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Buyers are returning to the London market.
Now that Lloyd's of London is back on track and new capital has come streaming into the market, business is returning to London that hasn't been seen here in a long time, market executives say.
Although the market at midyear continues to be soft for most lines of coverage, buyers could see an upturn in the near future, some executives predict.
London underwriters maintain there are some faint signs that the market has hit bottom and is poised for an upturn. British auto insurance rates, often a bellwether for other non-marine lines, are on the rise.
In many areas of the London market, however, rates continue to fall as they did during year-end renewals. Worldwide property catastrophe reinsurance rates are dropping as much as 50%; North American liability reinsurance is seeing 10% to 25% reductions; and North American liability insurance can command 30% to 50% rate reductions.
Terms and conditions also are broadening. For example, multiyear property programs are becoming fashionable. There also has been a return to a retrocessional market not seen since the 1980s, when the London market excess-of-loss spiral took hold in London and cost the market billions in losses.
"We are busy with our July 1 renewals, and we are surprised by the number of new opportunities we are seeing," said Ken Barrett, chief underwriting officer for casualty, strategic marketing and development for Zurich Reinsurance Co. in London.
The London market may only accept about 10% of this new business, "but it's good to see the business coming in," he said.
"London has been re-emphasized and London orders are up," added Neil Maidment, treaty underwriter for Lloyd's syndicate 623, managed by Beazley Furlong Ltd.
Lloyd's has been described as particularly aggressive this season to get the business.
"London is again more buoyant than in the last few years and there's a lot more capacity," said Ross McKenzie, chairman-non-marine for Aon Group Ltd. "There is a fair bit of bullishness around Lloyd's and the London market."
There's a better choice of leads in London now than there has been "in many years," he said. Lloyd's also is very competitive and is "back on stage as a major competitor in the world marketplace."
And the market is indeed competitive in London during midyear renewals of primarily U.S. and Australian business, just as it was during year-end renewals.
Mark Boleat, director general of the Assn. of British Insurers, warns that "to maintain profit levels this year or achieve an increase will require higher premiums or a reversal of the recent upward trend in claims."
However, Mr. Boleat concedes that "further pressure on profits can be expected this year with strong competition for business."
"It's getting tougher, and it's going to continue getting tougher," added David Mann, chief underwriter at Lloyd's underwriting agency D.P. Mann Underwriting Agency Ltd. Rates are "still getting weaker," he said. Asked if he sees any sectors of the London insurance market showing even faint signs of improvement, Mr. Mann replied: "Absolutely none."
Others are more optimistic.
Tony Baker, the ABI's deputy director general, says auto insurance-which is sometimes seen as a bellwether for the rest of the market-is showing rate increases of about 5%. This is still well short of the 10% increases that the sector needs to return to profit, Mr. Baker added.
Indeed, the U.K. auto business is showing signs of lifting off the bottom, added Mark Brockbank, group chief executive for Brockbank Syndicate Management Ltd. and underwriter for Lloyd's syndicate 851.
And there are signs that the downward pressure on U.K. policyholders' rates appears to have ended in other fields, such as property, accident and health, and general liability, said Mr. Baker. But because competition remains fierce, "it will be difficult to get any rate increases to stick."
"There are signs of the market moving upwards," added Reg Brown, liability underwriter for Lloyd's syndicate 702, managed by Octavian Syndicate Management Ltd. U.K. property rates are probably as low as they're going to get, he said.
Other than in these domestic U.K. categories, however, the London market remains soft for international business.
"We are certainly down" in the underwriting cycle, said Aon's Mr. McKenzie. "I don't know where the bottom is anymore, but we're at the lower end of the market than we've been in the last decade."
As long as there isn't a major catastrophe, "there is no reason for pricing to be corrected," Mr. McKenzie added.
"There is ferocious competition for business because we are facing a long period without any losses," added John Pelly, chairman of non-marine reinsurance for Willis, Faber & Dumas Ltd., the reinsurance unit of Willis Corroon Group P.L.C.
Since 1993, reinsurers around the world have made "significant" profits because prices have been steep and there have been few catastrophes, he said. "It's been a good period for the insurance industry, superior results for reinsurers."
Underwriters therefore are now battling for market share, he said.
The market will continue to be soft at year-end renewals, when even more capital will come into the London market, executives add.
"It's quite a good time to start an operation because from here, the likely direction is up" in the underwriting cycle, said Wayne Daniel, executive director in charge of comprehensive risk solutions for Liberty Re Ltd.
Liberty Re hopes to be licensed by the Department of Trade and Industry by year-end renewals with capital of (British pounds) 250 million ($416.1 million).
The company expects to write (British pounds) 500 million ($832.3 million) of premium annually within five years, said Mr. Daniel.
"We are still in a very competitive market, and generally rates are falling," added Brian Cragg, chairman of London International Insurance & Reinsurance Market Assn.'s statistics subcommittee and general manager of Cologne Re Ltd. in London.
LIRMA's survey released last month of the year-end renewal season as of Jan. 1, 1997, shows that while most London-based insurers and reinsurers are reporting large profits, "generally the terms they are writing on are getting worse," he said.
Mr. Cragg said reinsurers need to look again at rating levels. "If the historical claims frequencies have not changed, it would be difficult to justify the level of rates (at the next renewals) we are seeing today," he said. However, he is not optimistic that this downward direction in rates will be reversed in 1998.
LIRMA's survey of two-thirds of the London reinsurance company market showed that gross premium volume fell at year end, as did the number of reinsurance contracts being written.
