The IG Group of P&I clubs looks set to achieve a high single-digit risk-adjusted rate (RAR) reduction in its market reinsurance costs, according to an Insurance Insider report. That percentage would sit comfortably with the conclusions of two reports released in the past couple of days, from PricewaterhouseCoopers and AM Best.
PwC’s latest review of London market conditions for 2017 said that underwriting confidence in the London Market continued to decline, although PwC anticipates that premium rate reductions in 2017 will be lower than the rate reductions achieved/suffered in 2016. With the 2016 reductions being lower than those of 2015, it can at least be said that, for reinsurers, things are still getting worse, but at a slower pace.
Given the ongoing rate reductions, it is widely being discussed that the 2017 rates are technically loss-making and profits will depend more than ever on imaginative use of capital and investment returns—a worrying thought at a time of low interest rate returns.
In energy classes the market view for 2017 is that average RAR reductions will be between 6% and 7% for energy and aviation lines. The offshore property risks of
energy operators looked set for significant falls – an anticipated RAR reduction of 8%. With average RAR falls of 14% during 2016 for risks in the Gulf of Mexico and 11% elsewhere, these classes do not look set to be technically profitable in 2017.
Harjit Saini, London Market director who led PwC’s review, said:
“The outlook for energy lines continues to deteriorate. For example, the majority of 2017 plans are unprofitable for the offshore property risks of energy operators.” He added: “More generally, we have observed questionable pricing information for many London Market insurers and this highlights the need for strong controls to be in place for monitoring new business profitability in particular”.
PwC observed that “market average risk adjusted rate reductions exceeded 25% last year for offshore property risks exposed to natural catastrophes in the Gulf of Mexico. It noted that market business plans include, on average, a 30% catastrophe loss ratio for this class. Catastrophes have been benign in recent years, but PwC said that “there are increasing concerns over rate adequacy, with the market average initial 2016 planned combined ratio being 100% after allowing for reinsurance”.
In cargo, PwC said its analysis highlights evidence that experience and rate changes are “not being appropriately reflected in pricing for these classes.” It was apparent in the cargo class with market average planned combined ratios of around 100% after allowing for reinsurance. This makes the business “wholly reliant on good fortune in claims experience and investment returns to make a profit.”
The proportion of binder business is expected to increase from around 40% in 2016 to 47% in 2017.
Jerome Kirk, London Market actuarial Leader at PwC, added:
“It’s tough to find positives, although the declining pace of rate reductions is one. However, counter this with the low expectations of the market and the outlook is still fairly bleak, something confirmed by Lloyd’s recently. The reliance on re-underwriting makes sense at an individual syndicate level but not at a Market level”. He said that “making the right decisions at all levels is crucial in such a soft market and market participants should focus on getting the right analyses, analytics and management information to support the business. Especially as our analyses at a Market level shows not everyone is going to get is right.”