Claims experience drove price increases across many lines of primary business, with hull and liability flat, cargo up 5 percent and energy offshore up 5 percent to 15 percent. Over-capacity remains prevalent in the marine sector, suppressing rates to a certain extent.
However, increasing loss activity is likely to lead to price increases across most classes. One area of particular focus will be long-term storage exposures. They are likely to come under far greater scrutiny as losses from the Thai floods unfold, and reporting excess of loss layers placed in the “direct” cargo market are likely to have event limits inserted or restricted reinstatement coverage imposed.
There has also been a desire to see more transparency across energy portfolios detailing the exposure split between the energy physical damage and energy liabilities. This follows the keen interest shown by the Lloyd’s Franchise Board earlier in the year.
The “Maersk Gryphon” loss has been a significant spike in the energy market following the Deepwater Horizon loss in 2010. Smaller energy losses such as “Jupiter” are also focusing attention on attachment levels. Furthermore, the Thai flood loss, from a marine perspective, is likely to have a greater impact than the marine element of the Japanese earthquake/tsunami, which we estimate to be an original loss of around USD450 million. With companies returning to the Gulf of Mexico for deep sea drilling, insured values are increasing. Meanwhile, hull and freight rates continue to decline as a result of the economic downturn.
In the regulatory space, Solvency II is already having an impact across all lines of business. This is generally pushing catastrophe rates higher for global marine reinsurance programs.
Catastrophe Excess of Loss (Both All Risk and Event)
Cedents sought to reduce pricing on loss-free programs at the January 1, 2012, reinsurance renewal, leading to some consolidation of class specifics, such as hull, war and liabilities in an attempt to lower costs. Rates for energy-exposed programs increased modestly. In general, loss-affected programs sustained reinsurance rate increases of 10 percent. The Thailand floods are likely to influence the retrocession renewals, where some reinsurers were considering imposing additional premium penalties on contracts with potential loss exposure. The full picture in terms of volume of loss will hopefully unfold during the first quarter of 2012, ahead of the Asia Pacific reinsurance renewal season.
Structural changes have occurred for energy programs, with some reinsurers not looking to support programs with retentions within 20 percent of maximum line. In London, consequently, cedents are seeking to manage their exposures rather than purchase
more cover. In the international market the trend is toward higher auto capacity in an attempt to secure more vertical limit.
The erosion of underlying loss ratios across most classes has resulted in lower capacity available to renew proportional business. Thus, cedents have had to retain more risk. There has been downward pressure on ceding commission levels (results-driven)
for some major quota share cedents. Worldwide, capacity is declining, especially for the hull and cargo classes.
MENA Marine & Energy
At the January 1, 2012, reinsurance renewal, Middle East/North Africa (MENA) marine reinsurance continued to attract modest rate reductions of up to 5 percent year over year for loss-free renewals. This is fundamentally due to the sector’s proven track record of profitability. However, pricing for catastrophe and clash layers has firmed somewhat, with continued reductions unlikely.
Over the next 12 months, price decreases are expected to dwindle, as the significant marine losses from events in Thailand have had a global impact. It will take a while for the impact to be realized since the full picture will take time to become clear. Prices may rise for large programs, while smaller programs are more likely to be scrutinized by reinsurers for profitability.
Marine cargo losses are still relatively unknown for reinsurers, and many are requesting clarification of their clients’ likely exposure to the Thailand event. Unusually, it has impacted a number of regional markets, from Singapore to the more established London, US and Continental European reinsurers. Energy losses also have had a noteworthy impact on reinsurers in 2011, with this class experiencing particularly close attention from reinsurers for the coming year.
Most insurers are seeing reductions in premium income due to highly competitive original market conditions. Despite underwriting losses in both marine cargo and hull in some regions, most carriers continue to underwrite the class. While the reinsurance
market has reacted to specific losses, programs with continued positive results will continue to achieve reinsurance rate reductions and attract competition from reinsurers.
Loss-free catastrophe excess of loss programs realized rate reductions of as much as 5 percent year over year at the January 1, 2012, reinsurance renewal, depending on exposure changes. Loss-affected programs were flat to up 10 percent, also based
on exposure changes. Reinsurance structures remained consistent, except where capacity requirements changed for 2012. Capacity has been consistent for the past year, with continued abundance for programs in smaller markets, which has led to competitive pricing.
There were no significant changes to proportional treaty retentions, except in cases where programs were difficult to place and reinsurers required increases. Commissions were generally flat relative to expiring treaties, with pressure on commission levels
focused on unprofitable programs. A number of programs faced salient challenges due to factors such as event limitations, cuts in commissions and additional exclusions. Overall, reinsurers remain more cautious when writing this type of marine reinsurance protection.