A lot of clients saw higher rates, higher deductibles, and tighter wordings last year. What was behind it? 

CHRISTOPHER HICKS – LIBERTY SPECIALTY: The changes to many clients’ programmes during 2020 were the result of a prolonged period of global over-capacity. It led to significant price erosion, an expansion of terms and conditions, and a lack of differentiation between risks. As a result, the market as a whole has been unprofitable for at least five years. 

After years of poor attritional results arising largely from goods in transit, the California wildfires and hurricanes Harvey, Irma, and Maria in 2018 created sudden volatility through catastrophe losses to goods in storage. That caused the market to raise its rates tentatively. The trend was accelerated in 2020 in the wake of large risk losses and significant withdrawals of cargo underwriting capacity. Rate rises last year have gone some way towards redressing the long-term profitability challenge, but recent large losses show that the market is still a long way from sustainability. 

DAVID KIRK – CHUBB GLOBAL: I agree with all that. Premiums were barely covering attritional claims after the cumulative rate reductions of the past ten years, let alone the catastrophe losses. We continued to see corrections by cargo carriers in 2020. 
 

Christopher mentioned capacity withdrawals, but we are now seeing new capacity, and some existing participants looking to grow. How will this impact the market? 

DAVID: As the market starts to see improved terms, capacity will return. This benefits clients looking to achieve larger limits, and carriers wanting to spread their positions over risks and layered programs. However, the market is still on a journey to achieving sustainable pricing, so I don’t expect an immediate counter-effect of new capital on pricing or conditions.

CHRIS MCGILL – ASCOT: Nor do I. New capacity is never a surprise, but it doesn’t necessarily come with underwriting expertise, or, importantly, the ability to lead business and settle claims. We saw new entrants with poor discipline during the soft cycle, but I believe that this time round the new entrants will have better discipline, and are more focused on following business. Their premium growth targets vary quite significantly, but I don’t anticipate they will pursue them at the expense of the bottom line. 

How can clients best manage these market conditions, and present their risk in the best possible light?   

HELEN STEADMAN – AXIS CAPITAL: They need to choose a good broker! A good one will keep them up to date with the latest market conditions, and manage their placement expectations. The market is hardening, as Christopher just explained so well, but clients need to understand why. A good broker will explain all that, then distil each client’s data into concise and accurate presentations which will enable underwriters to make sound judgements. 

CHRISTOPHER: Providing the information early is vital, since underwriters appreciate openness. And it’s prudent to expect further investigation, and to anticipate the need for action, in case issues are identified. Carriers value clients that show the flexibility and creativity to explore different coverage options or retentions, because it gives us increased scope to find the best solution.

DAVID: Providing as much information as possible is critical for a risk even to be considered. It allows brokers to assess the risk in the first instance, then to direct the enquiry to an appropriate market for terms and conditions to be set. Underwriters look for clients with a clear understanding both of their risk, and of how they mitigate against exposures. They will set a risk-adjusted premium that’s adequate to sustain long-term, profitable performance. Longer-term behaviour also plays a role: we’ve seen clear differentiation in pricing changes for those clients who have pushed for year-on-year rate reductions, versus those who accepted more stable, exposure-based rates. 

CHRISTOPHER: Exactly. Relationships built with carriers are hugely important, and it’s not too late to begin building them. Clients with long-term renewals who have taken time to meet underwriters and explain their business and challenges are treated differently to those who haven’t. Underwriters have shown they are keen to work with long-term clients to smooth the transition over multiple renewals, rather than impose it all at once.

Christopher, you mentioned meeting with underwriters. One of London’s strengths has been face-to-face trading. Has Covid-19 changed the broker’s role?  

CHRISTOPHER: It’s become even more important. The transition to trading electronically means brokers have to work harder to differentiate their clients by highlighting stand-out areas of the business and its risk controls. Additional information demands mean brokers have to sift and organise far more comprehensively to make sure risks are considered fairly. And, as I was saying, clients who invest in their insurer relationships may see more favourable renewal terms, so brokers are increasingly facilitating contact between carriers and insureds virtually to maintain and build relationships.

On the practical side, large, complex, or difficult risks have proved particularly challenging to shift to electronic trading, so we’ve seen a movement towards a hybrid model combining the best of the traditional London approach with what we’ve been learning during the past nine months. At Liberty, our Virtual Rooms platform facilitates video meetings that give brokers easy access to underwriters, and replicates the face-to-face discussions necessary to understand and price complex risks.

HELEN: Brokers must now decide from the outset which underwriters they want to work with, rather than walk the floor of Lloyd’s to see who might be there. Without set underwriting hours, and with many people juggling work and family commitments, they have become more focused in their approach, booking times to discuss risks. The fundamental role of conveying the clients’ needs to underwriters is still being done, just in a different way. 
 

Following the civil unrest in the US last year, some all-risk underwriters have questioned whether cover for strikes, riots and civil commotion (SRCC) is better suited to a specialist market, such as terrorism. What are your thoughts?  

