Rates In Some Classes Have Peaked: Report

"The market is also a prime source of capacity for unusual financial risks and often it is the only place where complex or otherwise difficult risks can be covered," the report said.

Axcos report on the London market discussed trends and details of various classes of business entering the London market:

Property. Facultative reinsurance rates for U.S. property risks have been very high, "but as the local market recovers and competition from Bermudian companies for top layers (and some at the bottom end) increases, pressure on rating is expected during 2003," Axco said. "It is expected, though, that rating levels will remain broadly stable this year."

Since 2001, the amount of facultative reinsurance business being placed at Lloyds for the largest U.S. corporations has increased substantially, as have a larger number of primary covers for highly protected risks and their excess layers, the report said. "The reason for this is that domestic U.S. insurers were faced with pressure on their treaty programs following the events of [Sept. 11] and other problems including increased asbestos reserves," the report said.

As for rates on the property treaty reinsurance side, the report said the London market has pushed through substantial increases in recent years, "but some underwriters feel that the market for catastrophe programs has peaked."

"If 2003 does not see any particularly large catastrophe losses, then renewals [generally will be] made with a premium reduction," the report said. Nevertheless, it is felt that even with a reduction, there is a "good chance of profitability," the report said.

Retrocessional property programs experienced rate increases in 2002, although not to the same extent as the reinsurance market, the report said. "This was because rates had already been raised substantially for 2001. For 2003, [retrocessional] covers with U.S. exposures were either unchanged or had a 10 percent increase; for non-U.S. exposed treaties, there were some reductions of a similar size."

Casualty. The London market accepts a wide range of casualty insurance and reinsurance, including general liability, medical malpractice, professional indemnity, directors and officers, and cover for financial institutions, the report said.

Axco said rate increases in direct and facultative casualty business have been substantial, particularly for risks with frequent or large claims. "Professional indemnity risks are seeing increases of 25 percent to 30 percent as a whole, but D&O rates have gone up 50 percent to 100 percent or more for clients in the financial sector, telecoms or IT."

For U.S. business, major Lloyds syndicates include Faraday, Amlin, Atrium, Wellington and MAP, Axco said. "The leaders can accept up to $10 million or $15 million with the smaller ones writing a line of $1 million."

Regarding casualty reinsurance, at the last renewal (for 2003), "pricing levels were substantial with rates typically going up by about 30 percent overall on top of increases in original rates of a similar figure," the report added.

In the U.S. treaty reinsurance area, Axco said there is almost no capacity for U.S. D&O business in the London market, given the catastrophic results seen. "Some insurance cover is available, but treaty reinsurance is hard to find."

The report said that there is much more capacity available for errors and omissions (professional indemnity) treaty business, "but there are some concerns over U.S. legal and accounting firms and financial institutions, given the more intense supervision of U.S. investment banks."

Although medical malpractice treaty business is a potentially heavy risk and consistently unprofitable, a large amount is written in the Lloyds and London company markets, the Axco report said.

"Cedents are generally members of the Physician Insurers Association of America, a trade association of more than 60 medical malpractice insurance companies owned and operated by doctors and dentists (and commonly known as bedpan mutuals)," the report said. "Collectively, these companies insure approximately 60 percent of the USAs private practice physicians, as well as dentists, hospitals and other health care providers."

Due to the disastrous results in medical malpractice, there have been dramatic rate increases of 50 to 100 percent in some cases, the report said. Highlighting The St. Pauls withdrawal from the medical malpractice market in late 2001, Axco said that because of the gap left by that exit, as well as other difficulties within the U.S. market, London has seen a much larger volume of business in the last couple of years.

London has also seen a lot more workers compensation business in the last year. "Cover given is non-proportional and can be per life or to cover an accumulation of lives (a clash cover)."

Marine. Capacity for marine hull is still relatively high in the London market, Axco said, reporting that one estimate suggests the London market as a whole could cover a risk of up to around $400 million in value.

"Advances in shipbuilding techniques, with more standard production methods, have reduced the overall cost of vessels and values are therefore also more modest with quite large vessels costing about $20 million to $30 million," the report said.

This also means that the world marine markets premium base has dropped, the report said, which has helped create a problematic market with extreme rate volatility.

Rates rose by about 50 percent for the 2002 renewals, more increases (30 percent to 40 percent) were achieved for 2003, and further are expected during the year since 2002 had such poor results, the report said.

"The best fleets are seeing 15-20 percent rate rises with any fleet affected by claims getting 60-70 percent or more, especially if crew negligence was a factor," the report said. "Further increases are still required to bring rating up to 1994 levels."

The largest insurers have capacity to write a line of up to $50 million, but do not usually use these limits, as $25 million is a more common maximum limit, the Axco report went on to say.

Aviation. As a consequence of the events of Sept. 11 and losses to the world aviation market, premiums for hull, liabilities and war risks soared, the report said.

While 2001 was one of the worst in aviation insurance history, 2002 had very few losses and as a result, the rating trend in the traditionally volatile market has already turned downwards, the report said.

"As a sign of the softening in the market, there [already has been] a return to vertical marketing," the report said. Vertical marketing exists when different shares of a program are placed at different rates.

"Parts of the London aviation market see some risks with a rate of 10 percent less than other insurers, with overseas markets writing the business at a 20 percent to 30 percent discount."

The Axco report also discussed the markets for credit, surety and political risks; miscellaneous classes such as contingency, kidnap and ransom, and e-risks; marine cargo; marine liability; marine reinsurance; energy risks; space risks; personal accident and life.

For each category of business reviewed, the repot also presents a list of major insurers in the London market, as well as major brokers and reinsurers.

Established in 1970, AXCO produces a range of insurance information products covering more than 145 countries worldwide.

To obtain a copy of the London Market report, contact the company at axco@axcoinfo.com

Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.