UK insurers faced motor reinsurance rate rises of 20% to 30%

Reinsurers were reluctant to provide UK insurers with financial institutions cover at recent renewals because of recent banking scandals, according to Guy Carpenter.

The reinsurance broker also noted that buyers of UK motor reinsurance were generally facing price increases of between 20% and 30%, and a two-tier market has developed thanks to the use of periodic payment orders (PPOs) to settle bodily injury claims.

Libor fixing

In its study of the 1 July renewals, Guy Carpenter said that in general, rates for UK professional indemnity (PI) reinsurance remained relatively flat as capacity stabilised.

However the broker added that financial institutions PI was the one exception. “New reinsurance capacity was not readily available, particularly for new entrants,” the report said. “Reinsurers remained very wary of the systemic and volatile loss potential inherent within this account and of the many ‘scandals’ that continue to hit the press – for example, Libor fixing.”

On 27 June, the UK and US regulators fined banking group Barclays a record £290m for manipulating the London Interbank Offered Rate (Libor).

D&O woes

Guy Carpenter also detected reinsurer reluctance to provide financial institution directors’ and officers’ liability (D&O) reinsurance.

“Reinsurers were cautious in their approach to financial institution D&O reinsurance due to the potential impact of the sovereign debt crisis in Europe and the scandals that hit the top banking institutions,” the report said.

It added: “For those accounts without financial institution exposure, reinsurance pricing remained flat with occasional rate reductions for those accounts without US securities exposure.”

Two-tier market

Guy Carpenter also noted the creation of a two-tier market in UK motor reinsurance thanks to the use of PPOs. Some reinsurers may only provide cover where the insurers fund the PPO liabilities, the broker said.

“Significant capacity remained, but there was evidence of a two tier market developing, with some programs potentially having to accept PPO capitalization clauses to ensure completion.”

Motor hardening continues

Guy Carpenter said UK motor reinsurance rates continued to harden following the reduction of excess-of-loss capacity, as seen at the 1 January 2012 renewals. It said rate increases were targeted in the layers of protection above the £5m mark, and price rises of between 20% and 30% were the norm rather than the exception.

Excess-of-loss reinsurance pays out once the client’s losses hit a certain point.

The broker added, however, that reinsurers’ appetite for UK pro-rata motor business, where reinsurers pay an agreed percentage of all of a client’s losses, remained strong, with reinsurers willing to accept profit margins in the 2% range to secure the business.