MARKET UPDATESPECIALTY, PROPERTY & CASUALTY BULLETIN OCTOBER 2017
London property and business interruption insurance market updateIn our latest bulletin, we consider the insurance market results of 2016, particularly at Lloyd’s. We also look at the significant events of 2017 and how these have led to a tougher approach to pricing from some markets. We consider here, whether current market volatility is temporary or staying for the short to medium term future.
MARKET ENVIRONMENT PREVAILING PRIOR TO Q3 2017In recent years the London property and
business interruption insurance market
has been characterised by intense
market competition and falling prices due
to new capital inflows from alternative
capital providers. This has resulted in
downward pressure on premium prices
especially where standard cover is being
purchased in a transactional manner with
a willingness on the part of buyers to
change insurers’ year on year. This trend
having been reinforced by what can best
be described as an unusually long period
of relatively benign loss aggregation.
2016 was unquestionably a buyer’s
market with supply still far exceeding
demand. Stagnant interest rates meant
that (re)insurance continued to lure in
new capital with its typically high return
offering. At the end of 2016 JLT Re
estimated reinsurance sector capital
to be approximately USD 320 billion
(compared to premiums of USD 255
billion), a supply and demand imbalance
and a market awash with capacity.
Lloyd’s of London alone saw an average
of 7.5% increase in syndicates over the
three years prior to 2016 contributing
to this challenging environment and
ultimately leading to deteriorating returns.
Inevitably this was beginning to result
in push back on rate reductions in the
first quarter of 2017 (which at the same
time a year earlier was unheard of).
Insurer’s ability to further reduce prices
was becoming increasingly limited as
rates were in many cases already below
technical adequacy and therefore no
longer economically viable in the longer
term. In 2016 Lloyd’s posted a 97.9%
combined ratio, 7.9 percentage points
worse than in 2015.
2 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017
2016 COMBINED RATIO
ACCIDENT YEARPRIOR YEAR RESERVE MOVEMENT
CALENDAR YEAR
Reinsurance 102.3% (10.0)% 92.3%
Property 106.6% (3.2)% 103.4%
Casualty 102.9% (0.2)% 102.7%
Marine 108.4% (2.2)% 106.2%
Energy 106.4% (13.8)% 92.6%
Motor 108.9% 2.6% 111.5%
Aviation 106.9% (22.2)% 84.7%
Life 113.0% (2.6)% 110.4%
Source: Lloyd’s of London
Most of the factors behind this
deterioration matched the industry’s
general trends: higher catastrophic (CAT)
losses and major claims paired with
reduced levels of reserve releases which
more than offset a better underlying
performance. The true performance
in 2016 was additionally masked by
positive foreign exchange gains.
The rate of premium reductions was
therefore already moderating during the
early part of 2017 from the double-digit
falls that were typical just 18 months
previously and indeed even starting
to stabilise in some areas especially in
the reinsurance market (which would
inevitably start to feed through to the
retail purchaser in time). What was clear
was that reinsurance was propping up
the market with most other significant
lines losing money.
The sustained headwinds of modest
premium growth, low investment returns
and reduced reserve releases in an
environment of excess capacity had also
resulted in a number of important merger
and acquisition (M&A) deals reflecting
that difficult market conditions had
started to limit organic growth potential.
Towards the end of 2016 amid growing
incidences of reserve strengthening there
were already early signs of a pricing floor,
with some lines of business and regions
seeing rates stabilise for the first time
in years. Even the power sector, which
saw over USD 1 billion of losses to the
market in 2016, didn’t harden in the way
we would have expected as the continued
abundance of capital seemingly prevented
any meaningful increases in premiums.
*The combined ratio for the market and by
class of business is the ratio of net incurred
claims and net operating expenses to net
earned premium. The prior year reserve
movement represents the ratio of the surplus/
deficit arising on reserves set at December
2015 to overall net earned premiums in
calendar year 2016. The overall combined ratio
includes central adjustments in the technical
account in respect of transactions between
syndicates and the Society as described in
notes 2 and 8 to the PFFS (pages 55 and
72). The combined ratios and results for
individual classes of business do not include
these adjustments as the market commentary
for each class reflects trading conditions
at syndicate level as reported in syndicate
annual accounts. The underwriting results and
combined ratio tables include the results
of all life and non-life syndicates transacting
business during 2016. The results and the
net assets for life syndicates are not material
and have not been separately disclosed in the
profit and loss account and balance sheet. The
results for life business have been reported in
the segmental analysis, note 9 on page 73.
