PROPERTY & CASUALTY (P&C)
Figure 3: Risk-Adjusted Rate Movements for P&C Programmes Renewing at 1 January 20192 (Source: JLT Re)
2 Please note that the figures provided in Figure 3 are averages and significant variability exists in individual programmes.
3 Very few retrocession aggregate covers were loss-free, so the ranges shown here for 2019 reflect loss-affected rate changes.
4 Rate changes for Global Facultative applies to full year 2018 (light blue) and early 2019 (dark blue). Outcomes varied within the ranges shown for each class of business.
- The United States experienced another active catastrophe year in 2018, with Californian wildfires, hurricanes Michael and Florence and a major Colorado hailstorm (to name a few) significantly impacting the insurance and reinsurance markets. These events came quickly on the heels of devastating losses in 2017 following hurricanes Harvey, Irma and Maria (HIM), as well as fierce wildfires in California.
- Despite this, reinsurance capacity at 1 January 2019 remained plentiful. An increased focus on underwriting discipline from some major reinsurers notwithstanding, competition was particularly intense for accounts that have performed
- strongly in recent years. Indeed, markets continued to prioritise core accounts during the renewal and, as a result, these placements were often oversubscribed and renewed on more favourable terms. Cedents with strong income growth also benefitted from the abundant capacity in the market.
- A number of (larger) markets were nevertheless prepared to draw a line and walk away from business they considered to be poorly rated, particularly if cedents pushed aggressively for risk-adjusted rate reductions. Performance was another criterion used by reinsurers in determining whether to maintain participations at 1 January 2019.
- Increased churn was an important (and different) feature of the renewal, although the vast majority of placements were still completed in relatively good order as a number of new markets were willing and able to pick up any jettisoned business from incumbents.
- Abundant capacity and a highly competitive market environment therefore helped offset any upward pricing pressure at 1 January 2019, and early speculation of risk-adjusted rate increases abated through December.
- Indeed, loss-free layers saw relatively muted movements at 1 January 2019, typically falling within a range of flat to down 5%. These decreases essentially absorbed the increases cedents paid at 1 January last year. Loss-impacted layers, meanwhile, generally saw price rises, but outcomes varied depending on losses, geographies, exposures and relationships.
- Terms and conditions were generally stable, although the Californian wildfires drew attention to loss occurrence definitions, and the use of radii specifically in determining the number of events.
WESTERN EUROPE P&C
- The Western European reinsurance market continued to experience modest softening across most lines of business at 1 January 2019. Capacity levels were stable but remained plentiful.
- With Brexit looming large, Lloyd’s often utilised alternative carriers (e.g. syndicate parents or Lloyd’s Brussels) to continue to write business from the EU.
- Pricing for loss-free property-catastrophe programmes was predominantly risk-adjusted flat to down moderately. Windstorms Burglind and Friederike apart, catastrophe activity in the region was benign in 2018. Few programmes suffered losses as a result but, for lower layers that did trigger, rates mostly renewed as expiring, or with manageable increases.
- Renewals for other lines, including property risk, motor and general third-party liability (GTPL), were very much dependent on historical performance. Renewals for these lines of business at 1 January 2019 were typically flat, with some modest downward adjustments according to experience.
- For proportional business, ceding commissions were generally stable, although some increases were attained. Again, historical performance was the key driver here.
- Risk-adjusted pricing for loss-free XoL property-catastrophe programmes in China renewed with reductions of 3.5% on average at 1 January 2019. There was some variance around this figure, with better performing cedents achieving the most favourable outcomes during the renewal.
- Loss-affected XoL programmes saw risk-adjusted rates rise by 2.5% on average. Although there were some notable catastrophe events in China in 2018, Typhoon Mangkhut being the most prominent, most programmes renewing at 1 January did not suffer any significant fire, typhoon or earthquake losses. The vast majority of catastrophe business in China is renewed on 1 May and 1 July, and this ultimately limited upward pricing pressure at 1 January.
- Ceding commissions for proportional business were very much determined by performance. Typically, programmes that performed strongly renewed with commission increases of 1% to 2% whilst decreases in the order of 1% were generally recorded for those that did not perform so well.
- Capacity remained plentiful at 1 January 2019. As a result, firm order terms often settled below initial quotes, improving by between 2.5% and 5% on average.
ASIA PACIFIC PROPERTY-CATASTROPHE (EXCLUDING CHINA AND JAPAN)
- Property-catastrophe pricing in the wider Asia Pacific region was also competitive at 1 January 2019. After the flat(tish) outcomes of 2018, cedents benefitted from improved market conditions at the 2019 renewal, as risk-adjusted pricing for loss-free XoL programmes typically renewed within a range of down 5% to down 10%. Although there was some variance around this range in specific markets (e.g. property-catastrophe renewals in Singapore were typically flat to down 5%), strongly performing cedents almost without exception achieved the most favourable outcomes.
