Reinsurance rate on line (ROLs) for the international marine and energy market varied by sector at the January 1, 2011 renewal. Hull and war and marine liability were both flat, with cargo flat to down 5 percent and energy and energy liability up 10 percent to 15 percent.
While the global economy is recovering slowly from recession, the benefits to the marine insurance market are limited. The primary reason is that there is excess capacity. As a class, cargo is firmly at the bottom of the cycle, recently quoted by one Lloyds underwriter as “the worst he had experienced.” Hull rates are generally flat, as plentiful new capacity has flooded into the market.
The Deepwater Horizon loss in April has reversed the negative trend in the energy sector, albeit not to the extent expected. The anticipated increase in buying activity in the energy excess liability sector is unlikely to materialize until the US government requires increased limits through the Oil Pollution Act.
Nevertheless, the impact of the Deepwater Horizon event on reinsurance rates is likely to involve significant increases on the programs affected most severely. After all, this will be the largest risk loss suffered in the marine market.
Energy liability business is likely to come under greater scrutiny in terms of transparency and multi-assured interests. Energy programs that cover significant liability exposures are also likely to be subject to restructuring, with the potential for additional separate pillars being required. Retrocession business should experience substantial increases based on the deepwater loss scenarios which, on mid-based estimates, will generally erode 60 percent to 70 percent of the existing program. Hull, cargo, war and marine liability contracts will likely be flat unless the loss record dictates otherwise.
Generally, exposures in this sector appear to be flat. Consequently, the key driver will be loss experience. Energy-related programs can expect reinsurance rate increases of 15 percent to 30 percent, depending on the loss and liability content. All other classes remain favorable to cedents, and rating should remain flat. Given that the direct energy market appears to be struggling to achieve expected rate increases, there exists the possibility of a disconnection between the direct and reinsurance market in this class.
In 2011, sanctions clauses are likely to have an impact on reinsurance coverage international marine and energy. Specific issues include whether a standard market clause is being applied by the direct markets and whether clients will accept the reinsurers’ insistence on a sanctions clause within contracts.
Global program purchasing, voluntarily increased retentions and co-insurance on higher ROL layers look to be a potential trend. More vertical coverage may be required should energy liability and physical damage remain on a combined basis.
Capacity is plentiful, with reinsurers looking to write more business in certain areas. Several players are viewing the increased retrocession prices as now being at the requisite level to enter the market place. They feel this offers a good opportunity to write the business, though there is a potential sense these entrants will only offer capacity short term which could work against clients over the longer haul should they decide to consider this option.
For proportional treaties, there is increased capacity available for energy quota shares following the increase of rates in the offshore space. For marine, there were no new market entrants. Meanwhile, hull and cargo proportional capacity continues to reduce due to primary market rating and performance.