According to Mr. Cragg, this could be the result of recent consolidation among insurance companies, leading to fewer companies taking larger layers of cover for themselves and passing on larger contracts to fewer reinsurers.
LIRMA's survey also showed that:
Rates for property catastrophe reinsurance fell by 10% to 15%.
Property non-proportional business was one of the weakest sectors, with 85% of contracts showing decreases in rates on line, compared with 70% showing decreases in the January 1996 renewals.
Mr. Cragg noted this sector remains "very competitive" and said there has been little change from this trend at the midyear renewals.
Cedents retained more of their property proportional treaty business.
These conclusions match what underwriters are saying in the market during midyear renewals, though some say rates have decreased even further. For example, one executive claims that property catastrophe reinsurance rates have fallen by as much as 50%.
Beazley's Mr. Maidment added that property catastrophe reinsurance rates on line are down about 10% to 15% in the United States but by as much as 20% elsewhere.
Rates for catastrophe risks remain weak in the absence of any major losses, added Mr. Brockbank.
That makes this year's hurricane season very important in determining the direction rates will go. "If there are no major claims, the market is going to keep sliding downwards," he said.
Underwriters also see a continuing soft market in the liability field.
Of the liability side, Octavian's Mr. Brown said, "All one can say, generally speaking, is that the market is still very competitive at the moment."
Ken Davies, chief underwriter for syndicate 463, managed by Archer Managing Agents Ltd., agreed that the market for employers liability and general liability remains competitive, though he said further reductions are being seen in most risks, particularly on larger accounts.
London lost hundreds of millions of dollars worth of North American general liability insurance business in the mid-1980s when the market decided only to offer claims-made policies rather than occurrence forms, said Zurich Re's Mr. Barrett. Much of this business that was lost to the market "could have been written on an occurrence form to this day" without causing massive claims, he said.
Today, less than a handful of companies, including Zurich Re, offer North American general liability insurance in London, he said. "Unless the London market is prepared to do something substantial-such as cut prices dramatically-this business won't return," said Mr. Barrett.
Zurich Re has pared its North American casualty insurance volume by about 40% in the past three years rather than accept the soft prices, however. There are "cutthroat" North American casualty prices slashed by as much as 50% being seen in London right now coming from the Bermuda and U.S. markets, said Mr. Barrett.
London does offer other types of liability coverage, however, said Mr. Barrett, such as North American casualty reinsurance, where rate reductions are from 10% to 25%; and professional liability insurance, where there are reductions of 20% to 30% for lawyers.
London underwriters are questioning whether they should introduce exclusions on liability policies, particularly professional liability policies, for the Year 2000 computer problem, but so far only a few have been drafted because of the soft market.
Even though directors and officers liability insurance also is very cheap, Lloyd's Mr. Brown is concerned that clients are buying inadequate limits. For example, a typical directors and officers liability policy has a limit of (British pounds) 5 million ($8.3 million), which he thinks is "wholly inadequate." Mr. Brown attributes this situation to the phenomenon that when rates are cheap, clients want to get their insurance coverage as cheaply as possible.
D&O liability "is the most competitive of all due to the lack of claims made in this area and the large capacity that is now being offered by each of the main insurers," added Archer's Mr. Davies.
Meanwhile, in London's marine sector, Mr. Brockbank says rates remain soft and are still being reduced rather than increased. However, "there are small signs that the bottom many have been reached" in that there appear to be fewer fringe players, he said.
Peter Wright, chief underwriter for Archer marine syndicate 741, said overcapacity continues to push down rates in this sector, and some large syndicates and "aggressive" insurance companies, eager for more income, are leading business in which they have no experience.
More optimistically, Mr. Wright says, "Although it is difficult to predict when the bottom of the cycle will occur, there are some signs of determination by underwriters not to give in to every owner and client."
In the aviation market, Richard Maylam, chief underwriter on Archer aviation syndicate 270, says premiums have continued the decline this year that began last year as a result of a combination of overcapacity and low losses. However, he points out that world airline premiums have risen "dramatically" since the low point of the rating cycle in 1990 as airlines increased their fleet values and passenger mileage.
This midyear renewal season is unique in at least one way, however. In the past six months, there have been at least five major broker acquisitions in a battle for first place between Aon Group Inc. and Marsh & McLennan Cos. Inc. Most of these mergers have driven monumental consolidation in the London broker market.
Aon and J&H/M&M together account for 50% of the gross premiums placed at Lloyd's, according to underwriters.
Most London executives say it is too early to say how these mergers will change the marketplace.
"It is difficult to see any effect at the moment," said Stephen Riley, managing director of Swiss Re U.K., which merged with Mercantile & General Reinsurance Co. last year. However, "our clients have fewer choices, and there is a concern about that."
Swiss Re U.K. won't know until the year-end renewal season how successful it has been it retaining M&G Re's business, Mr. Riley added.
"It is slightly early days, but I'm sure it will have an impact on the market," said Beazley's Mr. Maidment. The brokers should be able to control their costs better, which could be an advantage, he added.
Executives who have been in the market for a while and have seen many a merger already await the spinoff brokers that will be formed by the scores of people who will be laid off as a result of the recent acquisitions.
Despite the mergers, however, "there are still plenty of competitors out there," said Aon's Mr. McKenzie. There used to be the Big Six in London and now there are the Big Four "or Big Two plus Two," he said, referring to Aon, J&H/M&M, Sedgwick Group P.L.C. and Willis Corroon Group P.L.C.
Regarding the mergers, though, "clients are very positive," said Mr. McKenzie. "They see us as bigger, stronger and with a better spread. And they're allowing us a honeymoon period."