London market insurers see continued soft market and some broadening of conditions

London market insurers foresee another year of continued softening in premium rates and some evidence of widening in terms and conditions, according to the UK’s Prudential Regulation Authority (PRA). However, the PRA said that analysis of feedback from its recent questionnaire completed by London market insurers, including large UK commercial insurers, highlighted a contradiction. In aggregate, premium rates reduced, but overall premium adequacy, as estimated by firms, is marginally higher. “While we recognise that not all business can be subject to robust technical price, this observation does raise the question whether some firms are taking an overly optimistic view of current pricing,” said the PRA. The aim of the analysis is for the PRA to get a quantitative and qualitative sector-wide understanding of current market conditions and identify those insurers that are most affected by them. It finds that risk-adjusted rates continue to deteriorate, albeit reductions are moderating in most lines, with smaller insurers experiencing higher rate reductions than their larger peers. Terms and conditions are widening but views differ as to whether this is sufficiently material to raise risks overall, and perceptions of rate adequacy suggest firms believe profitability is being maintained, but this highlights a potential disconnect between current views of pricing levels and assessments of Risk-Adjusted Rate Changes, said the PRA. Lines of business that are perceived as most favourable (with regards to rate adequacy) are those that are harder to model and where the ultimate claims cost will not be known for a number of years, such as casualty and financial and professional lines. It also found that new business continues to be viewed more favourably than renewed business, and while smaller insurers generally have a more favourable view on rate adequacy, they are also seeing greater rate reductions than their larger peers. The majority of firms, but by no means all, had concerns about changing distribution channels, with common themes including higher commissions, difficulties in exposure management and the implications of moving from case to portfolio pricing. In addition to changing distribution channels, cyber exposures, merger and acquisition activity and the move to increasingly aggregate cross-class covers, were the main structural issues commented on by firms, the analysis finds. In a letter to market participants explaining the analysis, David Rule executive director, insurance, PRA, wrote: “Current market conditions mean that firms are receiving lower premiums for the same level of exposure. Widening terms and conditions may result in increased claims, both in terms of what is payable in the event of a claim as well as new events that could result in a claim. In addition, weakening terms and conditions can also affect claim notification and settlement patterns, challenging firms’ claims reserving. “It is important that firms explicitly assess and understand the extent and level to which changes in terms and conditions carry an internal cost (for instance, an increase in risk capital or an increase in the level of incurred-but-not-reported claims), and whether this cost is commensurate with the additional risks.” The analysis provides examples of the changes highlighted by firms, including: - Business interruption coverage expanded to include non-damage perils - Cyber inclusions or expansions of cover to include non-physical damage - Increase in years of discovery/extended reporting periods - Inclusion of contagious disease - Weaker definition of incidental coverage (for example, the insured determines what constitutes incidental damage) - Increase in multi-year policies. In his letter, Mr Rule added that the PRA is concerned that some firms may have insufficiently captured current market conditions and the potential impact of broadening terms and conditions in their risk management. During the course of 2017, the PRA said it will carry out a number of supervisory initiatives to improve its understanding of how individual firms are being affected by current market conditions: 1. Assessing underwriting and exposure management in detail for selected lines of business in a number of large corporate insurers, with a view to understanding how changes in terms and conditions are reflected in the monitoring process and carried through to planning, reserving and capital assessment. 2. Where these firms participate in broker facilities, managing general agents or other delegated underwriting arrangements, assessing how they ensure that they understand the impact of business written on their overall risk profile and their results. 3. Across a number of smaller Lloyd’s managing agents, conducting a thematic review of distribution practices to understand trends in strategies employed by firms, how distribution channels are evolving and the quality and cost of obtaining this business.

London market insurers see continued soft market and some broadening of conditions

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