The London and European market is a major underwriter of US natural catastrophe perils as part of PD/BI programmes, with large market share (30% average) of global US windstorm and earthquake capacity, and the reason why many large US companies have a share of programmes placed in London.
London (inc Europe) US property placements usually form part of placements led off in the US and supported by Bermuda and Asia market. Aon’s London team is an arm of our US Property Practice that coordinates the global competitive dynamics valued by buyers. Based on Aon’s 2020 US Property team data, London premium transacted increased by 21%; client quote requests increased by 38%, and new client orders to London grew by 24%. Apart from Canada, the US recorded the largest increase in London market quote requests globally.
“Apart from Canada, the US recorded the largest increase in London market quote requests globally.”
Fig 10: Trading activity
London market shares of US programmes are on average between 25% to 35% of total placement capacity. With ongoing tightening in the US domestic market, this has edged up by an average 7%, with differentials across layered structures, where larger primary layer share increases were a notable feature. Figure 11 records the loss free and loss active rate ranges, and the median points of 22% and 33%, respectively. These are risk-adjusted rate changes allowing for (mostly) increased self-insured retentions, and why overall premium transacted is below these numbers at 21%.
Fig 11: US property accounts per risk rate change
2020 placement themes
The following themes offer some extra colour to the base rate increase story changes:
- Carriers quoted rate increases across the board, and for loss active accounts terms included an increase in deductible(s) for 24% of clients.
- Larger buyers with stable long-term London market relationships secured terms at the bottom end of ranges. Those with poor historic loss history, even in this preferred group, fared less well.
- There was no real shortage in capacity, and both total and natural catastrophe capacity were broadly stable (see appendix II).
- Carriers deployed this capacity more sparingly, often reducing the line size offered if the terms were not technically right, according to their rating models.
- There was slightly more capacity available in the primary layer areas, which were often over placed; this contrasted with middle and high excess layers where extra work was often required to complete 100%. Some clients cut back on the total capacity bought if the pricing was considered too expensive or the top EML had reduced due to economic reasons.
- Policy terms and conditions were tightened by most carriers; new pandemic and often cyber exclusions were applied to all placements (further on this on next page).
- Where US carriers offering 100% solutions withdrew capacity entirely, replacement programmes often required 30-40 carriers from the US, Bermuda, and London to complete.
London market per risk capacity
This includes European carriers accessed via London brokers and is the theoretical maximum – offered or available capacity will be less, particularly for the natural catastrophe perils. For example, USD 650 million was the most recent maximum on California earthquake we observed that clients were prepared to pay.
Fig 12: US per risk capacity
Industries, where revenue flows dropped significantly because of COVID-19, sought multiple retention and pricing options. Many decided to self-insure larger amounts to ride out the hard market and economic conditions. This included both primary and excess layer shares where pricing was thought to be too expensive. A number faced the acute challenge of weaker balance sheets that could not take additional risk because insurance losses could create banking covenant and cash flow issues. These deals required extra creative placement structures, with second loss caps and split peril aggregates, along with lower limits for non-core exposures featured.
Pandemic exclusions were applied across the board—clients who had made COVID-19 claims under their policies, which were disputed, increased placement complexity. Carriers looked to trade renewal terms for clarity on claims. Many of these situations are with lawyers and yet to be resolved.
There was a record number of 30 named hurricanes in 2020, of which 12 made landfall, as evidenced in figure 13 below. Most US landfalls did not hit densely populated areas in 2020, resulting in relatively low insured losses of USD 20 billion. California wildfire claims are currently estimated between USD 7 billion and USD 13 billion (source: RMS). The estimate for 2020 worldwide insured losses is USD 83 billion (Source: Swiss Re Institute), which is close to the 10-year average notwithstanding the increased windstorm activity, and these human and environmental disasters are becoming difficult to insure in some areas. (Natural catastrophe loss data is in appendix II of this report).
Fig 13: Number of US windstorms in the last decade
Source: Aon Re
US property 2021 and beyond
There is little evidence that sufficient new capacity or levels of profitability at existing carriers have been reached to turn the current hard market trend. We, therefore, expect rate increases to be near 2020 levels into the first half of 2021. There is a debate that after 13 quarters of firming terms, starting from Q4 2017, mid-year will be a tipping point, and some competition and levelling of rate increase could return. There are many factors at play, and a new unexpected dynamic may appear. However, based purely on capacity and current profitability, our best estimate is that the current market rate increased momentum will slow only gradually through 2021. The US and Bermuda market will have an influence and we could see a softer trend picture as a result. (See appendix III for new carrier capacity and capital raises.) One of the main reasons is we believe carrier underwriting discipline will hold up more than during past cycles. The reason for this is that many of the major global carriers still have profitability challenges in P&C, and Lloyd’s syndicates, who in the past have been the first in and out of hard market cycles, have much tighter oversight. The increased focus on performance management from Lloyd’s Franchise Board, where unprofitable syndicates were closed, is relatively fresh in the underwriters’ minds. Figure 14 shows the profitability of the US open market property direct and fac loss ratios. The years 2016-2018 mean it will take many years to recover, even after adjusting for natural catastrophe event timing. There are also many risk sectors offering much improved terms to attract capital.
Fig 14: Lloyd’s overall US open market property loss ratios
“Our best estimate is that the current market rate increased momentum will slow only gradually through 2021. The US and Bermuda market will have an influence and we could see a softer trend picture as a result.”
Greater numbers of US buyers took advantage of London and European capacity during 2020 to blend with that of US and Bermuda carriers. We expect most of these orders to stick in 2021 unless the US market softens unexpectedly. We also anticipate London market quote requests to remain at near-record levels as clients investigate their options. COVID-19 will remain a factor for the economy while vaccine programmes are rolled out.