Investment - Articles - PwC: London Market underwriting confidence down again?

 London Market insurers are, on average, assuming a net combined ratio of 98% for 2016 underwriting with one in four relying on investment returns to generate profits. Adjusting for planned investment returns reduces the market average net combined ratio from 98% to 95%, highlighting the limited benefit of cashflow underwriting in the current economic climate.

  

 There are also significant risk-adjusted premium rate reductions anticipated across most classes in 2016. This follows double digit risk adjusted reductions this year in the property reinsurance and energy classes, as predicted by PwC a year ago. The current market view is for these reductions to be compounded by further reductions of between 7-9% across these lines. PwC has observed a tendency within the market over recent years to underestimate rate changes in the current soft market. If this continues, we may see another year of double digit risk-adjusted rate reductions across property and energy lines.

  

 For the energy classes, the experience has been particularly acute for property related covers with actual risk adjusted rate reductions of 15% across onshore and offshore risks in 2015 - despite a number of large losses in the offshore sector during the year.

  

 Low oil prices, a key factor in the profitability of the offshore drilling industry, have reduced drilling activity and therefore demand for insurance cover. This has further reduced premiums resulting in overall reductions of near 30% in some sectors of offshore energy.

  

 Within property reinsurance, talk of rates ‘bottoming out’ earlier in 2015 appear to have been premature. There has also been pressure on terms and conditions relating, for example, to the hours clause and reinstatements in addition to further rate reductions. The pressure on rates in the property reinsurance and energy classes is forcing some reinsurers to redeploy capital towards casualty reinsurance despite anticipated average risk-adjusted rate reductions in this sector of 7% in 2016.

  

 For the third year in succession, the accident and health sector appears to be the most resilient against rate reductions with a market average rate reduction of only 1% anticipated in 2016.

  

 Harjit Saini, London Market director who led PwC's review, said: "(Re)insurer confidence and the general outlook in the London Market has been hit by year-on-year rate reductions in the property reinsurance and energy classes since 2013.

  

 “The cumulative effect of these reductions, combined with the anticipated risk adjusted rate reductions for 2016, imply that following 2016 renewals, on average (re)insurers will have cut premiums by 30% since 2013.

  

 “Anecdotal evidence suggests the actual outcomes in 2016 may be worse than expected. Underwriting discipline on new business tends to be weaker than on renewals in a soft market and therefore the true economic view may be worse.

  

 “Consequently, many insurers in these sectors are reliant on good risk selection to make a profit on underwriting in 2016."

  

 Jerome Kirk, London Market actuarial leader at PwC, concluded: “It is clear we are in the depths of a soft cycle when an average year will see a loss for many, the pace of rate softening increasing, broker facilities commonplace and questions raised on casualty reserves.

  

 “Recent claims experience has been anything but average and actual returns remain strong, meaning the insurance industry, and London Market in particular, remains an attractive investment for new capital.

  

 “In these conditions, (re)insurers will need to adapt to survive. Making the right decisions, whether strategic or individual risk selections, are fundamental and holding your nerve imperative. The path to success is increasingly based on sound data, insight and analytics which are fast becoming the key differentiators.

  

 “At a recent seminar I asked attendees where they thought they were in the insurance cycle and "depression, despondency and desperation" were the most common responses but there was mention of "hope". I think that says it all.”