BEN FARLEY – FIDELIS: Civil unrest is a growing issue in several countries, with retail locations and urban buildings being the main targets. Our preference is for SRCC risk in these areas to be covered in the terror market, where it can be underwritten and priced by experts who monitor the changing social and political environment closely. It is here where damage can arise from proximation to the original target building as unrest unfolds. That risk factor is reduced for more remote industrial sites, which tend to be some distance from the traditional centres of unrest, and more spread out, so we still consider providing SRCC cover within our cargo book for goods stored in out-of-town areas. 

CHRIS: This peril deserves to be underwritten by terrorism or SRCC experts who can offer clients a long-term solution. During the soft market, SRCC coverage was included in almost all marine cargo policies, but ignored in the pricing process. With the exception of recent riots in South America, the peril hadn’t reared its head in North America since the LA riots, but following riots in the U.S. last year, and the losses paid in the retail space, underwriters reviewed the coverage. Since then we have had successful renewals with a package product offered in conjunction with our terrorism team. Looking ahead, given the rise of populist governments, it’s possible that we could see more SRCC events in the medium term, whilst the divisions these governments have created are healed. 

After 29 named Atlantic storms in 2020, is the market pulling away from providing full catastrophe limits? 

CHRISTOPHER: The ability to offer large catastrophe limits is a key strength of the subscription market. I cannot see it voluntarily pulling away from offering full limits, but some insureds may consider themselves over-insured, and choose to buy less cover, which almost always brings premium relief.

HELEN: As Christopher says, the capacity is there, and as we’ve discussed, new capacity is entering. It’s the cost of it that has led some clients to reduce their coverage. Capacity comes at a price in more cat-prone areas, so some clients are opting to buy sub-limited cat perils, or taking higher retentions. We’ve also seen movement towards aggregating more catastrophe perils than before, as the market experiences more event activity. Aggregated perils now include all windstorm, rather than just named windstorm, and in certain areas we are seeing wildfire aggregations.

A lot of people see the London Market only as Lloyd’s. Can you shed some light on the company market? 

BEN: London has always been known as the place where diverse and niche risks can be placed. Lloyd’s and the company market can be viewed interdependently to this extent. As a company market, our move into cargo was born of our recognition that some clients were finding it more difficult to obtain cover. We’re not subject to the Lloyd’s risk-code system, and we work collaboratively with a joined-up underwriting approach, so we can provide relevant solutions quickly for those niche risks, even when they don’t fit neatly into one class. Equally, companies are part of the fabric of the market, for example by leading change. Work by Fidelis to drive broader social and behavioural changes includes the development of our Forced Labour Clause, which has been widely adopted across the cargo market.

DAVID:  At Chubb, we have within the same underwriting team the ability to write either on Lloyd’s or on company-market paper. It allows our clients and brokers to choose the security that they wish to utilise. Cyclical changes within any product line are invariably felt across the London market, so we’ve seen little need to differentiate our underwriting strategy. 

Many underwriters’ minimum premiums typically mean open market business needs to pay upwards $100,000. Is London still competitive on smaller business? 

CHRIS: Yes! SME business is very important to the London market. It provides balance to insurers’ portfolios, allowing them to take on the heavy catastrophe-exposed and volatile business we talked about earlier. In partnership with Beazley, we set up the A2B consortium in 2019 to ensure that London has a consistent and reliable solution for smaller-premium business.

DAVID: The need and desire to serve our clients, large and small alike, remains. We’ve developed a specific strategy to allow smaller business to flow into London, to be placed as efficiently as it has been in the past, and without a barrier of minimum premium levels.
  

What do you predict for 2021?

DAVID: A London market that remains as open and willing to underwrite, even in the midst of the pandemic. Clients should expect a continued drive to improve underwriting results through a combination of a requirement for improved submission information, conditions set appropriately for the risk size and premium spend, and premiums at an appropriate risk-adjusted rate to enable long-term sustainability.

CHRISTOPHER: I envision further contraction of capacity in 2021, as weaker or smaller carriers withdraw from the market, and a flight to quality occurs as clients’ partner with larger, more stable insurers. Despite that, though, the market is likely to be more orderly as carriers generally completed refining their appetite in 2019 and 2020. 

HELEN: I also think corrective action is still required. Results are still not back to tolerable levels, which means pricing and the remediation actions that we have all seen in 2019 and 2020 will continue, but after two years of correction we will likely see the severity of those underwriting measures reduce. New entrants will also dampen down the sharp increases that we have been seeing recently. The continued focus on cat perils and aggregation is likely to stay, because underwriters need to limit their downside. But the market must get back to sustained profitability, so underwriters’ increased discipline in terms of conditions, retention levels, acquisition costs, and line-size will remain.

BEN: We will continue to see increased rating, along with amendments to terms and conditions. We will certainly not move away from our ability to provide bespoke coverage. Rather, we are looking to ensure that we provide appropriate coverage for the risk, and price for it accordingly, as David said. Although we have seen this trend in previous years, there were several large market losses in 2020, and coupled with increasing frequency and severity of extreme weather events due to climate change, means there is still some work to be done in achieving rating adequacy in an ever-changing environment. 

CHRIS: I too hope we will see the return of some face-to-face underwriting and business travel! 2021 will be a more predictable market for brokers and clients, but as Ben says, there’s still some correction required on underlying rating.

Thank you all for such an interesting insight into your market.