London Market underwriting confidence down again – PwC’s London Market 2016 outlook

Published at 11:52 AM on 16 December 2015

  • 1 in 4 London Market insurers will be reliant on investment returns to make a profit in 2016
  • Average net combined ratio of 98% for 2016 underwriting (reduced to 95% when adjusted for planned investment returns)
  • Premiums cut by 30% since 2013 on average Property reinsurance and energy classes

Underwriting confidence within the London insurance market continues to decline at an alarming rate, according to PwC's latest review of market conditions for the coming year.

As insurers approach the 1 January 2016 renewal season, PwC's research shows a number of London Market participants anticipate further premium rate reductions of greater than 10% across some lines.  Despite the assumed rate reductions, senior insurance executives in the market, influenced by recent market profitability and the desire to avoid plans which imply a strategy of cashflow underwriting, are generally not reflecting these reductions in their planned combined ratios for next year. 

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.”

Ends                                                                                  

Notes to editors

  1. PwC performed a review of 2016 underwriting expectations based on our own analysis, judgement and discussions with market participants to form a PwC market view of 2015.  This view is based on analysis and/or discussions with over 30 London Market participants.
  2. Jerome Kirk and Harjit Saini are available for interviews. Please contact Ellie Raven on [email protected] or +44(0) 207 804 3663.

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

©2015 PwC. All rights reserved

 

Ends.


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About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2016 PwC. All rights reserved

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