- Despite parts of Asia Pacific suffering devastating catastrophe events in 2018 (Japan specifically), loss activity in the territories that renew on 1 January was largely benign. Few programmes therefore suffered major losses but, for those that did, rates mostly renewed as expiring, or with manageable 5% increases. Singapore was again the major exception, with loss-affected programmes seeing risk-adjusted rate increases of 10% on average.
- Although 1 January is not a major renewal for property-catastrophe business in Australia, a severe convective storm that affected parts of New South Wales, including Sydney, is likely to impact reinsurance programmes in 2019. Early indications suggest that the storm will be the largest hail event to impact NSW since 1999, which remains the largest insured catastrophe event in Australia. First layers of some catastrophe programmes with nationwide exposures are likely to be triggered, and aggregate covers will be eroded further.
- Ceding commissions for proportional business renewing at 1 January 2019 were broadly flat in most Asia Pacific markets, although decreases of up to 2.5% were recorded for programmes that suffered losses.
- Capacity levels in Asia Pacific remain plentiful as reinsurers look to maintain or strengthen their presence in the region. Chinese capital remains a major feature of new capacity as it continues to target the market. The excess supply in Asia Pacific has also been exacerbated by low catastrophe losses in recent years, 2018 included. Firm order terms often settled below initial quotes at 1 January 2019, improving by 5% on average.
- Overall, the Asia Pacific property-catastrophe market continued to soften at 1 January 2019. Looking ahead, recent and imminent regulatory changes in certain Asian countries (e.g. Philippines and Korea), and the general trend towards stronger risk-based solvency requirements across the region, will inevitably bring a period of adjustment (and preparation) for carriers. But these are important developments that will help to lay the foundations for a more mature and profitable market in the long term.
MIDDLE EAST AFRICA P&C
- Following relative price stabilisation in the Middle East Africa P&C market at the 1 January renewal last year, most business classes renewed on an as expiring basis at 1 January 2019.
- Market conditions are challenging, however, as reinsurance margins and loss experiences have worsened over the last 12 months. Local reinsurers remain under pressure and the outlook for the market is expected to remain difficult in 2019 on the back of capacity tightening and higher retrocession costs. These increased costs will be significant after regional retrocession programmes ranged from up 5% (loss-free) to up to 35% (loss-affected) at 1 January 2019.
- Regional loss activity in 2018 was down overall compared to the previous year. Nevertheless, some large losses (inside and outside the region), as well as loss creep from significant 2017 events (such as the ADNOC refinery fire) and general attrition, combined to prevent any risk-adjusted rate reductions.
- As a result, pro-rata bouquet treaties that include property, engineering, general accident and marine risks typically renewed flat, in line with last year.
- Loss-free XoL property-catastrophe programmes also renewed flat on a risk-adjusted basis whilst loss-affected accounts saw pricing increase by 5% on average. Cyclone Mekunu was a significant event for the Middle East Africa market as it was one of the most powerful storms on record to make landfall along the Arabian Peninsula. Pricing for loss-free per risk XoL programmes renewed as expiring at a minimum at 1 January 2019, often with a 2.5% increase built in.
- Loss-free energy programmes renewed flat on a risk-adjusted basis, although there was some variability depending on risk exposures. Loss-affected energy programmes saw rates rise by 15% to 20% in cash terms, although aggregates were often up. Pro-rata energy programmes came under significant pressure due to the sizeable losses suffered by the market regionally and internationally. With a number of big proportional programmes renewing at 1 April and 1 July, challenging conditions are expected to persist in 2019 with reduced commission and/or sliding scales a distinct possibility.
- Outcomes in the marine market were not too different to those in energy. Loss-free programmes renewed flat (or 5% down risk-adjusted) whilst loss-affected programmes were up 10% to 15% on a risk-adjusted basis. Pro-rata programmes were likewise under pressure as commissions were reduced slightly and/or sliding scales were introduced.
- Conditions in the motor market were largely unchanged in 2018. Results for the year were strong and motor XoL programmes renewed as expiring on average at 1 January 2019. Market dynamics remained favourable for cedents as capacity levels remained plentiful and placements were often over-subscribed.
GLOBAL DIRECT AND FACULTATIVE
- Global D&F catastrophe programmes fared well in 2018, despite elevated catastrophe activity. Claims from hurricanes Florence and Michael settled around retention levels, and typhoons Jebi, Mangkhut and Trami, as well as the US wildfires, did not prove to be an issue. Given most D&F programmes had strong increases at 1 January 2018, rate changes in 2019 were typically down 2.5% to down 7.5% on a risk-adjusted basis.
