2020 trends The London international casualty market is weighted towards companies located in Australia, Canada, the EMEA region and Latin America. Large capacity buyers in the oil and gas, power, mining, construction, and public sector/infrastructure sectors represent the bulk of the client base. Notwithstanding these higher-risk and catastrophe-exposed industry sectors, the London casualty market has been characterised by its long-term (often decades-long) client and carrier relationships, with stable or slowly softening pricing, where high quality and pragmatic claims service is valued equally to competitive terms and broad policy coverage. Against this normally stable placement landscape, the market hardening in the international casualty sector has felt like the biggest trend change of the four sectors reviewed in this report. However, in percentage terms, this wasn’t the case.
"The market hardening in the international casualty sector has felt like the biggest trend change of the four sectors reviewed in this report. However, in percentage terms, this wasn’t the case."
2020 placement data
Australian premium transacted increased
This is on a like-for-like client base but with 13% more contracts due to placement restructuring.
Canadian premium transacted increased
Rest of world premium transacted increased
The number of new firm orders to London increased by 7%, with quote requests increasing by 16%.
Fig 15: Primary layer adjusted rate change
Fig 16: Excess and umbrella layer risk adjusted rate change
Industries and occupations attracting the most change were the Australian power segment, oil and gas, mining, construction, and public sector, where loss history and capacity reductions had the greatest impact.
Each of these industry segments underwent new levels of strategic review by carriers, resulting in the withdrawal of capacity in some cases, with a knock-on impact on sectors' premium rate and coverage availability.
Single layers of programmes were adjusted, and the rate per million factors was brought to the forefront with readjusted rating at times of multiples of prior premiums. This was most marked in the Australian power segment, where certain layers were concluded at levels above the 200% increase point. These specific industry challenges must be taken into context when comparing to the more general market trends above.
Oil and gas and mining sector term changes were not as dramatic. Across these industries, there were still substantial changes to premiums and pricing across all layers on programmes as capacity looked to move to higher attachment points within placements. This change of preference meant increased client retentions and, in some areas, a reduction in total limits purchased.
"Each of these industry segments underwent new levels of strategic review by carriers, resulting in the withdrawal of capacity in some cases."
Drivers of premium rate change
Premiums for international casualty are calculated using a mix of rate on line, turnover, claims history, industry specifics, claims inflation, actuarial model developments, and competition dynamics. During 2020 the main drivers of premium rate change were:
- Updated underwriters’ actuarial models factoring in new prior-year loss deterioration estimates, limiting room for prior year reserve releases to bolster current year results.
- Overall premium pools at the start of 2020 were between 30% to 35% below where they were five years ago due to rate softening, with no meaningful allowance factored in for claims inflation.
- London carriers focused on performance improvement, simultaneously seeking a return to underwriting profitability against better alternative return options for capital in other classes.
Trends within the trend
Premium rate change has not been linear across primary and excess layers. The trends within the trends are as follows:
- Primary layers recorded the tightest change range, while excess layers the widest, with some power & oil and gas buyers experiencing mid and top layer increases of more than 200%.
- Over 40% of primary layer loss active renewals were finalised with both a deductible increase alongside the rate increase.
- Where carriers had cut capacity, often placements required five carriers to complete primary and excess layers, where in the past, a single carrier wrote 100%. Vertical pricing was a common feature of placements.
"Over 40% of primary layer loss active renewals were finalised with both a deductible increase alongside the rate increase."
Country and industry specifics
Australian placements for power companies seeking bushfire/wildfire coverage were completed with current limits when purchasing in the AUD 800 million to AUD 1 billion range. Some purchased lower limits, with an average of 10% reduction in capacity a median. However, one outlier was the largest limit purchased being a reduction in the market capacity commercially available, reducing the limit from AUD 1.5 billion to AUD 1.1 billion. This was also the largest limit, including local and global capacity. Insured wildfire losses have generally been much smaller in Australia than in the US, meaning that capacity remains available. However, underwriters are very focused on frequency and severity potential, litigation environment, and climate change as key topics. We expect this sector to remain event sensitive throughout 2021.
For Canadian risks, the most challenged industries were construction, public sector, and energy, where local market hardening picked up, and the London market saw increased capacity requests. Capacity was available if the pricing was considered attractive. Although, in some segments, buyers elected to self-insure shares vs paying what they perceived as over-inflated premium for capacity.
Mining risks with complex casualty risk profiles and more client-by-client structures than most other industries faced capacity reductions, with total per risk capacity dropping from USD 800 million to USD 650 million, with coverage for tailing dams dependent on the quality of risk information and risk management reputation factors. Latin American miners required additional work to complete placements, although the best managed secured the best results.
Oil and gas risks are highly bespoke, with the average 10% capacity reduction noted, translating into disproportionate challenges in completing programmes. Carriers were seen to leverage their positions by offering smaller lines on shorter layers, requiring more restructuring to complete placements. Pipeline and refining risks required high-quality risk information to secure optimum terms.
We anticipate a further reduction in international casualty capacity through 2021, although not to the levels of 2020. The capacity available from new entrants will balance up only part of the withdrawals. These carriers, such as Convex, have offered fresh capacity, but not in a disruptive way to undercut the market. This may change over time, but for 2021 we anticipate the trend for rating corrections to continue with risk-adjusted changes of between 10% to 15% to be the range average.
Policy coverage will continue to be tightened or, on occasions, traded off for lower premium rate changes. The blanket trend to exclude all pandemic risk has caused London some competition issues as we’ve seen that some European carriers remain silent in their wordings. However, this depends on industry and risk profile from client to client.
Figure 17 records the forecast 2020 maximum theoretical per risk capacity.
Fig 17: Forecast 2021 maximum theoretical per risk capacity