The combined ratio, the return on capital, the
investment return, the underwriting result and
the accident year ratio are considered to be
metrics which are consistently used to analyse
financial performance in the Lloyd’s Market
Result’s and/or in the Society Report. These
metrics (wherever used in the Annual Report)
are considered to be Alternative Performance
Measures (APMs) with further information
available on pages 196 to 197 of Lloyd’s 2016
annual report.
UNDERWRITING RESULT BY CLASS*
£M
Reinsurance 548
Property (202)
Casualty (146)
Marine (129)
Energy 59
Motor (103)
Aviation 71
Life (8)
COMBINED RATIO BY CLASS*
%
Reinsurance 92.3
Property 103.4
Casualty 102.7
Marine 106.2
Energy 92.6
Motor 111.5
Aviation 84.7
Life 110.4
Source: Lloyd’s of London
www.jlt.com | Market Update 3
NATURAL CATASTROPHE LOSSES DURING FIRST HALF OF 2017According to Munich Re a series of
hailstorms and tornadoes in the USA
dominated the natural catastrophe
statistics in the first half of 2017. A total
of six severe, large-scale thunderstorms
were recorded, each causing billions of
dollars of losses.
Worldwide natural catastrophe losses
from January up to July were however
still below average. Overall losses came
to USD 41 billion. The corresponding
figure for the first half of 2016 was
USD 111 billion; the average for the last
ten years USD 102 billion. Insured losses
totalled USD 19.5 billion (previous year:
USD 32 billion; ten-year average
USD 29 billion).
This said Lloyd’s announced that
pre-tax profits fell by almost 17% to
GBP 1.22 billion (USD 1.64 billion) for
the first half of 2017 despite it being a
benign period for catastrophe events
and large losses.
The property market is braced for a
significant ‘man-made’ claim from Merck.
The US pharmaceutical giant is preparing
to file a claim which the market fears
could be as high as USD 1 billion to
USD 1.5 billion owing to losses resulting
from the NotPetya cyber-attack, as
revealed in The Insurance Insider.
Given that the loss stems almost entirely
from business interruption, the quantum
at this early stage is highly uncertain, but
a range of market sources pointed to
estimates in the above range.
Profit before tax (2015: £2,122m)
£2,107m
Gross written premium (2015: £26,690m)
£29,862m
Combined ratio* (2015: 90%)
97.9%
Investment return* (2015: £402m)
£1,345m
Pre-tax return on capital* (2015: 9.1%)
8.1%
2017 HALF YEAR LOSS OVERVIEW (UP TO JULY)
• Total economic losses from
natural catastrophes in the
first half of 2017 reached
USD 41 billion (down from
USD 111 billion in 2016)
• Insured losses from natural
catastrophe events totalled 19.5
billion (down from USD 32
billion in 2016)
• 75% of insured losses emanated
from the USA
• Hail remains the largest driver
of storm losses
• The event which incurred the
highest insured loss was a
large thunderstorm in USA in
early May, costing insurers
USD 1.8 billion
• 350 relevant events were
recorded on Munich Re’s
NatCat database in H1 2017
• The second most expensive
event of H1 2017 was Cyclone
Debbie in Australia, with
total economic losses of
USD 2.7 billion and insured
losses of USD 1.4 billion
• Approximately 3,000 people lost
their lives in catastrophe events
in the first half of 2017 (the
lowest for 40 years)
• Energy losses reached
USD 1.64 billion by the end
of July 2017
• The largest power loss was
USD 42.2 million emanating
from Saudi Arabia
• H1 2017 storms are expected to
cost insurers approximately
USD 14 billion.