- Several traditional markets, particularly the European professional market, looked to write more D&F business in 2018. Some new players also entered the sector. Although buyers mostly stuck with existing markets, more changes were seen to reinsurer panels than in previous years. Budget spend remained a key driver in most cedents’ buying appetites.
- Income estimates for the 2019 year included positive rate movement, as direct class underwriters sought to improve terms and conditions of front-end business.
- Outcomes for D&F risk excess renewals proved dependent on portfolio mix and loss experience. Despite programmes generally excluding losses emanating from critical catastrophe zones, 2018 still proved an extremely active year for non-catastrophe losses. However, in spite of poor loss experience, programmes were generally completed with unchanged structures on the back of reinsurers’ belief in the improving outlook of accounts.
- Pro-rata placements saw ceding commissions and event limitations being challenged and there were far more pronounced variations in terms than in previous years.
- With the trend of higher catastrophe loss frequency continuing in 2018, retrocession renewal prices at 1 January 2019 showed another marked uptick. Aggregate covers bore the brunt of losses once again, although a number of occurrence covers were affected by Typhoon Jebi and the Camp California wildfire loss.
- The issue of trapped capacity/collateral became even more a point of focus during renewal negotiations, with many key ILS funds seeing an increase in investor redemptions and a more challenging fundraising environment overall. Investors have also been concerned by continued loss deterioration from Hurricane Irma, as well as the significant losses incurred from under-modelled perils like wildfires. These issues caused a reduction in available capacity for aggregate covers as well as reductions in capacity offered on some established quota shares and sidecars.
- These dynamics led to rates for retrocession catastrophe programmes renewing between flat and up 20% on a risk-adjusted, like-for-like basis at 1 January 2019, with event-based programmes falling towards the lower end of this range and aggregate covers towards the upper end. Distinctions between occurrence and aggregate covers became more pronounced in 2019, compared to prior years.
- With aggregate covers seeing the greatest loss impairments in 2017 and 2018, as well as the most marked rate increases, some cedents bought more occurrence coverage where rate increases were less penal and capacity was more plentiful. Retrocession capacity levels remained broadly in line with 2018 overall, even if a greater amount of capacity reverted towards occurrence covers. It is important to note that ILS funds were not alone in reducing their appetite for aggregate covers as a number of notable traditional retrocession markets also did the same.
- Ceding commissions for pro-rata treaty placements were challenged at 1 January 2019, with many buyers of this cover having to be more commercial to keep reinsurer support.
INDUSTRY LOSS WARRANTIES
- The industry loss warranty (ILW) market was hit by considerably fewer losses in 2018 compared to 2017.
- Risk-adjusted pricing for loss-free US nationwide occurrence covers renewed flat to up 10%, with regional coverage seeing more moderate increases of up to 5%.
- Available capacity at lower trigger levels, or for more structured higher ROL covers, is more challenged in early 2019 compared to 2018, as some ILS funds have reined in interest in ILWs from a selling perspective. Capacity remains broadly similar at higher levels (USD 50 billion plus), but aggregate capacity is still hard to find at competitive terms and levels, with minimum loss franchise triggers being pushed up as well.
- ILS funds continue to use ILWs as a key way to hedge risk, with traditional reinsurers continuing to prefer indemnity coverage without the associated basis risk.
- Reinsurers continue to take a sceptical view of second and third event covers at lower levels for all natural perils cover. The recent Californian wildfires have also narrowed the breadth of cover to named storms only plus earthquake. There continues to be resistance to broadening the scope of cover to include US territories and possessions, with losses from Hurricane Maria still fresh in memories.
US PUBLIC ENTITY
- Stable loss experiences and strong capacity levels for US public entity business at 1 January 2019 meant a number of cedents’ programmes renewed as expiring or with modest rate increases.
- Loss-free XoL programmes for liability saw risk-adjusted price increases of 2% on average. Property business mostly renewed flat.
- Loss-affected XoL programmes saw more meaningful upward pricing pressures in reaction to losses, with both property and liability business experiencing risk-adjusted increases of 4% on average. Outcomes for liability lines reflected increased loss severity whilst property lines were hit by an upturn in attritional losses.
- Ceding commissions for proportional business were generally flat at 1 January 2019.
- Capacity levels were largely stable, although some pullbacks in the liability space did cause some tightening during the renewal. Retention levels and excess limits remained fairly constant for all lines of business.
US WORKERS’ COMPENSATION
The US workers’ compensation primary market has seen a run of strong results in recent years, achieving a combined ratio of 89% in 2017 (on a calendar-year basis), according to the National Council on Compensation Insurance (NCCI). Primary market pricing has fallen as a result, often in the high single-digit range, although this has varied by class and state. A strong US economy has offset the effect of these rate reductions on industry premiums because of payroll growth.
