LMA warns on casualty reinsurance terms & conditions at Lloyd’s

by Artemis on September 1, 2015

The Lloyd’s Market Association (LMA) has released data which shows that the majority of casualty treaty reinsurance underwriters at Lloyd’s have concerns about the extent to which terms and conditions have been relaxed recently.

The data provides an interesting look at how the softening of the global reinsurance market has affected the way business has been underwritten in the Lloyd’s casualty market at recent renewals.

It highlights the fact that underwriters are facing pressure in most markets now, as the overspill of capacity from other lines has pushed reinsurers increasingly into longer-tailed lines such as casualty. It also points to a potential reduction in discipline among some market participants, as they look to gain access to signings and to maintain capacity deployment.

68% of casualty treaty underwriters said that they felt the Lloyd’s market risks repeating mistakes that have been made in the past, by offering more relaxed reinsurance terms and conditions.

The LMA warns that this could result in the Lloyd’s of London market “repeating the same mistakes that have placed the market in difficulty in the past,” according to its straw poll of reinsurance underwriters at Lloyd’s.

A huge 95% of those who responded said that they had seen relaxation of reinsurance contract terms and conditions in the international casualty market, while 39% said that they believed over half of those changes were having a material impact on the amount of exposure that underwriters assumed.

Also noted was a return towards the prevalence of differential terms across the market, as some reinsurers receive preferential terms for signings while others have to agree to relaxed terms in order to gain access to the slip.

The LMA’s survey showed that 71% of respondents believe that differential terms across a placement were becoming more prevalent at Lloyd’s. This is no surprise as the market splits into leaders and followers, with the following markets and smaller syndicates likely having to agree to more relaxed terms and conditions.

In terms of pricing in the market, the LMA said that most underwriters felt that casualty rates are nearing the bottom of the cycle, with most agreeing that pricing at these levels will not prove to be sustainable over the longer-term.

That’s particularly interesting in the context of relaxed or expanded terms and conditions, as it suggests the Lloyd’s market is underwriting casualty risks at price levels it does not believe can be sustained, but at expanded terms which suggest more risk than before being assumed at lower prices.

Given the softening conditions most underwriters were surprised that their clients weren’t buying greater amounts of cover in order to take advantage of market conditions.

As a result of the soft pricing and broader terms, the amount of non-renewed business increased as well. Two-thirds of underwriters said that they turned down more business in 2015 than in 2014, with broader terms and conditions cited as the main reason, followed by pricing and poor loss experience.

It’s interesting that broader terms have been the major reason for declining business in casualty treaty reinsurance, which makes sense given the longer-tailed nature of the risks. Where as in catastrophe reinsurance it is typically the pricing that caused contracts not to be renewed at recent renewals.

“This is a fairly informal survey but its results point strongly towards a buyer’s market in which traditional underwriter discipline is under considerable pressure,” commented the LMA’s senior executive for underwriting Patrick Davison.

“The growth in the prevalence of differential terms is particularly disturbing. These create headaches for the market’s back office and the efficiency with which claims in a subscription market can be managed. Differential terms might be one indicator that some reinsurers have concluded further amendments to coverage or retentions are unsustainable,” he continued.

“This view is supported by the clear perception in the market that the bottom of the cycle is approaching, as highlighted by the increasing number of underwriters declining business.”

The LMA’s surveyed members involved in casualty treaty reinsurance business during August 2015, with three-quarters (by gross written premium) of the international casualty treaty market in Lloyd’s responding.

The data is good evidence of the way the disruption in reinsurance markets has spread to areas that are longer-tailed and less commoditised.

The pressure faced by these, often smaller, Lloyd’s underwriters of casualty reinsurance treaty’s may not go away quickly either, as larger global reinsurers increasingly look to win that business from them.

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