Miles Trotter highlights the key rating trends in the main business areas of Lloyd's.

In September 1999, SBW conducted its most recent rating survey at Lloyd's. It asked underwriters to complete a questionnaire, providing data for analysis. This analysis does not take account of underwriting profitability; the current rating level is simply measured against a fixed benchmark, to help ascertain what stage of cyclical development any class or sector has reached at any point in time. In SBW's survey of Lloyd's underwriters, the rating level in 1993 is used as a benchmark and the results are summarised in the graphs that appear below for each of the main sectors of the market.

The survey shows that competition continued to force rates down for all the main aviation classes in 1999. When it was conducted, airline rates were still under pressure and premium increases were only achieved because of increased exposure or for accounts with poor experience.

Over two-thirds of airline business renews in the final quarter of the year, after the survey was conducted. More recent news from the airline market is hardly encouraging, with the trends observed in 1999 having persisted through the renewal season. EgyptAir received an increase of over 160% in its premium following the crash of flight 990 at the end of October but, to date, the crash has not led to a more general increase in pricing levels.

The survey also showed that products liability business continued to deteriorate in 1999, often due to increasing discounts. General aviation is also weak although underwriters report greater stability recently. When SBW conducted its ratings survey in 1998, space underwriters expected rates to begin to edge up in the second half of the year. It is now clear that this recovery did not materialise.

However, there is some evidence that space risks for the 2000 year of account have been receiving increases. Aviation war is the sector's most competitive class and rates are now less than one third of 1993 levels.

There has been a succession of serious aviation losses recently. In addition to the EgyptAir loss already mentioned, at the end of 1998 there was the Swissair flight 111 loss. China Airlines lost a MD-11 in August last year, when it crash landed during a typhoon at Hong Kong's new airport, and Korean Air has had several serious losses, including the recent loss over the Christmas period at Stansted. All of these have occurred during an extremely “soft” phase in the rating cycle.

Despite the parlous state of the aviation market, it remains uncertain when underwriters will be able to impose “across the board” rate increases. The problem is that, although there is recognition of the need to increase rates, the sector continues to be plagued by over-capacity. Any reductions in capacity as a result of companies withdrawing from the market have been countered by new entrants starting up aviation underwriting operations.

The marine market is the most competitive sector in Lloyd's and, for most classes, 1999 began with further rate decreases. Rating levels declined relatively sharply in the marine hull, energy and marine war markets. Decreases also continued for liability, cargo and specie business, traditionally more stable markets. Marine excess of loss is the only class where rate reductions have not been widespread. Progressively more business in the excess of loss market was renewed “as before” and underwriters began to report some increases, particularly in the retro market.

This may be an early precursor of improvement in the marine sector as a whole because increased reinsurance costs will ultimately feed through to the direct market.

More recent news from the 1999/2000 renewal season remains gloomy. Although underwriters are increasingly uncomfortable at current rating levels, there has not been a sharp correction in rates. At the September conference of the International Union of Marine Insurance (IUMI), there were predictions of harder market conditions from mid-2000 at the earliest. Certainly, the market has been held back during this renewal season.

An important factor has been the number of contracts now written that exceed the conventional one year period. Peter Chrismas, hull underwriter at Wren syndicate 735, has estimated that 90% of category 3 and 4 fleets (the larger fleets) are now insured under long term contracts.

As with the aviation market, the soft market conditions persist against a background of worsening loss experience and poor performance. At the end of 1998, marine underwriters warned that marine casualty experience could deteriorate dramatically. Preliminary information indicated a sharp worsening in casualty figures in October, with hurricanes and typhoons causing extensive damage to ships and cargoes. It is now clear that the number of total losses in 1998 will far exceed 1996 and 1997.

Both the Lloyd's Underwriters' Association (LUA) and International Underwriting Association of London (IUA) have issued statistics showing the weak condition of the marine market in London, caused by falling premiums and rising claims costs.

Trevor Hart, underwriter of syndicate 62, has stated that, if incurred but not reported loss (IBNR) is added to marine hull figures issued by Lloyd's, then the market gross loss ratio for 1997 would be about 130% and 150% in 1998. Pricing problems have not been confined to Lloyd's and the London market. The American Institute of Marine Underwriters (AIMU) and Norway's Central Union of Marine Underwriters (Cefor) have also released poor figures, particularly for marine hull insurance.

The UK motor sector at Lloyd's is the only market where underwriters are consistently imposing rating increases. There have been some quite dramatic increases in fleet rates. The private car market has continued its gradual recovery but some underwriters believe that underwriting losses will still be produced despite rate increases. Motorcycle rates improved at a faster rate in 1999, having been relatively flat in 1997 and 1998. In a recent report, analysts in the actuarial consultancy firm, English Matthews Brockman, indicated that the UK motor market will ultimately lose £1.6 billion in 1998. This represents 23.6% of earned premium, a decline of 4% on figures from the previous year. In conclusion, English Matthews Brockman stated that an immediate premium increase of 13% is required to return the market to underwriting profitability. Premium increases at the current rate are expected to return the market to profits during 2001.

