The London property market - sometimes referred to as the ‘direct and facultative’ (D&F) or ‘primary’ market - continues to see rate increases in 2019, as insurers seek to return to profitability.
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Whilst the treaty reinsurance market is running at a five year net loss ratio (NLR) of 75% 1, the D&F market for the same period is running at a loss ratio average which is comfortably in excess of 100%, with the 2017 net loss ratio at 225%. Despite these being different markets, Gallagher has in previous years seen how rate changes are reflective and interlinked - even if the quantum does not sometimes quite match the direction of the rate movement.

What clearly is occurring at the present time is that D&F market is generally obtaining greater rate increases than the treaty reinsurance market, as one market is operating in a profitable cycle and the other is not. The 1/1 treaty renewals1 saw the treaty market remain relatively stable in terms of pricing and capacity, although those cedant(s)/ reinsured(s) with losses to specific layers have seen increases in their programs for some product lines.

Retro insurance market sees increases influencing reinsurance price increases during 2019

Some carriers also buy an aggregated product from the collateralised part of the ‘retro market.’ This market experienced back to back losses during the last two years - largely as a result of the ‘HIM’ hurricane losses in 2017, and the wildfires and other global natural catastrophe (‘nat cat’) events of 2018. As a result, the collaterialised markets currently have a significant part of their capital ‘trapped’ as they await notification and payment of losses. This market is therefore demanding significant increases, which will likely have an impact for those carriers renewing their treaty reinsurance programs at 1 April and beyond.

An ongoing hardening of the market

After years of sustained compound rate reductions, in Q4 2017, the market began to harden abruptly, following after the unprecedented series of natural catastrophes which occurred during Q3 2017. For the first time in many years, we saw rate increases for the majority of major client renewals.

Whilst reinsurance cost is one factor that impacts pricing decisions, underwriting performance and profitability is of course a major influencer. After three years of losses , property insurers are now taking remedial measures to adjust their own strategies, with the output of a robust underwriting plan (including actuarial input for 2019) aiming to achieve sustainable profit going forward. This has resulted in greater market selectivity on risks, as some insurers cease to write risks in under-performing classes and territories. Others will be looking for improvements in terms in those same classes and territories.

The impact for buyers

The renewal market of 2019 will pose various different challenges for buyers, although much will depend on the precise risk profile and characteristics of the each individual client. Broking-houses with under-performing business are unlikely to be able to obtain the same renewal results as seen in previous years. Those insurance brokers that are likely to be best placed to weather this storm will be those with a diversified portfolio of clients and that have continued to invest in talent since Q4 2017; bolstering teams with senior brokers that are accustomed to dealing with insurance market cycles, and adding headcount to ensure that clients are kept abreast of market changes and delivering quality service. Inevitably, long-term ‘core’ clients will continue to attract the best terms and capacity.

Top tips for buyers
  • Engage with your broking teams early; as insurers switch their underwriting strategies, risks that we previously reviewed and handled quickly may now be referred ‘up the chain’ to senior underwriters. The renewal process will take longer as a result, so the earlier the process is started, the better.
  • With more insurer selectivity in the London and European insurance markets, clients must seek to differentiate their risk as much as possible. Your London market broker can guide you on this; but clear presentation of the risk and timely submission of information will help smooth the renewal process.
  • Consider the full breadth of the market and explore all options. While some markets are being more selective than others as they seek to return to profitability, others will be seeking to capitalise on current market conditions and will be seeking to gain market share. Your broker will be able to guide you on the suitability of each carrier.