London Views
London Correspondent

As the market plays cat and mouse with this year’s reinsurance renewals delays are occurring. Lloyd’s managing agent Arch reported that reinsurance renewals are significantly behind schedule. Arch believes firms are holding back on committing capacity because they are unsure how far up rate increases will go.

Arch is one of London’s insurers that write in the company market and at Lloyd’s. Like many players in the London market, Arch plans to strengthen its presence in 2021 and intends to write around $1.5 billion in gross written premiums across 20 lines of business including reinsurance. Arch aims to become a market leader in many of its business lines and a top 10 London market insurer in the next three years.

Speaking at a Morgan Stanley analyst conference recently, Arch’s CFO said that bound business is running far behind prior years with only around one percent of renewal business placed as of the conference date. He added that the focus of the renewals has shifted to retrocession and uncertainty around property catastrophe risks.

Arch’s news coincides with reports from a number of players in the market. There isn’t just one reason for the delays, but the continuing unknown cost of Hurricane Ida seems to be a major cause with underwriters worried about loss creep, and the industry as a whole uncertain where the losses will end up. Another factor is the unknown willingness of the primary market to pay. Nonetheless, no one wants to go first at a five percent increase and later see the rest of the market get a 10 percent-plus rate rise.

Rates are not the only discussion point. Many reinsurers are looking at wordings, increasing deductibles and reducing exposure in the aggregate and per occurrence. It is worrisome that many negotiations are still at an early stage, and it’s going to take a lot of effort to get everything in place by Jan. 1.

The situation will probably be made worse by the U.K. government’s latest edict on Covid. With Omicron rife in the U.K., people have been ordered to work from home for the foreseeable future wherever possible. As usual, there are two medical camps – one telling everyone not to worry and the other forecasting doom and gloom.

Structuring a reinsurance program is not an easy task for brokers any time, and fixing the right rate is not easy for underwriters. Without a full backup team, these tasks just got harder for both parties.

Lloyd’s Brave New World is on hold

Lloyd’s is looking at its future and how best to use its 1986 building. Already out of date for the existing Lloyd’s market, the building’s suitability for the future is questionable now that the world has been changed by Covid-19. Talks with the owner of 1 Lime Street, Ping An of China, are being held to find the best use for the building.

When the 1986 building was conceived, Lloyd’s was a market of 29,000 individual Names with hundreds of small syndicates. When Lloyd’s moved into the new building, these syndicates filled up the ground floor and the first four galleries. The Lloyd’s of today has 76 syndicates with over $45 billion of capacity.

Lloyd’s has wondered how to use the building more efficiently for some time. The increasing move to flexible working and digitalization, which already was affecting the market gradually, sped up because of Covid. The belief is that the U.K. will probably face five more years of Covid. The U.K.’s government response every time there is a new Covid strain is to restrict movement until the new strain’s impact is known.

Since London has had plenty of practice at working from home this year, the latest restrictions are not a problem. Lloyd’s already announced that it revised its Covid-19 protections for the market to ensure the safety of all those who use the Lloyd’s building. The building remains open and fully operational, and Lloyd’s is committed to supporting the market through the renewal season in the run up to Jan. 1.

Insurance executives are trying to work out different permanent work models for their employees as the spread of the Omicron variant begins to disrupt their plans. Insurers and brokers are struggling to understand how Omicron might affect their operations and profits. Most have taken a wait-and-see stance as they weigh how fast the variant may spread and its potential harmfulness.

Earlier this year, Lloyd’s decided to revamp the Lloyd’s building, calling this a  “once-in-a-generation” overhaul of the building’s central space. The aim is to provide better accommodation for the market’s flexible working practices following the pandemic. The underwriting room was set to be updated and the supporting spaces to be overhauled.

Lloyd’s began its plans in the first quarter of this year. The market was originally promised a final version by the fourth quarter. Focus groups gave ideas for the future spaces and services needed. Among their many ideas were different-size spaces to support private and collaborative work alongside areas that accommodate physical and virtual interactions. Lloyd’s also considered adding a number of amenities, some of which would have been open to the public. An exclusive restaurant at the top of the building was planned to help attract more clients, as well as a market hall, a terrace bar and a wellbeing facility consisting of a gym and spaces for quiet contemplation.

Now everything is on hold until March 2022 as Lloyd’s reconsiders its decision on 1 Lime Street. Like a lot of the London markets, Lloyd’s is considering what it needs. With many staff unwilling to consider office work for the whole week, there is a lot of wasted space.

Changes rating property reinsurance

With property reinsurance making losses for the past five years, senior reinsurance underwriters are looking at the way risks are rated. It seems the traditional way of rating is changing and will be based on perils likely to cause losses. Rate-makers will look forward to the exposure instead of looking backward to paid losses.

An article in the Beazley Blog by Patrick Hartigan, group head of treaty at Beazley, explains that a critical mass of reinsurers from some of the biggest players in the London market and individual Lloyd’s syndicates want to move from the traditional perils of earthquake and windstorm to basing rates on wildfires and floods as well.

The move is not going to affect the current reinsurance renewal season, although the market understands climate change is here to stay and that climate variability needs to be factored into the rating. Hartigan said any changes will take place over the next eight months. During this time, reinsurers will make a concerted effort to shift the basis on which they price most perils in most territories.

Reinsurers sought to increase their understanding of the changing nature of the risk represented by natural catastrophe events, said Hartigan. The change is a radical approach, as underwriters up to now looked at historical results to achieve a rate. Instead they want to look at possible future results.

