By LEN WILKINS
The rule in London is that risks cannot be renewed within three months of coverage inception. This rule makes Oct. 1 the official start date of the 2021/2022 renewal season, but as usual, initial business will be slow.
Once again, Covid-19 meant the cancellation of the Monte Carlo Rendezvous which offers delegates the chance to discuss market movements for the renewal season. At least the Baden-Baden reinsurance meeting is set to go ahead. Monte Carlo’s cancellation led reinsurance executives to write articles calling for rate increases reflecting the current loss experience.
The question is: Which way will the market turn? Following last renewal season’s double digit or so rises, a market correction was expected. However, things didn’t slow down for the April Japanese renewal season, the June Florida renewals or the Australian/Far Eastern renewals in July. Rates kept increasing, and then the claims came.
Despite the rate increases, the world’s largest reinsurers are headed for another loss this year, according to a report from Aon. Any chance of rate reductions for primary insurers and their clients is out the window, and Aon believes this could result in tougher renewals for reinsurance buyers.
The problem this year is that the increase in premiums was met by an increase in claims. Catastrophe losses more than doubled in the first half of 2021 to $4.9 billion. Aon analyzed 22 of the world’s largest reinsurers that together write 50 percent of global premiums and said that European flood losses in July and Hurricane Ida in September wiped out all the gains made in the first six months of the year. Reinsurers made profits, but nothing like the hoped-for profits that the renewal season suggested. Reinsurers hope there will be no more major losses this year.
Once again reinsurers will have “failed to cover the cost of capital” and will record an average combined ratio of 102.3 percent between 2017 and 2020, according to Aon. As far as reinsurance premiums go, the only way is up, and that will hit primary markets which inevitably pass on these costs to insurance buyers. The only hope is that there will not be a late U.S. hurricane or European storm to make poor figures look worse.
In addition to increased premiums, reinsurers will look at other ways to reduce their exposure. During the days of excess reinsurance capacity, brokers found that offering wider cover was more acceptable to reinsurers than reducing premiums. This increased cover is now under attack, and reinsurers are reducing the cover available to the primary market.
Named perils versus all risk is one area that will be bitterly fought over. Brokers will do their utmost to keep the all-risks option, but reinsurers are likely to be unwilling to continue this cover. Reinsurers will argue that with named perils cover they know what’s covered, and as their own retro protections (the reinsurance of reinsurance) are written on named perils they will have no worries about gaps in cover. Brokers will argue that primary markets can buy named perils cover from the ILS market cheaper.
Another area of contention will be aggregate covers where losses will have wiped out some protections, and reinsurers will be diving for cover rather than writing aggregate cover.
It’s far too early to predict rate increases with any certainty, but the doves are arguing for rate increases between two and five percent; whereas, the hawks are looking for double-digit and beyond. Considering the 17 percent increase in premiums that Aon disclosed was wiped out and that the likely catastrophe losses for the year are going to be nudging $100 billion, the hawks appear to be winning the day.
London is not the only reinsurance market looking for increases. The mighty Hannover Re predicts increases for insurance and reinsurance buyers of natural catastrophe, German industrial and cyber covers. Having paid massive losses from the European floods, together with pandemic claims, coping with low interest rates and rising inflation, the results of insurers and reinsurers are under pressure. Hannover Re said that in property and casualty reinsurance, there is a need for further rate increases.
Aon is not the only broker concerned with rate rises for clients. Guy Carpenter warned that large insurance and reinsurance industry losses from catastrophes and other major events are likely to be above $80 billion in 2021, and the $100 billion figure is easily in sight. GC sees the European flood losses reaching $11.57 billion, and Hurricane Ida will be between $25 billion and $30 billion. Some observers believe Ida is going to cost the industry $35 billion.
U.K. Covid claims top $1 billion
It’s taken some time, but insurers have paid $1.4 billion to SMEs who made claims for lost business income due to Covid-19. It took the U.K.’s insurance regulator, the Financial Conduct Authority, taking insurers to court, but eventually the claims were paid, and there is more to come.
Figures recently released by the FCA show that insurers made initial payments of $460 million for unsettled claims and final settlements of $974 million as of Sept. 5. There are a number of outstanding claims, which will increase the final sum.
New managing agency breaks away
To create a new Lloyd’s managing agency is extremely difficult as Lloyd’s protects its brand like a female wolf protects her cubs. As a result, many new capital providers start life at Lloyd’s simply by providing capital to the market, and then they set up their own managing agency using the turnkey structure.
The turnkey is an existing Lloyd’s managing agent which agrees to take the new syndicate under its wing. The turnkey uses its own Lloyd’s permissions, with the understanding that the syndicate will apply for its own Lloyd’s permission to set up as a managing agent within three to five years. This is all managed under a Third-Party Syndicate Management Agreement.
Dale Partners, the holding company of Dale Underwriting Partners, went through this system. DUP is an independent, owner-managed underwriting business which began trading in January 2014 when it formed Lloyd’s Syndicate 1729. The syndicate focuses on property/casualty insurance/reinsurance and expects to write $300 million this year. Dale Partners has been granted in principle approval by Lloyd’s to form its own managing agency. Its next move is to submit a business plan to seek regulatory approval from Lloyd’s, which it hopes to achieve sometime next year. At that time Dale Partners will leave the Asta Managing Agency which provides managing agent functions.