Motor insurers have faced several threats in recent years, not least a change in the pattern of claims for UK motor business. While there has been a decline in the level of damage and theft claims, bodily injury cases have increased. Society has become more litigious and court awards for bodily injury cases are increasing faster than inflation in a changing legal environment. One of the major challenges facing motor insurers is to find a way to meet the increasing cost of these bodily injury cases.

In summary, a mixed picture emerges from the motor market. Rates are definitely moving upwards but whether these increases are sufficient to cover increasing claims costs appears to be a matter for dispute.

The SBW survey of Lloyd's underwriters shows that rates in the non-marine market, as a whole, fell in 1999, although the rate of decline slowed considerably. There were some early signs of rates “bottoming out”' in the direct property and casualty market, most apparent in the property market. Excess of loss reinsurance was the most competitive section of the non-marine market, particularly property catastrophe excess of loss. The specialist casualty classes (ie professional indemnity, directors' and officers' liability, etc) also continue to suffer from severe competition. Miscellaneous short tail business has had a more stable run recently than underwriters anticipated, although monitoring this market presents difficulties because of the diverse nature of the classes included (eg pecuniary loss and contingency). Rates in the accident and health and UK homeowners markets appeared to be stable going into the final quarter of last year. News from outside Lloyd's, since the survey was conducted, generally presents a similar picture. The soft market caused by excess capital continues to undermine the property and casualty industry in the United States. Latest figures from the National Association of Independent Insurers (NAII) show that the industry's surplus dropped by nearly $10 billion in the first nine months of 1999. Losses from underwriting have increased at the same time as investment income has reduced.

Standard & Poor's recently issued a report, extending its pessimistic view of industry prospects to the year 2000. Differing views have been expressed, with some seeing early signs of changes in the market. However, with US property and casualty industry capital estimated at around $100 billion above its capital needs, a sharp correction in market conditions is unlikely.

Outside the US market, there were two serious storms in Western Europe after the survey was conducted, Lothar and Martin, both within a day of each other at the end of last year. Current estimates for the insured loss are in the region of $5 billion, most of which was sustained in France. The storms happened in quick succession and it is unclear, at this stage, whether it will be possible to differentiate between the two losses for reinsurance purposes. There is no doubt, however, that this is a large loss and will have a significant impact on catastrophe reinsurers and property insurers in Europe. Although there has been a reduction in Lloyd's involvement in continental European programmes recently, inevitably Lloyd's syndicates will also have some exposure.

With the addition of these storm losses, 1999 will be a poor year for property insurers and catastrophe reinsurers, particularly those writing international business outside the US. The combination of a highly competitive market and the succession of catastrophes will hit some reinsurers hard and could lead to some hardening in the catastrophe market. There were already signs from the retro market before the occurrence of the European storms.

At a press conference in early 1999 to announce the merger of XL Capital and NAC Re, Henry Keeling, president and ceo of XL Mid Ocean Reinsurance, said that the first signs of a turn in the market were apparent. Mr Keeling expressed the view that “... the tightening in the retrocessional market will start to impact both the reinsurance and insurance marketplace over time.”

The recent demise of several Australian reinsurers should also be a factor in the reinsurance market. Reinsurance Australia Corporation (ReAC) is the latest Australian reinsurer to announce heavy losses and the company has been selectively declining renewal business since March 1999. New Cap Re has been placed in administration and GIO withdrew from the reinsurance market, following what its management described as unprecedented losses. The problems suffered by these companies have had some impact on London underwriters already, particularly the retro market. Eventually, increasing retro rates will feed through into the direct reinsurance and insurance markets, as each party in the reinsurance chain seeks to pass on its additional costs.

Implications for Lloyd's
Where does all this leave the Lloyd's market? Lloyd's writes business that is placed in the international market for insurance and reinsurance. As such, the challenge Lloyd's faces from depressed market conditions is not specifically a Lloyd's problem, or even a problem for the UK insurance market, but a problem facing insurers world-wide.

SBW's survey and more recent reports show that there are early signs of improvement in the market although there has not been a clear turnaround yet. Underwriters are seeking to impose increases in some of the specialist markets that have suffered from particularly poor loss experience. The space market is an example of this. There has also been some tightening in retro markets and this should eventually feed through to harder markets for conventional reinsurance and insurance.

Worsening catastrophe experience could also bring the market closer to the possibility of rate increases. Certainly, the international property catastrophe market will be affected by the recent European storms.

However, at this stage, excess capital in the industry continues to hold back the market, despite growing concern at pricing levels. A consistent recovery appears to be unlikely during the year 2000 but changes currently apparent in the market may begin to have an impact next year.

Miles Trotter is a director of Lloyd's research company, SBW Insurance Research Ltd. This article is based on a full length report, “Rating Trends and Underwriting Margins - September 1999”. E-mail: