During the last two weeks a number of Lloyd’s syndicates have withdrawn their capital from the London marine cargo market. Is this a sign of things to come or just momentary belly ache from years of over indulgence?
The recent withdrawal of these cargo syndicates only serves to reduce the overall supporting capacity but the major market leaders are still active and open for business, offering robust capital and solution driven products.
As recently reported, Lloyd’s has instructed its managing agents to provide quarterly reports and a remediation plan to improve the underwriting performance of the seven under-performing classes. These seven have a cumulative gross annual premium income of USD 6.4 billion. Cargo is one of these underperforming businesses.
The 2017 Lloyd’s marine loss ratio, of which cargo is part, reported a 122% loss ratio and cargo, as a stand-alone business, is reported to be closer to a 135% loss ratio. As a result, it is rumoured that 14 Cargo syndicates are under review by Lloyd’s, with some closer to possible withdrawal from the sector than others.
To put this into context, Lloyd’s as a whole reported a 114% loss ratio for 2017 which is approximately a USD 2 billion market loss.
In 2018, the London cargo market is seeing further market consolidation, with AXA buying XL Catlin for a staggering USD 16 billion and AIG buying Validus Re. This reduces the number of market leaders available which in turn restricts choice for clients. So with four becoming two we will, regrettably, see reduced market appetite and potentially consequent job losses.
With the return of underwriting discipline, we are seeing soft exits from specific product lines (tobacco and pharmaceuticals) and business from certain territories being affected by reduced appetite from market underwriters (LatAm but more specifically Brazil and Panama). Following significant losses, the auto sector has been experiencing similar re-engineering since 2017 and into 2018 which has created opportunities for brokers and clients active in this sector.
Commodity traders continue to see a tougher stance from the market, with insurers continuing to focus on misappropriation risks and how clients mitigate and reduce these risks. The market released two restrictive misappropriation clauses in March 2017 which in some form or another are now slowly being adopted by insurers.
The reality is, if we can demonstrate that a client has a robust and well developed due diligence process for new counterparts, (including financial checks, physical inspections and careful and regular monitoring and product segregation, where possible) then coverage can be maintained for misappropriation. For some clients who have underdeveloped processes in place, coverage is less readily available, if at all. The reported market losses for misappropriation are staggering, although insurers should recognise that some, if not most, are not yet paid by the market, due to ongoing, lengthy and sometimes expensive investigations.
The impact of this capacity shrinkage and market consolidation has to be managed carefully by claims brokers, as service and solutions need to be maintained to the high standards that Lloyd’s mandate on its managing agents.
We do not believe this is just a momentary market correction but this is the market redefining itself to safe-guard the long term trading future. Insurers are re-engineering parts of their portfolios so they can return to sustainable profit margins and so they can continue to offer product solutions to meet the demands of their clients.
How to navigate around this changing trading environment?
- Early renewal preparation, availability of detailed exposure overviews, including NATCAT exposures and strong risk management plans are now as important as ever.
- Strong market relationships with underwriters at both client and broker level.
- Working with well-established brokerages with diverse global cargo portfolios that will be able to weather the storm whether it is long-term or just a hefty guttural blow in the wrong direction.
The current market has presented broking challenges but JLT Specialty Cargo’s team has maintained its renewal client base and continued to grow and develop its portfolio despite the headwinds of trading change.
For more information please contact Jay Payne, Senior Partner on +44 20 7466 6236 or email firstname.lastname@example.org.
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