July 6th, 2010

Reinsurance Renewal July 1, 2010: Capital Cushion Continues to Impact Pricing: Part III, Marine & Energy

Posted at 1:00 AM ET
klein_chris_bioChris Klein, Director of Reinsurance Markets

At the July 1, 2010 renewal, territories and marine classes that were unaffected by losses have seen rates remain stable. We have also witnessed a slowing in the decline of rates. The Deepwater Horizon Gulf of Mexico loss did not cloud reinsurers’ judgments when quoting international placements and each account was underwritten separately based on specific account losses and exposures.

Marine excess of loss pricing is expected to increase substantially for reinsurance purchasers with exposures to energy risks. Increases of greater than 10 percent were seen for deepwater drilling risks similar to those of the Deepwater Horizon disaster. However, regional markets are still looking to compete with Lloyds for this business.

Reinsurers continued to look for diversification into areas with less volatility and fewer losses. Significant rate increases were being imposed on energy-affected accounts as many reinsurers reviewed the basis of their involvement in energy reinsurance contracts. Potentially the Deepwater Horizon loss is a market changing event, although it is geared principally towards energy and liability exposures. Reinsurers will have difficulty justifying to clients who are writing traditional cargo/hull accounts that they should pay rate increases because of the Deepwater Horizon loss. Underwriters remained flexible in negotiating terms and conditions on placements.

Capacity remained plentiful for marine classes that had been unaffected by losses. Quota share capacity for energy business was generally tight.

The subject premium income base for marine risks did not show any signs of increase as the economy began to recover. The primary marine market remained soft and rates continued to decline further amid aggressive competition. Although economic conditions have improved in recent months the primary market was still aggressive on most marine classes. The reduction in marine trade and fall in insured values have also compounded the issue of falling premium income and led to further competition for the most attractive classes and accounts. Primary cargo insurance incomes have started to show very small signs of recovery, however, given the fact that current income levels are significantly lower than 18 months ago there is clearly still a “long way to go.” There remains a general concern about the impact the current volatile European economy will have upon future trading levels. The marine cargo market was essentially flat with small reductions, depending on turnover and experience. Rate increases were seen on hull accounts with loss experience, but according to some underwriters, the increases were still not adequate. There were very clear signs that marine casualty rates may increase substantially (100 percent to 200 percent or even higher) for the upper layers of casualty programs.

There will likely be greater demand from reinsurers for further transparency on future renewals. The reinsurance market will require much more information regarding the direct market’s involvements in excess liability placements as these exposures accumulate with the physical damage policy due to syndicates’ involvements with multi-assureds such as Transocean, Anardarko, MOEX and Halliburton.

The Deepwater Horizon loss has shown that a relatively small physical damage loss of approximately USD560 million can potentially escalate to USD2.5 billion to USD3 billion depending on where responsibility is apportioned and liability placements respond. Therefore, marine whole account top layers are potentially more exposed to single risk type losses. Reinsurers will likely look to address this with rate increases on excess of loss programs at the January 1, 2011 renewal.

Click here to read Reinsurance Renewal July 1, 2010: Capital Cushion Continues to Impact Pricing, Part II:  Latin America and Caribbean, Retrocession »

Click here to read Reinsurance Renewal July 1, 2010:  Capital Cushion Continues to Impact Pricing, Part I: Introduction  and US Property »

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