Posted in News on 20 Nov 2020
The current market cycle has its origins somewhere in late 2017. At that time, the protracted soft environment had started to come to an end, as natural disasters and various liability issues across all sectors started to highlight the simple fact that results could no longer withstand soft trading conditions. Various European insurance companies failed, Lloyd’s made a clear message about remediation and the market at large started to fall into line. The tide had turned.
Since that time, the delegated authority market has seen significant change. Irrespective of product line or territory, there has been far greater scrutiny placed on the profits that coverholders deliver for their partners. Risk selection, rate, capacity and commissions have all come under significant pressure, and will continue to do so throughout the next renewal cycle. Obviously, capacity is paramount among those and further contraction is expected in many sectors in 2021. UK and US domiciled business appear to be among the key areas of focus for the next renewal season.
This year, COVID-19 has added a further layer of complication to the market. As market-wide remediation efforts bite, the global pandemic has brought unforeseen and significant losses to the insurance market. This can be argued as a one off, unique event but it does also draw a curtain across the effect of all that hard work on remediation (1) - market conditions for underwriters appear to be the most favourable for at least 15 years, but this is being shrouded by COVID-19 losses.
As half year results emerge, we can start to see the effect of the market’s efforts to reverse the soft-cycle and restore profit. We can also start to see the impact that COVID-19 has had on the current year of account.
For the Lloyd’s market, half year results show that COVID-19 claims are adding 18.7% (2) to the market’s combined ratio of 110.4% for the first half of 2020 (3) - that would mean GBP2.4bn (4) in claims. Correspondence from Lloyd’s of London on the market’s half year results stated that, ‘excluding COVID-19 claims, the market’s combined ratio has shown substantial improvement at 91.7%, down from 98.8% in H1 2019 (5). COVID-19 has had a significant impact, but the underlying trend is well ahead of the prior year on a like for like basis.
Yet what does this mean in practice? We assume it means that the hard cycle we are currently experiencing will last for longer as the required result of it has been pushed further away - essentially COVID-19 will protract the cycle by at least one year. However, it does indicate that the underlying remediation work is having the effect that the market desired.
We are now at the time of year when the shape of 2021 renewals starts to become evident; business planning at Lloyd’s develops, reinsurer views are heard and the sign-posts for the next 12 months present themselves. What we are seeing right now is similar to the prior year insofar as the requirement for a good story on rate and ultimate portfolio profitability is concerned. In some sectors and territories, commissions are now deemed to be at more acceptable levels - but in others they are not. And we are still seeing some syndicates, insurers and reinsurers shuffling their pack and closing down some units to push capacity to others. The shift of capacity from delegated to open market business remains clear and whilst that shift will reverse over the cycle, for the medium term, this will add further pressure.
Another perspective to consider is geography. Some territories have not yet delivered the increases in underlying pricing or the reductions in distribution cost that the market require, and those will be more under the microscope this year.
Behind all of this, the truth is that this story is not at all bad - in fact the opportunity it presents for coverholders and Managing General Agents (MGAs) is considerable.
Coverholders who can harness current market conditions will make a step change in their own earnings as prevailing conditions deliver an improved rating environment, less competition, more new customers, and ultimately better results. Working in partnership with risk capital now can bring significant advantage. Yes, there are some short term challenges and the maths of pricing can often be blurred by the emotion of commission percentage points. Profit commissions will also certainly improve.
Some old capacity partnerships may need to be replaced with new ones, which can be a stressful process if coverholders are not sure what the options are and where to go. We see this a great deal as insurers exit a class or territory - identifying a suitable replacement in a seemingly shrinking market can be challenging. Many coverholders come to us to understand what the landscape looks like and what the options are.
This all leads to the question of what lies beyond the January 2021 renewal season? Certainly underlying trading conditions will remain favourable for carriers and as the COVID-19 issue becomes clear, we will start to see the full, annual impact of remediation, which should be significant. Outside of pandemic related claims, we should see insurer balance sheets looking far healthier and inevitably as a result more new capital coming in - a quick glance at the insurance press will reveal some well-known market names raising significant capital to bring to market. Read closely and you will see that these markets are keen to deploy that capital into existing vehicles, perhaps indicating how crucial timing could be.
Yet new capital will not enter the market with an aim to bring it down, so discipline will not be lost to competition in the mid-term and that brings significant opportunity for MGAs to consolidate existing partnerships and make profitable new ones.
For more information, please contact:
Chris Hardcastle - Managing Director
Alesco Delegated Authority
+44 (0) 7584609374
CONDITIONS AND LIMITATIONS
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at [16.09.2020], but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this bulletin nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your usual contact at Alesco.
(2) Lloyd’s of London 2020 Half Year Results. Market correspondence issued to the London insurance market by John Neal on 10-09-20.
(4) https://www.bbc.co.uk/news/business-54091653 and Lloyd’s of London 2020 Half Year Results. Market correspondence issued by John Neal on 10-09-20.
(5) Lloyd’s of London 2020 Half Year Results. Market correspondence issued to the London insurance market by John Neal on 10-09-20.