- Working layers, on the other hand, have seen per person exposed reinsurance pricing come under upward pressure as a result of an increase in the frequency of severe losses. ‘Full employment’, distracted driving and the spiralling costs associated with improved medical success rates are thought to be contributing factors.
- Pricing for catastrophe layers ranged from flat to down 5%, although outcomes here were very much dependent on exposures and underlying rate changes. Adjusted for income growth, catastrophe layers saw rate decreases of up to 5%.
- Recent workers’ compensation loss activity has generally impacted working layers only and loss-affected pricing here was mostly restricted to up 5% at 1 January 2019.
- Firm order terms generally settled towards the lower end of quoting ranges, often at or near the lowest quote.
- Ceding commissions for proportional business typically increased by 1% or 2%.
- Cedents with access to quality exposure data often received favourable terms, particularly for catastrophe layers. Capacity continued to be adequate for working layers at renewal, with some new carriers entering the market. Capacity for catastrophe layers was more plentiful.
- Demand was largely stable overall. There was strong interest in more per person coverage and some cedents looked to reinforce their top layers for terrorism. Additionally, with potential gaps in coverage created by increased retentions under the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), cedents considered increasing coverage limits, for both treaty or facultative.
US COMMERCIAL AUTO
- The US commercial automobile market has experienced an uptick in loss frequency and severity in recent years, prompting carriers to increase rates significantly. A strengthening economy (and lower fuel prices) translates into more vehicles on the road, and an increase in the number of miles driven has led to substantially more accidents.
- Long-haul trucking has been hit particularly hard. Greater traffic density, alongside factors such as distracted driving, rising medical costs and higher liability payouts due to aggressive plaintiff representation, has seen the sector’s average combined ratio exceed 100% for several years now. 2018 is expected to be no different.
- Many carriers have exited the line in recent years as a result. For those that continue to write business, nearly all have increased underwriting scrutiny and implemented double-digit price increases. This trend is expected to continue.
- Commercial auto can therefore be regraded as the (re)insurance sector’s one true hard market at present. This backdrop saw cedent terms deteriorate further at 1 January 2019. XoL pricing varied depending on programme experience and original rates, but was up 5% to 10% on average. Reinsurance capacity was occasionally available at more favourable terms for experienced underwriting organisations.
- Ceding commissions for proportional business also varied by performance but were under pressure generally (as they have been for a while).
- Whilst a number of traditional markets have exited this class or increased pricing, alternative markets are emerging through the MGA/programme distribution channel. Reinsurance terms for these MGA programmes are generally pro-rata structures with commission slides protecting reinsurers’ margins from the increased volatility of the line.
US PROFESSIONAL LIABILITY
- Loss experiences in the US professional liability (PL) market have remained largely benign in recent years. PL lines are closely aligned to the performance of the US economy and loss activity has reduced in recent years as economic activity has picked up.
- Supply remains plentiful in the PL market, although reinsurers continue to be disciplined and are increasingly pushing back against rate reductions as market pressures build.
- Original pricing was mostly flat in 2018. Given reinsurance pricing largely follows the primary market, XoL programmes were generally renewed as expiring at 1 January 2019.
- Ceding commissions were typically flat at 1 January 2019 as reinsurers pushed for improved terms.
US GENERAL LIABILITY
- The US general liability (GL) market is seeing increased loss activity as a more inflationary environment, and higher medical and legal costs specifically, has seen carriers’ loss ratios deteriorate in recent years.
- Conditions in the GL reinsurance market are not too dissimilar to those in PL. Capacity is stable and strong, but rising concerns over loss cost trends have seen reinsurers become more discerning in deploying this capacity.
- Original pricing was flat to up 5% on average in 2018. XoL programmes typically renewed flat at 1 January 2019. Proportional business was likewise renewed close to expiring terms.
- Primary capacity in the umbrella market remains plentiful for the most part. There were a number of new entrants in the space in 2018 and primary pricing was stable as a result, with some slight softening in lower hazard classes. There are nevertheless areas of the excess and surplus (E&S) market that are seeing single-digit rate increases.
- Strong economic activity has seen demand for umbrella/excess increase in construction classes. There appears to be enough capacity to meet this demand, thereby limiting upward pressure on rates (one notable exception being New York State contractors).
- XoL pricing at 1 January 2019 generally followed original rates (i.e. flat).
- The majority of standalone commercial umbrella/excess reinsurance business is placed on a pro-rata basis. Ceding commissions for proportional business at 1 January 2019 typically renewed with expiring terms, although there were a few exceptions.
- Capacity remained plentiful overall, although reinsurers set limits on the upper levels of ceding commissions that they were willing to support.
