How Lloyd’s Underwriters Are Viewing Today’s U.S. Property Insurance Environment

By | November 12, 2020

While the COVID-19 pandemic has slowed business activity around the globe, for underwriters in the Lloyd’s market who were in the process of increasing property insurance rates when the pandemic hit, the timing may be auspicious.

Had the outbreak struck earlier than it did, the London insurance market would not be where it is in its campaign to re-establish rate adequacy and profitability, suggested experts during a recent segment in the “Tuesdays with Lloyd’s” virtual series with various Lloyd’s leading underwriters.

“I feel it’s very fortunate that it’s happened at a favorable point in the cycle for insurers. I think it would’ve been very difficult to achieve our plan in a soft market under the conditions, frankly. So I think we can count ourselves fortunate that it’s happened at this time,” said Ian Bridge, underwriting director and head of Property Insurance for Dale Underwriting Partners.

The “plan” is to attain underwriting profitability. The Lloyd’s market has reported a combined ratio above 100 in each of the last three years. Given this year’s seemingly relentless hurricane activity, this year could be the fourth in a row. The market did report an overall profit in 2019, its first since 2016; however its underwriting remained unprofitable, with a 102 combined ratio.

London must focus on the short tail lines of business to make an underwriting profit, and not rely on other areas.

“In my view, we’re still somewhat in recovery mode from the soft market,” Bridge said.

The “Tuesday with Lloyd’s” series is designed to help U.S. agents and brokers — and their clients— understand what to expect when they reach out to Lloyd’s in today’s market.

12th Quarter

Insurers actually began clawing their way back to profitability before the pandemic. According to moderator Rick Miller, some may not realize that this is the twelfth quarter of increasing rates.

“The period of time that preceded that was longer than that, where we saw rates going downward. But … we forget what we don’t want to remember,” said Miller, who is managing director and U.S. Property Practice leader at Aon Commercial Risk Solutions.

Derek Hanson, head of Open Market Property at Canopius, agreed that memories tend to be poor and the plan to continue increasing rates is both timely and necessary.

“We’ve quickly forgotten, it wasn’t that long ago we were doing rate decreases for consecutive years. It sort of felt okay at the time because it was only sort of 10, 15%, and because we were doing it every year, and by the time you get round to the next year, you’ve sort of forgotten you’ve been doing it for a number of years,” Hanson said.

According to Simon Jackson, head of Open Market Property at Beazley, it’s also important “to not consider property in isolation from the rest of the marketplace” where there is probably less potential in the short term for profit from investments and reserve releases on long-tail business as there was in the past.

Thus, London must focus on the short tail lines of business to make an underwriting profit, and not rely on other areas. “I think that’s going to be crucial for the broader marketplace in 2021,” Jackson said.

Jackson put his analysis in a broader context.

“I don’t think we as carriers should be ashamed to say, ‘We’re here to make some money,'” Jackson said. He said the debts and losses of the five-year soft market have to be paid now, even though this causes tension because insureds are currently under financial duress as a result of COVID.

He would urge clients to want robust carriers. “The endgame of insurers not making any money is the end of the insurer, and that’s not a good endgame. So when the years are good, allow us to make some profit, because there will be years, like we’ve seen, where we make significant losses.”

COVID Property Impact

While losses related to COVID-19 are mainly coming on the casualty side and do affect carriers financially, they do not directly affect property markets, except perhaps by contributing to the influx of more business into Lloyd’s.

As for the impact of COVID on property business into Lloyd’s, “I’ll have to say there’s really not much of an impact,” Hanson commented.

“[W]e’ve seen very little in the way of indemnity payments in respect of COVID, because there really was very little affirmative coverage, because we had very little appetite to write that kind of business,” noted Bridge.

That’s not to say there aren’t side effects.

“There is, however, an impact obviously for COVID in terms of the losses it’s putting into the insurance companies’ balance sheets. Now, obviously, that’s not coming from property; it’s mostly coming from contingency and some of the other liability lines. The impact is it’s driving a lot of business actually into Lloyd’s,” added Hanson.

Insurers are sensitive to the reality that many clients are in a place where insurance price increases are hard to accept.

COVID is just one of the drivers of business into Lloyd’s along with rate conditions, but “it’s led to an increase in flow, which is great for us because it gives us a chance to have a look at a broader market.”

Bridge added that carriers are beginning to see “an accumulation of fees” related to clients’ legal challenges of certain coverages.

The current Lloyd’s property market is not just about raising rates.

Jackson said insurers are sensitive to the reality that many clients are in a place where insurance price increases are hard to accept.