Sources: Munich Re, Inside Fac, Insurance Insider, Insurance Journal
“Worldwide natural
catastrophe losses from
January up to July were
below average. Overall
losses came to USD 41
billion. The corresponding
figure for the first half of 2016
was USD 111 billion.”
4 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017
MAN MADE
NATURAL CATASTROPHE
DATE EVENT COUNTRYINSURED LOSS (USD M) EVENTS ABOVE 25M
Jan-17 Major Fire at Refinery UAE 1000
Jan-17 Lost Oil Shipment - Refinery Shutdown Morocco 400
Jan-17 Offshore Well Blowout UK 79
Jan-17 Major Fire at Refinery Japan 125
Jan-17 Petrochemical Plant Fire Abu Dhabi 35
Jan-17 Major Fire at Refinery Ivory Coast 175
Jan-17 Coal-fired Turbine Failure Saudi Arabia 42
Jan-17 Apartment Block Fire US 36
Jan-17 Automotive Factory Fire Czech Republic 212
Jan-17 Riots Mexico 225
Jan-17 Chemical Factory Fire Finland 578
Jan-17 Wildfires Chile 890
Feb-17 Apartment Block Fire US 32
Feb-17 Petrochemical Plant Fire Canada 29
Feb-17 Fraud South Korea 100
Feb-17 Aquaculture Algae Bloom Loss Mexico / Chile 45
Feb-17 Petrochemical Plant Mechanical Failure US 32
Mar-17 Loss of Cargo Ship Korea 40
Mar-17 Oilsands Fire Canada 566
Mar-17 Apartment Block Fire US 25
Apr-17 Fire and Explosion at Fertiliser Plant Norway 46
Jun-17 Tower Block Fire UK 65
DATE EVENT COUNTRYINSURED LOSS (USD M) EVENTS ABOVE 25M
Jan-17 Severe Storms - Mississippi US 200
Jan-17 Multiple Tornadoes US 300
Jan-17 Windstorm Egon UK & Europe 248
Feb-17 Texas Tornadoes US 120
Feb-17 Extra-Tropical Cyclone Thomas / Storm Doris UK & Europe 280
Feb-17 Floods Peru 380
Mar-17 Cyclone Debbie Australia 1400
Mar-17 Severe Snowstorms US 125
Mar-17 Severe Weather - Midwest, Southeast US 500
Mar-17 Extra-Tropical Cyclone Zeus Europe 303
Mar-17 Texas Hailstorms US 300
May-17 Severe Weather - Plains, Mississippi Valley, Southeast US 125
May-17 Colorado Hailstorms and Severe Weather US 1800
May-17 Severe Weather - Midwest, Plains, Rockies US 700
May-17Severe Weather - Midwest, Plains, Mississippi Valley, Southeast, Rockies, Mid-Atlantic, Tennessee Valley
US 1200
Jun-17 Floods Canada 100
Jun-17 Hailstorm Paul Germany 455
Jun-17 Severe Storms - Midwest, Plains US 100
Sources: Swiss Re Sigma, Munich Re, Inside FAC
Sources: Swiss Re Sigma, Munich Re, Inside FAC
www.jlt.com | Market Update 5
NATURAL CATASTROPHE LOSSES SINCE 1 JULY 2017In sharp contrast losses in the second
half of 2017 have been dominated by
a series of major catastrophe events
occurring in a relatively short period of
time in particular Hurricanes Harvey,
Irma and Maria which made landfall
on a number of Caribbean islands
before turning towards the US causing
significant damage in the states of Texas
and Florida.
These losses have been supplemented
by Typhoon Hata (which made landfall
in the Pearl River Delta of southern
China battering Zhuhai, Macau and
Hong Kong), widespread flooding during
August across the Indian sub-continent
and a serious Earthquake in Mexico all
causing both loss of life and significant
property damage. Mexico’s Evaluacion
de Riesgos Naturales (ERN International)
has provided an insured loss estimate of
up to USD 4.8 billion for the Magnitude
7.1 earthquake that struck around
120km southeast of Mexico City.