- It remains too early to judge whether the adverse experience seen in US auto will impact the umbrella market.
LONDON MARKET CASUALTY
- 1 January 2019 renewals for London market casualty business were once again completed late. This was caused in part by Lloyd’s 2018 Decile 10 review as carriers took stock of the changes and considered what they meant for casualty lines, several of which have seen performance suffer in recent years.
- As a result of Lloyd’s performance review (as well as deteriorating results more generally), a number of cedents either closed or reduced their professional lines portfolios. Reduced capacity in the original market pushed pricing up through 2018, with employers’ liability and public liability seeing original rate rises of approximately 5%. Even greater pricing pressure was observed in the professional lines market, where increases of 10% plus were commonplace. Delegated Authority business continued to be under pressure during the renewal, particularly on associated costs and where the associated distribution network had not been generating value. This is expected to continue into 2019.
- Early assumptions that improving conditions in the original market would see reinsurers cede ground on price in order to retain business in a highly competitive treaty market at 1 January 2019 were proved unfounded. Reinsurers have likewise seen deterioration in their books and have relied heavily on (nearly exhausted) reserve releases to bolster results. Reinsurer discipline therefore held during renewal negotiations, and improved loss picks on original business only served to allow reinsurers to bring pricing back in line with their technical view.
- As a result, risk-adjusted pricing for XoL programmes where loss experience had not deteriorated typically renewed flat, and in some instances down, at 1 January 2019. Programmes that had seen deterioration in their experience generally saw modest rate increases, in the order of 5%. Scale also remained important and is likely to be a key differentiator in any (future) hardening market.
- Capacity levels during the renewal remained unchanged from last year (i.e. abundant), although markets looked to reduce lines if they felt required margins were not being achieved. Demand was largely stable as some cedents bought more protection (although this proved difficult for carriers whose portfolios had reduced in scale) whilst others increased their net positions with the aim of improving profitability (albeit at risk of increased volatility).
- Ceding commissions typically decreased at 1 January 2019 as reinsurers pushed for (and often got) improved terms.
- The global facultative market continued to soften during the first half of 2018, although there was a general trend towards price stabilisation (or pockets of modest rate firming) as the year progressed. Whilst rate reductions of between 10% and 15% were typical for loss-free accounts in early 2018, flat renewals (at best) were more commonplace by the end of the year.
- There was significant variability of rate movements within different classes of business. Whereas loss-free property business and casualty business saw some upward pricing pressure overall (ranging from flat to up 10% on average), reductions were more typical for terrorism and construction lines, with average decreases of between 10% and 15% for the former and flat to down 5% for the latter.
- Pricing for loss-affected facultative business depended in large part on the class of business as well as the nature and size of the loss. Some accounts renewed flat whilst others in specific, more challenged, industries (such as food) saw large increases. But even industries that suffered losses were able to look to their local retail and composite markets for more competitively priced capacity, resulting in fewer orders to London and more locally retained business.
- Supply and demand dynamics varied significantly by territory and type of business in 2018. The market remained particularly soft in Asia and Australia due to decreased demand. Some large carriers, on the other hand, fuelled demand for facultative protections whilst undergoing internal reviews, but then purchased less towards the end of 2018 as they withdrew from certain classes and/or lost orders due to the re-underwriting of their books.
- Decile 10, and reviews of unprofitable books more generally in 2018, therefore offered both opportunities and challenges to the global facultative market. Whilst insurers initially sought to offload some more hazardous exposures to facultative markets, placements subsequently became more difficult to secure at competitive prices once portfolios were either no longer being written or capacity was reduced significantly (e.g. international D&F and construction/engineering accounts).
- The other challenge for London market facultative placements was (and is) the continued softness of the local and regional markets. Increased local market retention has seen London lose many orders and the situation is unlikely to change until the pricing environments become more closely aligned and upfront insurers in the UK stop offering reductions on global accounts (which are currently leading to reduced facultative orders).
- Looking ahead into 2019, the facultative market is expected to remain flat until the next round of (Japan dominated) treaty renewals in April, barring any unexpected major disasters. Further M&A activity amongst insurers and reinsurers could impact rates in 2019. The new capacity being attracted to the market is in specific areas, with very little focused on facultative. This coming year could therefore prove to be a good leveller for the facultative playing field, with those boasting skilled teams and the best talent able to outperform the wider market.
The structured reinsurance market is split into two main types of transactions: prospective cover (protection for future underwriting) and retroactive cover (protection for existing reserves). Both markets benefitted from rising interest rates in 2018 as cedents’ focus on capital management supported demand. Looking ahead at 2019, Decile 10 at Lloyd’s, and the consequent closure of books of business, are likely to lead to greater interest in legacy transactions and capital efficient structures.