“So it might result in more focus on terms and conditions, which is fine by us, but we are cognizant of this tension,” he said. Underwriters “should never have a broad brush approach” to renewals — it should be very client specific.

He said that is what he is seeing. “When I look at the rate change across our portfolio, it’s really broad, and that tells me that we are treating our clients in the right way, based upon how they’ve treated us over the past, and their rate, how well rated they are in the first place.”

Bridge said today’s property market is also about clients retaining more risk such as through higher deductibles.

“One of the things that is a feature of the years of ’16, ’17, and ’18, talking about the results excluding catastrophe activities, the level of attrition that we’ve seen. And what we had to do in our plans is reduce this attrition,” he said, noting that one way of accomplishing this besides raising prices is clients retaining more risk.

Bringing down that level of attrition is important “so that we’ve got enough margin to run considerable catastrophe losses that we’ve seen in the last few years and in 2020.”

Today’s Lloyd’s market is also taking a second look at coverages.

“What we’ve seen in the soft market is all sorts of coverages creep in that it would’ve been our preference either to not gather them, or certainly not give the other levels of sub-limits that maybe clients are looking to forget. If clients are willing to look at some of their coverages, I think they perhaps might even find themselves with better renewals from a price perspective as well,” Bridge said.

Self-Insuring

With continued rate increases and the hardening of the market, a carrier syndicate runs a greater risk of losing part of its business when certain insureds decide to take part of the risk and self-insure.

Jackson acknowledged the situation as similar to what syndicates themselves face in trying to decide whether to buy reinsurance.

“I think, in many respects, I like it when a client takes risk because our interests become aligned, and I think that’s a good thing, be it through deductibles or co-insuring in the placement. I think that’s a good thing,” he said.

“The reality is we are sitting 4,000 miles away, and not everywhere in the U.S. is subject to SRCC challenges.”

However, it can become a concern when there is inconsistency from year to year, with an insurance purchase only in certain years and then self-insurance in certain years.

“That becomes somewhat of a one-way street, and I think as underwriters we like to offer continuity and consistency in our underwriting. But one thing in return is we like to see a continuity and consistency of purchase from our clients.

“I would encourage some continuity and purchase through the cycle,” Jackson said. “I think that drives better returns for an insured in buying insurance than trying to game the market too much, depending upon where they are in the cycle.”

Non-Modeled Losses

Miller posed a question about non-modeled or unprecedented perils the industry confronts, things that maybe underwriters would not have thought about. He cited the effect of the political climate and election in the U.S. as a possible example.

Jackson noted that recent civil protests in the U.S. might fall into this category, raising questions about whether Strikes, Riots and Civil Commotion Clauses (SRCC) should be used. SRCC provisions exclude damage from strikes, riots, civil commotions, lockouts, vandalism, and other political acts.

He stressed it is important to “not broad brush and tarnish everyone with concern over political unrest” and instead engage with clients to find out their specific situations.

“The reality is we are sitting 4,000 miles away, and not everywhere in the U.S. is subject to SRCC challenges. There are some places more so than others, so we just need to consider that, in my opinion,” Jackson said.

He said his team looks at such situations on a client-by-client basis in the retail and municipality space and asks them about measures they’re taking to reduce their risk. Where there are failures to do that, they may consider exclusionary language, deductibles, and other steps to mitigate that risk.

“Yes, it does give us some concern, but as a marketplace, I think we’re pretty good at not blanket throwing things out, and we have to take a more considered approach to the risk, and key to that is engagement with our clients and talking it through,” he said.

Bridge said that every loss seems to have a non-modeled element that results in a higher loss than expected and the list of non-modeled losses can be longer than the list of things that are modeled.

“They’re all different reasons as to why that happened. But I think the one thing I would caveat is that non-model loss differs hugely for each organization, vendor model, and region.”

He also offered that in a lot of cases — whether unmodeled losses by stalled storms, improper valuations, claims inflation or other forces — the gap is often closed after the lessons from an actual event are known, and then the vendor models catch up.

He said even with modeling, there must be “good old-fashioned” underwriting. “We get the opportunity to meet a lot of our clients and we get the opportunity to ask about valuation, enterprise risk management on supply chain, and their investment in their properties,” he noted.

Hanson added that while models are good at a syndicate or insurance company level of understanding exposure and how to introduce capital cost into that equation, they are not so good at individual risks and should not be used for that purpose.

“To me, that is not what we should be doing as underwriters, he said.

He dismissed the notion of one day getting to a “perfect place” where every single thing is modeled. “We’ll never get there. It won’t happen.”

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