What next for Lloyd’s marine insurance? (source Lloyd’s List)

It has become a cliché of US political commentary, usually attributed to Barack Obama lieutenant Rahm Emanuel, that you should never let a serious crisis go to waste. And marine insurance at Lloyd’s is in serious crisis

While underwriters have been heard to talk tough before, diminished capacity may mean that this time round they can make higher premiums stick. Indeed, a consensus seems to be emerging that they may represent the only way forward

ABOUT a dozen Lloyd’s syndicates have either dropped marine underwriting altogether or at least pulled out of one or more marine line.

The research, compiled for the latest Gallagher Marine Hull & Machinery and War Risks Market Report, essentially confirms what we already know; the list just gives us chapter and verse at a time when marine insurance is finding itself under increasing pressure, following a run of poor marine underwriting results in recent years.

Factors at work include the increasing incidence of extreme weather events, and growing claims volatility and accumulation risk, in conjunction with sufficient capacity to keep rates soft in a climate of tough competition, as well as just getting the pricing wrong.

Other syndicates will almost certainly join the rush for the door, after Lloyd’s of London last year ruled that “consistently loss-making syndicates” — defined as those that have failed to register a profit for the past three years — will be placed under additional scrutiny.

Those with business plans that do not show a clear path to long-term profitability face the prospect of seeing their business plans denied approval.

“We haven’t said we want to see X number of syndicates close or X premium taken off the books,” Lloyd’s chief financial officer John Parry has said. “But I expect we will see some lines of business close where syndicates assess the chance of returning to profitability in the near term are slim.”

Marine was probably one of the lines Mr Parry had in mind. There are thought to be about 20 marine syndicates to which the corporation’s strictures could potentially apply.

To put things in perspective, marine premiums at Lloyd’s rose in the first half of 2018, growing 3% to hit £1.4bn ($1.8bn).

Despite that, marine classes collectively generated an underwriting loss of £55m, up from £31m in the corresponding period of 2017. The aggregate combined ratio came in just fractionally under 107%.

Several industry leaders have felt compelled to speak out on the seriousness of the situation.

The most recent was Munich Re chief underwriting officer Dominick Hoare, who predicted Lloyd’s might find itself a marine insurance desert in the next year or two, unless owners take a double-digit percentage point rate hike on the chin.

Nor does the threat apply to Lloyd’s alone; the broader London market and other international centres are not immune from current pressures, he added.

Only last week, International Union of Marine Insurance president Richard Turner — who currently heads RSA’s specialty business out of Luxembourg — used an IUMI press conference last week to speak of a “period of pain” facing the sector.

Mr Turner gave the figure of 11 underwriters pulling out of one or more marine line in the London market since May last year, with substantial job losses.

Indeed, recognition that it can’t go on like this has even been heard from the top; Lloyd’s chief executive Inga Beale used a conference last year to urge marine insurers to “get used to a different kind of normal.”

Leaving the sector

Let’s start by going over a roll call of those who have already decided enough is enough, as set out by Gallagher.

Advent Syndicate 780 is to close its marine insurance book completely, as part and parcel of its merger with Brit, with some of it will be run-off and some of it will be transferred to Brit.

Brit Syndicate itself has withdrawn from yacht business, where it had an important presence.

AM Trust Syndicate 1861 has closed its Lloyd’s marine book in its entirety, withdrawing from hull, liability and cargo, despite only entering the market in 2015.

Aspen Syndicate 4711 has ceased writing marine hull, selling renewal rights to Helvetia, while Barbican Syndicate 1955 have withdrawn from marine hull and cargo business. Tokio Marine Kiln Syndicate 510 is not replacing senior underwriters who have left its employ.

CNA Hardy Syndicate 382 has closed its marine hull book, citing lack of profitability.

Standard Syndicate 1884 — linked to the Standard P&I Club — has entered run-off, with overcapacity and a weak pricing environment the specified cause of the decision.

In a circular announcing the run-off last October, Standard Club pointed out that the syndicate had only started business in 2015.

As a start-up, it had not been expected to be make money overnight; indeed, a profit was anticipated for 2019.

“However, the syndicate would at best be unable to grow the business beyond its 2018 scale, given Lloyd’s performance management approach, and this restriction on the syndicate’s scale would effectively remove its opportunity to generate meaningful profits in future years,” said Jeremy Grose, chief executive of syndicate manager Charles Taylor. “At worst, the syndicate would not have had its plan approved for 2019.”

Accordingly, the board concluded that current market conditions in Lloyd’s make it a much less attractive place to do business than it was three years ago.

“Overcapacity and a weak pricing environment have made it an increasingly challenging environment in which to underwrite profitably. On this basis, the board decided that the club would withdraw from underwriting at Lloyd’s from 2019,” Mr Grose said.

Channel Syndicate 2015 has withdrawn from marine hull and machinery business, although it will continue to write some of the book via parent company Scor.

Liberty has announced it will no longer write marine hull business through its Lloyd’s Syndicate 4472, but instead renew and grow its portfolio via its company security.

WR Berkley Syndicate 1967 pulled out of marine in 2017, while Canopius Syndicate 4444 is scaling back on blue water marine hull.

The trend is not limited to Lloyd’s, the Gallagher report added, with other London market participants such as RSA seeking an exit on at least some marine lines.

It is a cliché of US political commentary, usually attributed to Barack Obama sidekick Rahm Emanuel, that you should never let a serious crisis go to waste. And as marine insurance at Lloyd’s is clearly in serious crisis. This creates an opportunity to rectify matters.

Rate rises

Better underwriting discipline is one obvious solution, but of course, underwriters have already been doing their level best to price correctly over the last period, and singularly failing. The other obvious answer is a hefty rate rise, perhaps of the order of 10% or more.

“What I am saying to people is, you’ve got to really push and get those rate rises. You have got to push to discard the rubbish business. You have got to really now improve the portfolio,” Mr Hoare said.

“We have had more than a warning shot across the bow, and we are in danger of being holed below the waterline with the next shot. We have got to learn from what we have done badly over the past five years.”

What might that look like in practice? That is hard to specify in black and white. All vessels are individually assessed for hull insurance premiums, with rates in practice heavily dependent on safety records. But it is clear that pricing is in a pretty parlous state.

Purely for illustrative purposes, a 10-year-old very large crude carrier of 1500,000 gt, valued at $35m and assuming deductibles in the $200,000-$250,000 bracket, could expect to pay $50,000-$60,000 per annum, according to market sources.

Similarly, a 10-year-old capesize bulk carrier of 90,000 gt, valued at $25m, assuming deductibles of $150,000-$200,000, is likely to face a yearly insurance bill of $35,000-$45,000.

Even single-figure thousand-dollar rises will be something of an imposition for dry bulk operators right now, although tankers seem better starred.

And while underwriters have been heard to talk tough before, diminished capacity may mean that this time round they can make higher premiums stick. Indeed, a consensus seems to be emerging that they may represent the only way forward.

Meanwhile, marine insurance leaders — including Mr Turner, Helle Hammer of Cefor and Lars Lange of IUMI — can be heard setting out perspectives for marine insurance in 2019 in an extended interview on a recent Lloyd’s List podcast.