- Prospective covers once again came under pressure from traditional reinsurance in 2018 as the lines between the two continued to be blurred.
- Supply remained plentiful for the most part as a growing number of markets offered new capacity. As a result, pricing continued to experience downward pressure for much of 2018.
- Further growth in the prospective market is anticipated for 2019, although changing market dynamics could lead to
modest price firming.
- Retroactive covers continued to be competitively (but rationally) priced in 2018.
- Supply and demand in the retroactive market increased, as a growing number of markets were prepared to satisfy cedents’ requirements.
- Continued growth is expected in 2019 amidst strong competition from markets and sustained demand from cedents that seek solutions offering capital relief and finality.
Figure 4: Risk-Adjusted Rate Movements for Loss-Free Specialty Programmes Renewing at 1 January 20195 (Source: JLT Re)
5 Please note that the figures provided in Figure 4 are averages and significant variability exists in individual programmes.
- Abundant capacity, falling demand and the absence of significant losses meant aviation reinsurance renewals were competitive at 1 January 2019.
- Loss-free XoL aviation programmes typically renewed flat to down moderately on a risk-adjusted basis. This compared to flat outcomes on average at the corresponding renewal in 2018. Few programmes suffered significant losses but, for those that did, rates mostly renewed as expiring, or with manageable increases, given the vast majority have considerable credit balances.
- The abundance of supply dominated proceedings at 1 January 2019 and additional capacity from a few new markets only increased competition. Decreasing demand was also a key factor as pullbacks and withdrawals from the primary aviation market (due in part to Lloyd’s Decile 10 review), as well as a spike in insurance M&A activity, meant reinsurers’ client base shrank significantly in 2018.
- Proportional business benefitted from a firming pricing environment in the direct market. Incomes typically rose on the back of original pricing. There was nevertheless some pressure from reinsurers on commissions at 1 January 2019, although this varied depending on performance. Better performing accounts typically secured flat terms as markets looked to nurture core relationships.
MARINE & ENERGY
- After elevated losses from HIM precipitated rate firming in the marine and energy market at last year’s 1 January renewal, risk-adjusted pricing trends this year ranged from flat to down as plentiful capacity and a return to more normalised loss experiences prevailed.
- Loss-free XoL programmes typically saw pricing renew flat to down 5% on a risk-adjusted basis at 1 January 2019. The approach by leaders varied greatly during the renewal. Established European markets were conservative on the whole, cautiously evaluating opportunities and remaining stoic throughout. Other markets looked to consolidate or broaden their influence by competing for target accounts. Cash spends were generally constant and any positive rate trend was derived from falling energy exposures.
- There was little differentiation between clean programmes and those that suffered losses at 1 January 2019. On the whole, the marine and energy market had neutral back-year experience and any shock losses during 2018 failed to exceed premiums for that year. The lack of pricing movements in the post-HIM environment is reflective of an apathetic market operating within safe margins.
- Firm-order terms mostly settled below initial quotes at 1 January 2019, improving by 5% on average. Renewals in the marine and energy market are traditionally late, but more so this year due to Lloyd’s Decile 10 review. As a consequence, the negotiation period was condensed and opportunities to seek additional improvements were more limited.
- Marine and energy quota share placements were typically placed on comparable terms to 2018. Downstream energy quota share experienced significant pricing pressure as markets suffered a series of poor results in 2018.
- The supply and demand imbalance in the marine and energy market persisted at 1 January 2019, with the consolidation of major buyers and the constriction of product two key factors. There are currently too many reinsurers offering the same solutions to too few cedents. One interesting development was that marine reinsurers moved closer to becoming specialty reinsurers as they were forced to broaden the scope and limit of composite coverage. There was no apparent change in reinsurance capacity related to Lloyd’s actions and, as mentioned, the losses were far from impactful to pricing.
- In such a competitive environment, stronger cedents were able to secure more favourable terms at 1 January 2019. Differentiation for indigenous/local treaties was particularly stark as they often benefitted from rate reductions twice those of their global counterparts.
WAR, TERRORISM & POLITICAL VIOLENCE
- Although there were no significant insured terrorism losses in the developed world in 2018, emerging nations did suffer a number of claims from strikes, riots and civil commotion (SRCC), terrorism and political violence events. Despite this, war, terrorism and political violence (WTPV) results remained strong in 2018.
- The move towards non-damage coverages continues as carriers respond to the changing terrorist threat and increased geopolitical and social uncertainty/unrest.
- Many WTPV portfolios are expected to see premium income growth in 2019 on the back of new product offerings for loss of attraction, active assailant or similar malicious attack/ non-damage-type coverages. Products for threat, chemical, biological, radiological and nuclear (CBRN) and terrorism liability are also on the increase.
