Underwriting confidence within the London insurance market leading in to 2015 has reduced compared to this time last year, according to PwC's latest comprehensive review. As insurers approach the 1 January 2015 renewal season, PwC's market view shows London Market participants are assuming an average combined ratio of 97% for 2015 with one in five materially reliant on investment returns to make a profit. The continued abundance of capacity has dampened possible rate increases and has led to substantial declines over the past year.
The only sector anticipated to be flat is Aviation, albeit this varies by coverage. Even for Aviation Hull War, where many insurers were anticipating significant rate increases in 2015 exceeding 30%, overall rates are now expected to be flat following Q4 renewals.
There is significant softening anticipated across most other classes in 2015, in particular Property reinsurance and the Energy classes (direct and reinsurance) where PwC's market view shows rate reductions in excess of 10% are anticipated across most lines. Interestingly, PwC has observed a general market tendency over recent years to underestimate rate changes.
Within the Energy classes, an abundance of capacity is placing significant pressure on rates. This pressure is particularly acute on property cover and is even apparent for onshore risk despite the occurrence of a number of large losses
Within Property reinsurance the combination of low interest rates, limited growth in the traditional insurance markets, declining margins, the influx of insurance linked securities and soft market conditions, mean that reinsurers are working harder than ever to attract new business. PwC predicts that mid-sized generalists could find it particularly hard to sustain investment and competitive relevance in this new environment.
Harjit Saini, who led PwC's London Market review, said:
"The continuing soft market conditions appear to be having an impact on insurer confidence and outlook in the London Market. Insurers are combating a cycle of rate decreases and changes to terms and conditions, which are increasing pressure on management teams. Such as, for example, the removal of the seven day notice cancellation for Aviation insurers in some instances). The sector, however, continues to deliver good returns because of the benign loss conditions and, indeed, rates on Catastrophe are still equivalent to the pre-Katrina levels, where the market was profitable. Also, in our view, Casualty rates are at levels above the 1998-2000 period of the last very soft market."
Bryan Joseph, Global Actuarial Leader at PwC, added:
“Many reinsurers need a radical re-think of where and how to compete. With prices low and direct competition from Insurance-Linked Securities, clients can afford to gravitate to a select panel of higher rated, often larger, reinsurers. This is leaving some of the smaller and less well rated counterparts in the margins. Fighting over the commoditised crumbs or hunkering down in the hope of a more favourable rating environment is not a viable strategy for survival in the current market. Unless the undifferentiated generalists change tack, it’s only a matter of time before they’re absorbed or squeezed out of the market altogether. The urge to merge continues to be pressing and our estimate of about 40% of companies being at risk of the squeeze continues to hold”
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