London property D&F rates surge amid US domestic scale-back

The London property direct and facultative (D&F) market is seeing a widespread pricing correction and a flood of new business from the US following re-underwriting efforts at major US domestic players including AIG and FM Global.

In the run-up to 1 April, which typically sees the renewal of major US accounts, sources in the London market said they were experiencing average risk-adjusted rate increases of 20 percent on renewal business.

Clean accounts are renewing at 10 percent up as a minimum, sources noted, while some loss-affected or hard-to-place business is set for rate hikes of 100 percent or more.

Meanwhile, Lloyd’s carriers in particular are seeing a stream of new business following significant exposure scale-back from major D&F players FM Global and AIG’s Lexington.

However, rate increases have not just been spurred by this withdrawal of capacity, but more of a wholesale change in sentiment on the part of underwriters, according to sources.

The performance drive at Lloyd’s and a renewed focus on profitability on both sides of the Atlantic are driving a mentality for D&F business to be re-rated – in a bid to reverse the damage done over the past five years of soft market competition.

US commercial property business rates first started to slip into negative territory in the second quarter of 2014, according to the Council of Insurance Agents & Brokers pricing survey.

Rates continued on a steady downward trajectory until losses from the 2017 North Atlantic hurricanes started spurring market correction.

One source went so far as to say that 2019 could be a “transformational” year for the D&F market, and virtually all of the underwriting sources canvassed by this publication said they expected upwards-rating momentum to continue over the course of the year.

Another senior underwriter expects the average rate increase on their portfolio to build to 25-30 percent by the middle of the year.

However, Lloyd’s D&F underwriters are having to perform a difficult balancing act, as they juggle the opportunity to capitalise on harder rates, with a more constrained view on the desirability of growth from the Corporation.

Power shift

The balance of power in renewal discussions has shifted firmly in the London market’s favour following the repositioning efforts at Lexington and FM Global in the property space.

As AIG management confirmed in a November conference call, gross property limits offered by the group have been slashed from $2.5bn to $750mn in a bid to reduce volatility and improve profitability.

AIG excess and surplus (E&S) lines unit Lexington is one of London’s largest competitors in the space, as the second largest E&S writer in the US after the Lloyd’s market.

As early as October 2018, broking sources were telling this publication that Lexington had started to offer smaller limits on renewal business.

Although AIG is scaling back its exposure to large-limit deals with big corporate clients, it is looking to redeploy the capacity and grow in other areas, including a major push within the SME market.

Meanwhile, FM Global has traditionally been known as a large-limit writer in property D&F, and often would write large quota shares and 100 percent of large excess of loss (XoL) layers on D&F placements.

While the specifics of the repositioning for FM Global have not been made public, sources in London said brokers were now coming to the London market in an attempt to fill the large voids left by withdrawals from Lexington and FM Global.

As a result, placements are being restructured by brokers to suit the subscription market model – moving away from large quota share placements and towards XoL structures with shared layers.

“AIG or FM Global would previously often write 100 percent of a $100mn line. That is hard to replicate in Lloyd’s and to be fair brokers aren’t trying to,” one source explained.

Rates on these harder-to-place accounts are also rising – sometimes astronomically – with brokers having to work hard to fill gaps left by the large US writers. One Lloyd’s underwriting source said he had declined one risk which had previously been 50 percent written by a single US carrier for it to come back to his box a few days later at five times the premium.

As one of the most challenged classes in London, the D&F market has seen its own wave of carrier exits in the past year. To this publication’s knowledge, at least 15 London markets have either chosen to scale back or withdraw from the space completely.

However, sources remaining in the market said the combined withdrawal of capacity from these exits alone was not enough to spur significant correction – particularly in comparison to moves from much bigger players Lexington and FM Global.

Nevertheless, the smaller number of operating D&F markets has strengthened the negotiating hand of those left standing. Similarly, fears that the company market would swoop in to grab available opportunity have largely been left unfounded.

While AIG and FM Global were the two most common examples of US domestic carrier drawbacks noted by underwriters, sources emphasised a general tightening in the US domestic market which was helping spur rate increases.

Chubb, Travelers, Everest and Ironshore were among the carriers highlighted by London sources that were still competing on business, but being more selective with the risks on which they chose to participate.

In previous renewals, the London market has largely had its hands tied by the more competitive US domestic market when it came to forcing through pricing correction. However, the notable change in sentiment from across the Atlantic has reinforced optimism that this upwards-rating momentum is more sustainable this time round.

Opportunity versus restraint

It is this tougher stance from the US domestic market which is both aiding D&F rate increases and triggering an unprecedented flow of new business into London.

One senior London underwriting source told this publication they had written more new business in the past five days than they had done in the past five years.

“The flow of business is better than what we have seen the past four or five years,” said another Lloyd’s underwriter. “If you wanted to grow in the last few years you would have to settle for sub-standard business. Now we have choice.”

That source estimated today’s pricing at a similar level to 2015 “when we actually made money”.

The Lloyd’s D&F market is coming off the back of a year where it was hauled over the coals by Jon Hancock and his team for its performance.

The property market at Lloyd’s – which includes binders business – ran a 127.6 percent combined ratio in 2017 following losses from the North Atlantic hurricanes. However, in 2016 the segment was already operating at an underwriting loss – at a combined ratio of 103.4 percent.

With Lloyd’s due to report 2018 financials on Wednesday, it is largely expected that the property market combined ratio will again be in excess of 100 percent.

Open market property was highlighted as one of the worst-performing classes in the Lloyd’s performance review, and came under intense scrutiny in the business planning process for 2019.

The performance management directorate’s hard-line stance on growth meant the D&F market entered 2019 with strict guidance on planned premium levels and the expected rate increases needed to write approved volumes.

As such, D&F and active underwriters at Lloyd’s are having to tread a fine line between capitalising on the rating opportunity at one of the biggest D&F renewal dates of the year, and not blowing their carefully planned budget.

“I have spoken to someone who said they couldn’t write a risk because it was paying too much and they were tight on budget,” one underwriter recalled.

Lloyd’s has given no formal indication to the D&F market that it has closed the door on mid-year pre-emptions for syndicates if the market conditions are sufficiently supportive. The Corporation itself also has a balance to strike in stopping too much capacity entering the D&F market the moment it starts showing signs of correction.

At time of going to press, this publication had heard of no concrete instances of applications to the Corporation for permission to write more business.

Many in the D&F market believe that those applications may be forthcoming after the 1 April renewal, when underwriters have another pricing data point to support their case.

It is thought that underwriting track record would play a large part in securing approval to write more business.

“There will be big questions about Lloyd’s and what it is for if the Corporation keeps the market artificially depressed in times of opportunity,” said one underwriter.

Underwriters are mindful that the rate increases achieved today will not remedy the “sins” of the past five years.

However, there is greater optimism that this rating uplift will prove to be more sustainable.

Those rate increases achieved in 2018 were largely a reaction to loss experience and were therefore patchy depending on geography and industry segment.

However, given that the rate hikes booked so far in 2019 are the result of wider market dislocation and change in sentiment, optimism is building that the market will see a sustained correction.

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