- Demand for cyber terrorism cover as a specific peril continues to grow but current products are often sub-limited and mostly confined to resulting physical damage. Non-damage cyber cover is nevertheless increasingly being requested by insureds and is now being given selectively.
- Treaty reinsurance buying patterns at 1 January 2019 were broadly similar to prior years, although higher vertical limits often resulted due to increased underlying exposures. More cedents also purchased primary-level aggregate coverage to help mitigate possible increased attrition in 2019.
- In broad terms, most XoL programmes saw risk-adjusted reductions of 10% to 15% at 1 January 2019, with treaty capacity remaining abundant for the WTPV class.
CREDIT, BOND & POLITICAL RISK
- The credit, bond and political risk market has become slightly more disjointed over the last 12 months, with reinsurers beginning to show varying appetites for different business based on their subjective views of the market, countries, economies and products. Reinsurer strategies are separating, with some retrenching towards the centre ground of traditional products and structures whilst others are expanding to seek greater diversification.
- Micro-trends, rather than broad shifts, are therefore driving the market at present. Losses are localised by cedents and reinsurers, risk appetites are becoming more subjective and there are new reinsurers trying to enter the market whilst others are retrenching. Some reinsurers are becoming bolder in supporting specific cedents, but not the market overall. This is generating some movement in terms but not enough to be categorised as a hardening, or even a materially changing, market.
- The Lloyd’s Decile 10 review certainly had an impact on the London market at 1 January 2019. There are signs reinsurers’ behaviours are starting to change in anticipation of a harder market, even if it is not clear when or how it will be triggered.
- Loss experiences have undergone some change recently as political and credit risk losses of previous years are now being replaced by large surety cases, including one that could be the largest single loss ever to a private insurer.
- All this culminated in risk-adjusted pricing trends for credit, bond and political risk programmes at 1 January 2019 being flat to down, although some loss-affected accounts saw significant price increases. Loss-free programmes typically renewed within a range of flat to down 10% on a risk-adjusted basis. Headline premium was generally stable and the risk-adjusted change was driven more by slight overall deterioration in underlying risk quality, combined with some small growth. Loss-affected programmes, meanwhile, typically renewed within a range of flat to up 10%, or even 20%.
- The broadening of market prices is a clear indication of more favourable treatment for cedents and programmes that are in greater demand. This is amplified by many of the larger ceded premium volume providers being on multiyear deals with little renewing in January, pushing reinsurers to other programmes in order to achieve some top-line growth. This has concentrated attention on other programmes – both positively and negatively depending on performance and risk profile.
- Capacity remained plentiful at 1 January 2019, a strong positive for programmes and cedents, given demand remained robust. Programmes continued to be comfortably placed in the main, although there were some line reductions and declinatures for poorer performing or priced business, and even adjustments to terms and shortfall placements. Resistance was also observed in instances where reinsurers felt the balance of power had shifted too far in buyers’ favour as some reinsurers sought to hold their ground. It became more challenging to place new programmes, especially if not delivering obvious diversification benefits for reinsurers.
- Quote ranges became broader on average. Firm-order terms generally settled below the average, but not at the lowest.
- Ceding commissions were flat on average at 1 January 2019, with increases or decreases related to individual performance.
- There were a number of important developments in the cyber (re)insurance market in 2018. Firstly, May saw the long-awaited introduction of the General Data Protection Regulation (GDPR) in the EU, affecting all EU organisations as well as any firm holding EU subject data.
- There were also a number of high-profile cyber attacks last year. The Marriott Hotel Group, for instance, recently revealed that the attack that breached some 380 million records is likely to exhaust its insurance tower, with almost USD 150 million placed in Lloyd’s. With this and many other breaches occurring after GDPR was enacted (e.g. BA, Facebook, Ticketmaster), significant fines are expected to follow. Whether GDPR fines are insurable by law has been a topic of intense debate within the (re)insurance market.
- Cyber capacity continued to increase in Lloyd’s during 2018. With up to 80% of its business now coming from the highly competitive US market, income levels are flattening and market rates are softening. Many syndicates are looking to provide delegated authority to access the small and medium-sized enterprises (SME) market.
- In such a competitive landscape, underwriters are coming under increasing pressure to include new coverages such as system failure, contingent business interruption and carve-back on exclusions (e.g. natural catastrophes, infrastructure and war), fuelling concerns of accumulation risk.
- Despite growing interest from cedents in silent cyber risks in the wake of 2017’s NotPetya attack, there is little appetite within the reinsurance market to provide cover as reinsurers argue it should either be covered affirmatively or excluded explicitly. Cedents, on the other hand, would like more clarity around war exclusions in the wake of disputes following NotPetya.
