Success of re-underwriting strategies key to profitability in 2017, says PwC

Underwriting confidence in the London Market continues to decline, according to PwC's latest review of market conditions for 2017. As insurers approach the 1 January 2017 renewal season, PwC anticipates premium rate reductions in 2017 will be lower than actual rate reductions in 2016; these, in turn, were lower than 2015 rate reductions, indicating increasing resistance from London Market insurers to falling prices.

It says profitability of the market, in an average 2017 cat year, hinges on the success of planned re-underwriting strategies seeking to improve the performance of the book in light of ongoing rate reductions. As a result, the consultancy says re-underwriting appears to be at the heart of most London Market players’ strategies to retain profitability in the market.

London Market insurers are, on average, assuming a net combined ratio of 97% for 2017, including a 4% reduction in profitability due to reinsurance. Nearly one in three insurers are now reliant on investment returns to generate profits. However, given the current investment environment, in reality, this will not amount to much.
There are significant risk adjusted premium rate reductions anticipated on energy and aviation renewals in 2017. Following double-digit risk adjusted reductions this year across most energy classes, the market view for 2017 average risk adjusted rate reductions is between 6% and 7% for energy and aviation lines.

PwC has observed a tendency within the market over recent years to underestimate rate changes in the current soft market. During 2016, the experience was more balanced (beyond energy and aviation) with some classes experiencing rate reduction in line with, or lower than, expected. This provides further evidence that the pace of rate reductions is falling in response to greater resistance from London Market insurers to falling prices.

There is a particularly bleak outlook in 2017 for the offshore property risks of energy operators as highlighted by anticipated market average risk adjusted rate reductions of 8%. These classes are not anticipated to make gross underwriting profits in 2017. This follows an average risk adjusted rate reduction of 14% during 2016 for risks in the Gulf of Mexico and 11% elsewhere.

The aviation classes have seen the 2017 outlook for airport liabilities deteriorate. A market average risk adjusted rate reduction of 9% is anticipated with no gross underwriting profits in 2017.

Outlook more positive for cyber

For the fourth year in succession, the accident and health sector appears to be the most resilient against rate reductions with a market average rate reduction of only 1% anticipated in 2017. The 2017 outlook is also more positive for cyber data and privacy breach insurance where many insurers are assuming sub-90% gross combined ratios in 2017.

PwC’s 2017 study highlights a continuing shift towards binder business at the expense of open market risks. The proportion of binder business is expected to increase from about 40% in 2016 to 47% in 2017 plans.

Harjit Saini, London Market director who led PwC's review, said the outlook for energy lines continues to deteriorate. “The majority of 2017 plans are unprofitable for the offshore property risks of energy operators. Whilst the view of 2017 plans highlights cause for concern, 2016 pricing data appears relatively more positive despite 2016 price reductions being greater than expected.

“Counter-intuitively, 2016 new business profitability for most energy property classes is anticipated to be better than renewal business and what was initially planned for these classes. We believe the view of new business profitability is materially overstated for most energy property underwriters in an average catastrophe year.

“More generally, we have observed questionable pricing information for many London Market insurers and this highlights the need for strong controls to be in place for monitoring new business profitability in particular”

Jerome Kirk, London Market actuarial Leader at PwC, said finding positives was tough, though the declining pace of rate reductions is one. “However,” he said, “counter this with the low expectations of the market and the outlook is still fairly bleak, something confirmed by Lloyd’s recently. The reliance on re-underwriting makes sense at an individual syndicate level but not at a Market level”.

“2016 saw some real horror stories in classes such as energy and the outlook for 2017 is not much better. Making the right decisions at all levels is crucial in such a soft market and market participants should focus on getting the right analyses, analytics and management information to support the business. Especially as our analyses at a Market level shows not everyone is going to get is right.”

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