Syndicate in a box boosts capacity
Having lost one turnkey partner in Dale, Astra managing agency acquired another, following Lloyd’s giving in principle approval to the Oman Insurance Company to launch Syndicate 2880 under its new Syndicate-in-a-Box initiative. Oman Insurance Company, based in Dubai, is one of the leading insurers in the Arabian Gulf. It has 15 branches in the UAE, and caters to other Gulf Cooperation Council member countries such as Oman and Qatar. The syndicate will provide lead and follow capacity on regional and international facultative business. The syndicate will be managed by Asta on behalf of the Oman Company.
The syndicate will operate out of the Dubai International Financial Centre where Lloyd’s has an office and runs the Lloyd’s Dubai Platform. The deal is subject to the usual Lloyd’s regulatory approval. All being well, the syndicate will be operating for the 2022 underwriting year and will be the first syndicate to operate from Dubai. Lloyd’s Middle East wrote $939 million of premiums in 2017, the latest figures available.
Jean-Louis Laurent Josi, OIC CEO, said, “Our vision for Syndicate 2880 is to build a profitable business that will facilitate further growth of our international account and raise the profile of the Lloyd’s platform in the region. We are grateful to our partners in this venture, notably Asta as managing agent, Argenta Private Capital as members agent, Lloyd’s in London and Dubai, and the DIFC, for their help and guidance.”
London to remain leading financial center
People in the financial sector in the U.K. were hoping for a more relaxed relationship between the U.K. and the European Union after Brexit, but unfortunately, Europeans still see people in the U.K. as a group of rebels who need to be put in their place. The concern in London is that this might hit financial industries, such as banks and international insurance and reinsurance, but a recent survey suggests that despite uncertainty over regulation due to Brexit, most financial players believe London will continue to be a leading global financial center.
The survey is an annual event carried out by Lloyds Bank, one of the U.K.’s top banking companies, which surveyed over 100 banks, asset managers and insurers and found that more than two-thirds believe that London will remain a top center.
If there is a threat, it will come from regulatory change. EU insurers would love to get their hands on London’s business, and suggesting that EU insurers have better security is one way to do this.
If the rules change, the U.K. would have to decide whether or not to change its own legislation, something that Brexit was designed to prevent.
MGAs back in love with Lloyd’s
U.K. lawyers Clyde and Company organize an annual survey of MGAs who use the Lloyd’s and London markets. According to James Cooper, head of insurance at Clyde and Company, the survey shows that MGA confidence has staged a significant recovery from its pandemic low in 2020 and is at its highest level for three years. Over two-thirds of MGAs expect to expand carrier partnerships in 2022.
The popularity of the Lloyd’s market for MGA business was waning in 2019 and 2020. The 2021 survey shows a significant reversal. The Lloyd’s market is more popular than ever, with 47 percent of carriers believing that Lloyd’s provides the best environment in which to grow and develop MGA business, against the 12 percent who felt like that last year.
Lloyd’s still after wrongdoers
In days gone by, it was common to find items in this newspaper of wrongdoings by persons in the Lloyd’s market. There haven’t been many recently, not because Lloyd’s has stopped looking for wrongdoers.
A few weeks ago Gregory White appeared before the Lloyd’s Enforcement Board charged with discreditable conduct. White was a private client director for the Lloyd’s members agent, Hampden Agencies Limited. He was assisting in providing loans for Lloyd’s members who were clients of his employer. In return, White received commissions.
Under the terms of an agreement approved by the Lloyd’s Enforcement Board, White will be censured and will pay a fine of $134,426 and lose his permission, consent or right to transact the insurance business at Lloyd’s for 17 months. In addition, White will contribute $7,714 for Lloyd’s costs in bringing the proceedings.
Gallagher acquisition of Willis investigated
Takeovers in the U.K. are not always straightforward. The U.K. government has a competition regulator whose role is to prevent and reduce anti-competitive activities. The regulator has decided to investigate Arthur J. Gallagher’s proposed acquisition of Willis Towers Watson’s treaty reinsurance business which trades as part of Willis Re. The Competition and Markets Authority is to check on whether the takeover will result in “substantial lessening of competition within any market or markets in the U.K. for goods or services.”
With the January renewal season almost here and Gallagher anxious not to miss out on transactions, the market is concerned that the CMA will not be finalizing its decision until Nov. 29.
Gallagher originally announced its plan to buy Willis Towers Watson’s treaty reinsurance business in August, following the collapse of Aon’s acquisition bid for WTW as a result of U.S. authorities. Currently, the U.K. competition authorities are involved, and Gallagher has to obtain permission from U.K. regulators and from European and U.S. regulators.
The options for the CMA are to investigate whether or not the takeover will be anticompetitive, and then decide whether or not to make a full review, which can take up to six months, taking out most of this and next year’s reinsurance renewal seasons.
It’s not good news for Gallagher, which hoped its offer of $3.25 billion with an additional $750 million after three years based on revenue would allow the deal to close during Q4 2021. Now, Gallagher must wait to see when it will be able to trade and what any delay could cost in lost revenue.