- New, meaningful capacity entered the reinsurance market in 2018, increasing competition. Interest from ILS markets persists, although additional capacity is not yet needed given the limited cyber losses suffered by the reinsurance market to date.
- All these dynamics culminated in loss-free XoL cyber programmes renewing down 7% to down 10% on a risk-adjusted basis at 1 January 2019. Loss-affected programmes, meanwhile, saw cash increases of between 5% and 10%. Stop loss and quota shares remain the structures of choice for the London market. There is now less appetite for XoL structures following costly incidents such as the Marriott loss.
Figure 5: Risk-Adjusted Rate Movements for Loss-Free Healthcare Programmes Renewing at 1 January 20196 (Source: JLT Re)
6 Please note that the figures provided in Figure 5 are averages and significant variability exists in individual programmes.
ACCIDENT & HEALTH
- There continued to be a strong appetite for A&H reinsurance business at 1 January 2019, although this probably masks a growing unease at recent results. Supply levels were sufficient overall, with relationships and loss experiences key to determining how markets responded to borderline acceptable renewal terms. Although increased scrutiny of managing agencies’ 2019 business plans at Lloyd’s saw at least two syndicates withdraw from the A&H class in 2018, new capacity also entered the market.
- London reinsurers are currently keener on the accident class than health, which is hardly surprising when comparing the performance of the Lloyd’s medical book against the accident. However, even within the accident class, certain subsectors continue to come under close reinsurer scrutiny.
- Specifically, the accident subsectors of US professional sports, loss of value and contract protection remain in focus and there are increasing signs that reinsurers are seriously considering whether to continue to support US sports Temporary Total Disablement cover due to persistent poor performance. Because of the high sums insured on certain players, most cedents are highly dependent on reinsurance support. Insurers are likely to confront rising reinsurance rates, which may make the class un-writable unless they can achieve increases.
- Loss-free XoL programmes typically renewed within a range of flat to down 8% at 1 January 2019. Reinsurers attempted to hold expiring rates when cedents’ premium increased but a compromise was often reached at the expiring earning power, unless there was a big leap in premium. Significant increases in subject premium bases (two in excess of 50%) were once again seen on some Chinese programmes.
- Rate changes for loss-affected programmes were very much dependent on the size of the loss and the size of the bank. Programmes that suffered sizeable losses often saw mid-single-digit rate increases, even when cedents’ premium bases had increased. Firm-order terms were largely as quoted.
- Ceding commissions for proportional business were typically flat.
- Better performing programmes typically secured favourable terms at 1 January 2019, with reinsurers more accommodating of cedents with proven and profitable track records.
- There seemed to be a desire on the part of buyers to remain with their current reinsurance leaders this year. This could perhaps be explained in part by the fact that those in the US, London and Continental A&H markets are both buyers and sellers of reinsurance and there was an acceptance that it may have been counter-productive to keep pushing hard for rate reductions.
- Looking ahead, syndicates with small A&H premium volumes may find it difficult to justify the costs of continuing to write these classes and, barring a series of large market losses, A&H capacity is unlikely to grow by the time the 1 January 2020 renewal comes round.
NORTH AMERICA MEDICAL MALPRACTICE (TREATY)
- The medical professional liability market is showing early signs of transition, with multiple factors driving pricing and capacity. After a strong run during the 2000s, performance has been more challenging in recent years, 2014 and 2015 especially. Faced with deteriorating results, several key markets are considering retrenching and diverting capacity to other (higher margin) classes.
- Although North America medical malpractice was not a key area of focus for Lloyd’s Decile 10 review (in its initial iteration, at least), there is some concern in the market about the potential implications of future action. London supply was diminished at 1 January 2019 as carriers generally took a harder line on pricing than their domestic counterparts. This led to slippage on some of the larger premium accounts, although London carriers often looked to maintain participations, albeit reduced, on some of the more competitive renewals.
- Additionally, reinsurers are increasingly concerned about adverse loss development associated with the recent spate of catastrophe activity, as many books have evolved to a position where they have a disproportionate share of catastrophe exposure without the working layers to provide balance.
- The culmination of all this at 1 January 2019 was typically flat renewals for loss-free XoL programmes, a good result given the difficult market environment. With some cedents’ subject premiums diminishing, a flat rate ultimately led to a dollar reinsurance premium reduction.
- Rate movements for loss-affected programmes were very much dependent on the overall level of loss. As a result, rate increases on loss-affected programmes generally fell within a wide range of 5% to 25%.
- Stronger performing cedents continued to benefit from favourable terms. There were also instances of new business achieving competitive terms at 1 January 2019 as the absence of previous pricing benchmarks afforded underwriters greater latitude.
- Ceding commissions were generally flat at 1 January 2019, although decreases were observed for some placements.