Lloyd’s predicts continuing hardening for marine after best result in years

Performance from MAT lines contrasts with market as a whole, with expectations that rate hardening will continue

‘Significant pricing improvement has been seen across the portfolio, but most notably in the two largest lines of cargo and hull,’ insurance market says

MARINE, aviation and transport lines at Lloyd’s clocked up their best result in years, with a return to both underwriting profit and a combined ratio below 100%, the insurance market revealed in its annual results.

The outcome is in marked contrast to the numbers for Lloyd’s as a whole, which had a pre-tax loss of £900m ($1.24bn) for 2020, down from a £2.5bn profit in 2019, with natural catastrophes, Brexit and the pandemic all contributory factors.

However, it already looks clear that reinsurance will take a sizeable hit from last week’s closure of the Suez Canal.

Lloyd’s chairman Bruce Carnegie-Brown told Reuters that while it was too early to estimate the scale of the payout, “it’s clearly going to be a large loss, not just for the vessel but for all of the other vessels that were trapped and unable to get through.”

The remark was made even though Ever Given’s hull cover was placed in the Japanese market and cargo claims are expected to be limited, and relates to the likelihood that the liability payout will substantially exceed the International Group’s collective $100m retention and hit the reinsurance layer.

That would be in line with the prognosis of other commentators, most notably ratings agency Fitch, which has already described the canal shutdown as a large loss event that will dent earnings for re sector as a whole.

Mr Carnegie-Brown indicated that Lloyd’s may end up meeting around 5%-10% of total reinsurance claims.

While there are no figures for marine in isolation, the results for marine, aviation and transport considered collectively saw the first positive underwriting result in several years, with last year’s £199m loss transformed into a profit of £239m.

Gross written premiums were also up year-on-year, from £2.8bn in 2019 to almost £3.0bn, although this is still below the levels seen in loss-making years such as 2016, 2017 and 2018. The combined ratio dropped from 113% to 98%.

Going on feedback from marine underwriters, there is no apparent reason why the hardening market should slow.

MAT — as marine, aviation and transport marine business is known collectively — encompasses a wide variety of sub-lines, in many of which Lloyd’s is the largest market or at least one of the largest markets.

Cargo is the largest line, with other lines including hull, various marine war perils, marine liabilities, as well as specie and fine art.

There are also niche products, including satellite pre-launch risks and construction-related cargo perils including delay in start-up.

“Following long-term sub-optimal performance, marine continues to go through an extensive remediation process, which has included several significant market participants reducing book sizes, and others choosing to withdraw completely,” Lloyd’s said.

Yacht, for example, has reduced in terms of gross written premium by over 50% since 2018.

Much of this has not been spontaneous; Lloyd’s itself initiated the so-called decile 10 crackdown on underperformers two years ago, effectively strongarming the weakest players out.

“Through these measures and the resulting contraction in capacity, a significant pricing improvement has been seen across the portfolio, but most notably in the two largest lines of cargo and hull,” said Lloyd’s.

Attritional claims in hull have reduced, but it is yet to be seen if this is due to a hardening market, a decrease in voyages owing to the pandemic, or a combination of the two factors.

War breach premiums have meaningfully increased due to increased tensions in the Middle East. However, annual war premium remains one of the most competitive sub-lines within the marine portfolio.

With a new government in the US, it remains to be seen how international sanctions and any subsequent effects on war breach premiums will evolve.

Lloyd’s also noted that marine lines typically hold a view of claims for a number of years to allow for any uncertainty, making releases common.

“Overall, these lines of business have performed favourably against expectations over 2020, despite heightened large loss activity impacting both property damage and liability within this line.”

Recent years have seen higher than average catastrophe losses, which are known to drive property damage claims. However, some historical catastrophe losses have improved over 2020.

In particular there have been reductions on overall losses due to Hurricanes Harvey, Irma and Maria in 2017, especially with respect to cargo business.

In contrast, Storm Dorian losses from 2019 have increased, particularly impacting marine hull.

There has been a substantial shift away from lineslip and binder driven portfolios in the marine market, which has led to greater underwriting oversight. This trend looks set to continue throughout 2021.

In terms of specialty reinsurance, MAT grew from £1.4bn to £1.5bn, although the price hardening for marine re was less than for marine as a whole.

Anecdotal evidence suggests larger increases were attained during the end of year reinsurance renewal season. However, capacity remained relatively unchanged, therefore.

Marine reinsurance experience on prior years was mixed, with favourable movements for Hurricane Irma, Hurricane Sandy, and the 9/11 World Trade Centre payout, offset by deteriorations on Typhoon Jebi and Storm Dorian.