Fitch ratings has warned that
catastrophe losses for the global
insurance and reinsurance sectors in
2017 will exceed USD 100 billion and
could reach close to USD 190 billion
on a pre-tax basis, which would be the
highest on record in a single year adding
that losses on this scale could weaken
capital at some (re)insurers and increase
the risk of rating downgrades.
Citigroup have warned that the recent
hurricanes could wipe out 2017
earnings for three out of Europe’s four
largest reinsurers, with the exception of
Hannover Re.
Lloyd’s meanwhile stated in its interim
report that “Windstorms Harvey and
Irma have caused significant damage
in the states of Texas and Florida in the
US and to a number of islands in the
Caribbean. It is currently too early to
reliably estimate the financial impact of
these loss events to the Lloyd’s market
given the level of uncertainty at this stage
of development. Our preliminary analysis
indicates net claims, after reinsurance,
to the Lloyd’s market in the region of
USD 4.5 billion” and adding that there
“remained a high degree of uncertainty
around the insured loss value for damage
caused by Hurricane Maria, and that the
marketplace had not yet quantified the
financial impact.”
Hurricanes Harvey, Irma and Maria will
have a particularly concentrated impact
on the property insurance portfolios
of the major Lloyd’s Syndicates since
35% of the revenues underwritten in the
Lloyd’s market as a whole emanate from
US and Canada.
6 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017
LLOYD’S CLASS OF BUSINESS BREAKDOWN BY REGION
US AND CANADA
OTHER AMERICAS
UNITED KINGDOM
REST OF EUROPE
CENTRAL ASIA & ASIA PACIFIC
REST OF THE WORLD
TOTAL FOR ALL REGIONS
Reinsurance 22% 70% 28% 29% 46% 62% 31%
Property 35% 8% 26% 20% 14% 11% 27%
Casualty 26% 10% 25% 22% 28% 10% 24%
Marine 7% 7% 6% 18% 7% 6% 8%
Energy 5% 2% 2% 4% 2% 2% 4%
Motor 3% 1% 11% 3% 1% 5% 4%
Aviation 2% 2% 2% 4% 2% 4% 2%
Total GWP 50% 7% 15% 14% 10% 4% 100%
LONDON PROPERTY AND BUSINESS INTERRUPTION INSURANCE MARKET ENVIRONMENT POST US HURRICANESFollowing hurricanes Harvey, Irma and
Maria many London based underwriters
have already been advising that, in
their view, a pricing floor has now been
reached and they are definitely now
expecting to see an uptick in their
reinsurance costs at year end in addition
to the costs of the losses that they must
now settle.
In view of this we have received
numerous indications from the London
property underwriters that the best they
will currently consider offering in terms
of rating will be flat to a small increase
where an account has run well and
does not include significant natural
catastrophe exposure. There is also an
increasing resistance developing against
policies of more than 12 months in
duration / long term agreements. Critical
natural catastrophe aggregate is getting
the greatest attention, becoming harder
to obtain and more expensive.
We are seeing many similarities to
1999 during which year the reinsurance
market also bottomed out following five
years of steep pricing declines that had
resulted from excess capacity, historically
low reinsurance rates, volatile equity
markets, stagnant premium growth,
lacklustre returns, a flurry of mergers and
acquisitions (M&A) activity and questions
about the future of the reinsurance
business model as a whole. The market
then experienced a period of rates
hardening triggered by the 9/11 attacks,
an equity market crash, a reserving crisis
and a succession of devastating land
falling hurricanes in the United States.
At this stage it remains difficult to predict
the longer term impact of the 2017
losses though it is clear that clients
and property brokers need to be aware
that the London property and business
interruption insurance market, and
Lloyd’s in particular, is definitely entering
a period of significant reflection. The
immediate market push is for increased
premiums but to follow are possible
amendments to risk models and reduced
aggregate available for critical natural
catastrophe exposures. Rate reductions
are looking rarely achievable in the
months ahead and possibly beyond.
In summary it is evident that many in
the Lloyd’s market are now looking to
achieve a greater return ‘from the many’
to contribute more towards balancing the
costs of “the losses of the few”.
