The London Insurance Market is undergoing a period of change. The abundant capacity available in the softer market of previous years drove fierce competition between insurers, resulting in downward pressure on rates. However, a collection of factors has recently resulted in both an unpredictable marketplace and a broad shift in insurers' treatment of policy renewals.
The Lloyd's of London 2018 Review
The Lloyd's of London review was launched in 2018 in response to a £2bn loss (the first in six years). This was partly attributable to claims resulting from a series of global natural disasters, but it brought the wider question of Lloyd's syndicates' cost-effectiveness and profitability into focus. In practice, this has meant more scrutiny around business planning for syndicates and increased attention on under-performing areas of business.
Claims Activity
Claims activity has been the key driver for recent movements throughout the London market. Losses in the Financial Institutions insurance market are becoming more frequent and tend to be of high severity. This is driven by the evolving risk spectrum of insureds in this sector and the increasing complexity of financial instruments and transactional processes coupled with regulatory changes (such as the recently introduced Senior Managers Regime). Alongside these developments, the traditional barometers associated with litigation remain ever present, with this process continuing to be lengthy, complex and expensive.
Financial Institutions has historically been a competitively priced area of insurance, which has led to a small premium base for a line of coverage that can easily be affected by a few large losses. This has brought the profitability of accounts with a challenging claims history into focus and insurers are addressing this through premium, retention and coverage reviews. Furthermore, accounts that have experienced a high frequency of notifications are being scrutinised by insurers, with questions from underwriters increasingly concentrated on both the remediation of such issues and the strength of systems and controls. To aid premium negotiations it is now essential that insureds are transparent in their submission and willing to respond to insurer queries.
The Impact on Financial Institutions Insurance
The Lloyd's review and industry claims activity has driven a broad reduction in capacity throughout 2019 (which is expected to continue). This has brought an end to the annual premium reductions quoted in the insurance market of recent years. Market factors have pressured insurers to rate coverage on a case by case basis rather than sector by sector, meaning changes to an insured's risk profile have a greater impact on the renewal outcome. For underwriters, the review of overall books of business has dictated the premium increase required for each risk and the average capacity they are able to deploy per programme has been limited. As such, insureds are likely to see new markets participate on their programmes and the same limits of liability will probably be shared by a greater number of carriers.
While Financial Institutions insurance has seen changes as a result of this Lloyd's remediation, the impact has been less severe than highly distressed areas of business such as Marine and commercial Directors' & Officers' and Crime insurance. These lines of business have seen a mass exodus of carriers writing these coverages, which is not the case in the Financial Institutions market.
Predictions
We expect to see the market environment harden further over the next one to two years with increasing pressure on premiums and coverage. This highlights the importance of insureds' engagement with the insurance market and the growing need to provide submission documentation in a timely manner. By doing this, we can position our clients' business most appropriately with insurers who are able to provide the required capacity and allow time for extensive negotiations with those identified carriers.
As with any market movement there is always some inertia and this is the period we are currently working through. Once rates have stabilised, capacity will return to take advantage of the higher premiums on offer, however, it will be some time before this impacts insureds' premium spend.