers on better than expected terms to them.
Reflecting the above positive trend for insurers, clients have ground down the rise percentages in force post the Harvey, Irma, and Maria hurricanes of 2017. On average, clean renewals now generally trend at plus 2.5% (i.e. being half the 5% increment previously insisted upon). The three drivers to changing markets negatively for clients are increased material claims activity, insufficient capacity at the margin to complete the last say 20% of any placement and lack of appetite of captive insurance companies to support policies outside general consensus pricing.
Of these three strands the Lloyd’s Performance Director Jon Hancock is attempting to curtail capacity at the margin within Lloyd’s much more aggressively by declining to approve business plans submitted by Lloyd’s Syndicates if he viewed them as likely to be unprofitable. Whilst Upstream is, for now, one of the best overall performing classes the scrutiny of the Performance Management Directorate is a good tell of the underlying challenges that those managing energy books are encountering.
The pillars of the upstream markets continue to corrode due to the low level of premium available. Whilst industry activity has definitely improved it has not translated into significant volumes yet, and it may be another eighteen months before an adequate upswing is felt by the insurance market. Insureds can therefore expect, for now, a continued balanced to favourable outcome in any upcoming renewal negotiations.
The market has remained relatively flat through the 3rd Quarter with rates seesawing plus or minus a few points. There have been some regional reductions of more significance but these are largely reflecting programmes with hang over rates from post loss experience that remain attractive to new capacity or subject to budgetary pressures. Large losses to the market appear about the USD 1.5 billion mark for the year to date with significant contributions from two refinery operational incidents and earlier earthquake damage in Papua New Guinea. The position remains somewhat opaque given the divergence between Joint Venture interests, OIL membership and territorial insurance structural requirements.
Private Equity continues to look at midstream opportunities which is encouraging for the market.
US domiciled clients are experiencing ‘flat’ renewal rates, with insurers charging increases in premium in line with any upward exposure movement.
Some key international casualty underwriting teams are reviewing portfolios and placing an emphasis on moving away from under rated business, and this is seeping through to the international onshore oil and gas portfolio, which typically has seen multiple years of reduction due to intense competition. We are yet to see a direct impact of this on the rating environment of clean business as capacity continues to remain abundant, however it could be a sign of a shift in market mentality.
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.
The marine market in London, and Lloyd’s in particular, remains in a state of flux as insurers are forced by the ‘Performance Management Directorate’ at Lloyd’s to face up to the fact that Marine insurance as a whole, and Hull in particular, continues to be, at worse, a loss making class and at best, a ‘breakeven’ traditional marketing play.
Against this backdrop, the market is abuzz with talk of syndicates, somewhat under pressure from central regulation at Lloyd’s, planning to reducing their marine capacity, rationalising their marine product lines and/or withdrawing from certain marine classes and geographic exposures, and of course individual insurers and staff being let go.
This climate is producing erratic and inconsistent underwriting decisions with a tendency for the newer capacity and inexperienced Underwriters to possibly overreact, but nonetheless, there is a general realisation that absent of looking at individual risks on their own merits an overall upward swing in rates and a tightening of Underwriting discipline is required – and not just in London.
London’s results in the marine class will be mirrored in the competing overseas wholesale markets and almost certainly within the treaty retentions of the local retail markets and cedents. However, without the ability, as for example within the Lloyd’s market, to correlate, combine and condense everyone’s results together and undertake significant collective soul searching, they remain for the time
being far more consistent and stable, but at the same time acutely aware of the noises coming from London and of the knowledge that in due course where London goes they will have to follow.
Therefore, the other significant overseas markets such as in America, Scandinavia or the Far East, for the time being, are increasing their share of both local business and larger wholesale offerings, but whilst this can in the short to medium term offset any significant overall rating changes we would caution making any longer term radical marketing decisions in this market place.
Ultimately the current Marine market brings to mind a rather over used but nonetheless wholly appropriate UK Government instruction given out at the commencement of World War Two to the general populace - “Keep Calm and Carry On”.
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