THE LONGER TERMWhilst as mentioned above longer
term predictions cannot be made with
any certainty there is an underlying
expectation from some over increasing
frequency and severity of catastrophe
losses from the increasing impact of
climate change. In addition some expect
the greater complexity of businesses,
and higher levels of interconnectivity
between them, will inevitably fuel
a growth in the scale of business
interruption claims, especially from
supply chain interruption where just in
time management is now more than
often the norm.
Concerns about rising flood exposures
in particular are well documented and
reflected within the developments made
to the latest flood models. The results
from these models in turn could
impact on future risk pricing and
reinsurance costs.
Furthermore and ahead of a busy year
end treaty season, unlike in 2016,
reinsurance is bound to make a loss in
2017 and the likely increased cost of
treaty renewals will probably have an
impact on to pricing generally as we
move into 2018.
Source: Lloyd’s of London
www.jlt.com | Market Update 7
100
90
80
70
60
50
40
30
20
10
0
400
350
300
250
200
150
100
50
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Economic Loss (bn) Uninsured Loss (bn) Number of Floods
Num
ber
of F
lood
s
US
D (B
illion
s)
FLOOD - INTERESTING FACTS
Economic losses from European
flood damage are expected to
increase four fold to EUR 23.5
billion by 2050
Extreme floods, like those in
2013, are expected to increase
in frequency from 1/16 year
events to 1/10 years, while also
increasing in duration
The leading factor in increased
insured losses will be socio-
economic growth, with more
buildings being located in flood
prone areas
Climate change will also play a
significant role as heavier rain,
swells rivers and causes sea
levels to rise
Rising sea levels will
have a severe impact on
coastal flooding
These predictions are the
result of new modelling
techniques which recognise
the link between different river
basins, rather than treating
them independently
Low-latitude coastlines will be at
risk first; however sea level rises
of 10-20cm will put almost every
coastline at twice the risk
of flooding
Sea level rises make large
waves and storm surges
increasingly likely to
overwhelm coastal defences
As many as 670 coastal
communities in the USA may
become uninhabitable due to
the persistent flooding by the
end of the century.
NUMBER OF FLOODS AND LOSS AMOUNTS
Source: Munich Re
Sources: European Commission, National Geographic
8 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017
JLT provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference – using insight, intelligence and imagination to provide expert advice and robust – often unique – solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles.
Our Specialty Property & Casualty (SP&C) division has over 150 individuals based in London and Birmingham. We have enhanced focus on property and casualty programmes for complex, risk managed clients worldwide, with particular knowledge and experience in the following sectors: Power, Mining, Professions, Life Science, Transport, Food & Agri and Communications, Technology & Media.
Jardine Lloyd Thompson Group plc, incorporated and registered in England and Wales. Registered Office at The St Botolph Building, 138 Houndsditch, London, EC3A 7AW. Registered number 1679424.
© October 2017 275526
CONTACTS
CHRIS STEVENSONSenior Partner+44 (0) 20 7466 6210 [email protected]
This document is compiled for the benefit of clients and prospective clients of companies of the JLT group of companies (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property. If insurance and/or risk management advice is provided, it will be provided by one or more of JLT’s regulated companies depending on the territories requiring insurance and/or risk management advice. www.jlt.com
2011 THAILAND 16.0BN
2016 US – LOUISIANA 3.0BN
2013 GERMANY 16.0BN
2007 UK 2.9BN
3.4BN2016 WEST/CENTRAL EUROPE
2007 AUSTRALIA 2.3BN
2.1BN2010 US – MID ATLANTIC
2.0BN2010 AUSTRALIA
1.9BN2013 CANADA
1.6BN2013 US – NORTH EAST
TOP 10 FLOOD LOSSES (USD)
TOP 10 FLOOD LOSSES (USD)
350
300
250
200
150
100
50
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Natural Catastrophes Man Made Disasters
Insured Losses
US
D (B
illion
s)
Num
ber
of D
isas
ters
400
350
300
250
200
150
100
50
0
Economic Losses
Source – Swiss Re
Source – Swiss Re, Sigma Explorer
Flood events together with wind storm events are the two perils
where we see the biggest increase in frequency worldwide.
Source – Ernst Rauch, of Munich Re’s Corporate Climate Centre
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