With property reinsurers seeing severe losses hitting their portfolios over the past four years, rates are expected to continue to rise. A baseline reinsurance rate increase of close to 10 percent is expected. However, Hartigan believes the average increase will veer more toward 15 to 20 percent with some cedants, particularly those in Germany (where companies suffered losses and in many cases exhausted their programs), being subjected to a 50 percent-plus increase.

Beazley is trying to move to a strict per-peril and per-territory rating methodology, Hartigan said, but until recently the market was resistant to the transparency associated with this approach to property catastrophe underwriting.

Loss creep remains a problem for the market, particularly in conjunction with short-tail classes and losses developing three, four, five or even six years down the line.

Lloyd’s faces losses for 2019

Underwriters renewing business might stop to consider Lloyd’s recently released figures for the third quarter, which suggest a loss for the 2019 underwriting year and possibly the same for 2020. For 2019, the market could face paying up to a 6.42 percent underwriting loss.

As usual, Lloyd’s released three forecasts. For 2019 the 6.42 percent loss is the worst-case scenario, but even the best-case scenario suggests a 0.58 percent loss. The mid-case figure is a 3.50 percent loss. The figures for the 2020 underwriting year are better, showing a 2.54 percent loss in the worst-case, a 3.71 percent profit as the best-case and a 0.59 percent profit as the mid-case.

On the worst-case scenario for the 2019 underwriting year, only six syndicates are indicating a potential profit, while two hope to break even. Chaucer’s Nuclear Syndicate 1176 should return a 30.00 percent profit and MAP’s Syndicate 6103 a 20.00 percent profit, but the best of the rest is a five percent profit. For the 24 syndicates expecting a loss Astra’s 6123 has the largest underwriting loss expectancy of 38.38 percent. The mid-case figures show the number of loss-making syndicates falling to 17 with Astra’s 6123 expecting a 33.38 percent loss. The number of syndicates predicting a profit has risen to 15 with Chaucer’s 1176 predicting a 35.00 percent profit, MAP’s 6103 a 23.75 percent profit.

At least the 2020 figures give the market some optimism on the mid-case and best-case figures. On the worst-case figures 24 syndicates expect a loss with Astra’s new 2121 predicting a 75.02 percent underwriting loss. Nine other syndicates expect double-digit losses with Astra’s 4242 predicting the highest underwriting loss at 39.77 percent. Four syndicates predict a potential profit, with Chaucer’s 1176 the highest at 15 percent, and of the other three, only one is just above a double-digit figure. Three other syndicates hope to break even. On the mid-case figures, sixteen syndicates expect to make a loss and two to break even with three profitable syndicates. The loss leaders are Astra’s 2121 with a predicted 70.02 percent underwriting loss and 4242 at a 34.77 percent loss. Profits are expected at Chaucer’s 1176 and QBE’s 386 of 25 percent and 15.29 percent, respectively. The best-case scenario shows 21 profit making syndicates and 10 loss makers. The profits once again come from Chaucer’s 1176 at 35.00 percent and QBE’s 386 at 17.79 percent, while the losses are from Astra’s 2121 with a predicted 65.02 percent underwriting loss and its 4242 at 29.77 percent.

Lloyd’s capacity up by 15 percent

The underwriting capacity of Lloyd’s syndicates is set to grow by 15 percent this year to almost $57 billion. The largest syndicate by capacity is Beazley, which will continue as the market’s largest managing agent and will be able to write almost $1.7 billion next year.

The increase is just over seven percent and is less than 2021 (9.3 percent) and 2020 (8.8 percent). This is probably because of the market’s belief that 2021’s double-digit rate increases are unlikely to be matched in 2022.

Stamp capacity is a calculation based on the funds investors have, together with the degree of risk they are happy to accept. It is a maximum, but all syndicates write to their stamp capacity limits. Usually syndicates write below their anticipated capacity to allow them to write lucrative business if there is a market change. Property reinsurers have been caught out in the past when losses occurred and the cost of reinstating cover pushed a syndicate’s capacity to the limit.

One surprise is the possible return of the U.K.’s largest insurance company, Aviva. The company is not a stranger to Lloyd’s. Once a Lloyd’s member, it left 11 years ago. Aviva made management changes recently and sold many of its European subsidiaries. The attraction of Lloyd’s is its vast licensing network and the ability to trade without having to adhere to the EU’s Solvency II regime.

Double-digit reinsurance rate increases

Fitch Ratings expects reinsurance rates to increase by more than 10 percent in catastrophe-related lines of business when contracts are renewed in January 2022. Fitch said two-thirds of non-facultative reinsurance business is renewed in January, with a regional focus on the U.K. and Europe.

Reinsurance prices are being boosted by prospects of a strong economic recovery and lower pandemic-related losses. As this opinion was written before Omicron reared its head, these figures might need some revision.

The premium rises, Fitch believes, are underpinned by the insured losses of around $100 billion in 2021 and the prospect of natural catastrophe claims increasing in frequency and severity.

Certain insurance lines, such as cyber risk and directors and officers liability, will see double-digit price increases, said Fitch. Cyber liability rises are due to a jump in claims linked to ransomware attacks. Tighter terms and conditions and withdrawal of capacity will add to the upward pressure on rates.

Fitch expects 2022 to be the fifth successive year of price increases, but with slower growth than in previous years. As ever with the insurance and reinsurance industry, attractive rates and healthy profit margins will continue to attract new capital, so price rises will be limited.