General Insurance Article - 2016 London Market pricing conditions – PwC review

PwC has performed a review of the ‘poorly performing’ classes identified by Lloyd’s based on our own analysis, judgement and discussions with market participants to form a PwC market view of 2016.

 •Evidence of recent experience and rate changes not being appropriately reflected in pricing Casualty and Cargo lines
 •An ‘average’ catastrophe year would erode all profits for Energy offshore property risks in Gulf of Mexico.
 •Nature and distribution of Terrorism risk is undergoing material change amidst ongoing rate reductions for extreme risk exposures.
 •errorism premium growth has been outstripped by the growth in exposures to further highlight the ongoing rating pressure for this class.
 Casualty and Cargo classes: PwC’s analysis highlights evidence of recent experience and rate changes not being appropriately reflected in pricing for these classes.
 In May 2016, we observed often counter-intuitive material reductions in the booked, planned and priced loss ratios in the Casualty class of business for this year. These reductions are particularly acute when recent rate reductions are considered. The Cargo class faces the same issue, despite market average planned combined ratios being around 100% after allowing for reinsurance, which would make the business wholly reliant on good fortune in claims experience and investment returns to make a profit.
 Energy class: An area of focus for the Energy class is the offshore property risks exposed to natural catastrophes in the Gulf of Mexico where market average risk adjusted rate reductions exceeded 25% last year. For this class of business, the market includes on average a 30% catastrophe loss ratio within business plans.
 Over recent years, catastrophes have been relatively benign, contributing to favourable experience. Indeed, we understand one catastrophe model vendors' internal view of ‘near-term’ catastrophe risk has reduced in response to recent experience. In light of ongoing and double digit rate reductions over recent years (in addition to the effect from falling oil prices), rather like Cargo, there are increasing concerns over rate adequacy, with the market average initial 2016 planned combined ratio being 100% after allowing for reinsurance.
 Terrorism class: There has been a marked change in the types of terrorism events, as evidenced by recent activity across Europe. This has led to material uncertainty for (re)insurers over the frequency of losses, with implications for the ongoing appropriateness of current pricing and catastrophe models. This increased uncertainty further highlights the need for adequate business interruption insurance cover, albeit the changing nature of terrorism risk does require insurance products to adapt to deliver the desired protection to society.
 The Lloyd’s City Risk Index highlights an aggregated £98.2bn of global GDP, across 301 major cities, is at risk from Terrorism over a 10 year period between 2015 and 2025. The same study also highlights £294bn of global GDP is at risk from cyber-attacks, and we note the majority of corporates are under-insured on both risks across the globe.
 Given this backdrop, Terrorism premiums have grown over the past four years, fuelled by more than a doubling of premiums from a variety of delegated underwriting sources such as broker facilities, binding authorities and where (re)insurers chose to follow another lead underwriter
 PwC’s review notes that this growth has been outstripped by the growth in exposures and highlights ongoing rating pressure for this class, with overall market average risk adjusted rate reductions between 5 and 7% per annum since 2013 and, in particular, Excess of Loss reinsurance treaties (including the reinsurance of national pools) suffering the most with risk adjusted rate reductions near 10% last year.
 Regulatory pressure: With ongoing rate reductions in an already challenging London insurance market, the PRA has observed some counter-intuitive pricing trends in the London Market in their recent ‘Dear CEO’ letter. Lloyd’s also announced a ‘portfolio review’ earlier this year to increase scrutiny in the approval of 2017 syndicate business plans this year and there are clear signs from both London Market regulators of increased focus on market conditions.
 Following Lloyd’s managing agency submissions of high-level 2017 business plans in July, engagement with Lloyd’s over the coming months will be key to ensuring approval for 2017 plans.
 Historically, Lloyd’s has paid most attention to plans that include an increase in volumes or significant new classes. This year, scrutiny will further focus on Aviation, Cargo, Casualty, Energy and Terrorism lines, where premiums are expected to be flat. The review will focus on what Lloyd’s considers the poorest performing or most challenging classes based on an assessment of recent experience and premium rate reductions.
 Commenting on the findings, Harjit Saini, London Market director who led PwC's review, said: “With the boom in broker facilities and new entrants to the Terrorism market over recent years, pressure on rates has been significant for a class which has avoided major losses for many years. 2016 plans anticipate a combined ratio of 80% for the Market before reinsurance but this reward results in 1 in 200 combined ratio exposures which exceed 350% for many (re)insurers. The market needs to ask whether the reward on offer is worth the (extreme) downside risk and how they can adapt the product to better meet the needs of corporations and society?”
 Jerome Kirk, London Market actuarial leader at PwC, concluded: “It’s not surprising that Lloyd’s and the PRA have taken these actions given everything we are seeing in the Market. Our review points to a number of potential problem hot spots and numerous examples of the Market assuming a greater level of profitability than what may be supported by recent experience and rate changes.
 Regulators are sending clear messages and direction to the Market, and we encourage Managing Agents to heed the messages by looking carefully and critically at both their half year reserves, as well as ensuring they have the right pricing management information including bridging to reserves to avoid nasty surprises in terms of either financial results or regulator interventions.”

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