MARKET UPDATESPECIALTY, PROPERTY & CASUALTY BULLETIN OCTOBER 2017

London property and business interruption insurance market updateIn our latest bulletin, we consider the insurance market results of 2016, particularly at Lloyd’s. We also look at the significant events of 2017 and how these have led to a tougher approach to pricing from some markets. We consider here, whether current market volatility is temporary or staying for the short to medium term future.

MARKET ENVIRONMENT PREVAILING PRIOR TO Q3 2017In recent years the London property and

business interruption insurance market

has been characterised by intense

market competition and falling prices due

to new capital inflows from alternative

capital providers. This has resulted in

downward pressure on premium prices

especially where standard cover is being

purchased in a transactional manner with

a willingness on the part of buyers to

change insurers’ year on year. This trend

having been reinforced by what can best

be described as an unusually long period

of relatively benign loss aggregation.

2016 was unquestionably a buyer’s

market with supply still far exceeding

demand. Stagnant interest rates meant

that (re)insurance continued to lure in

new capital with its typically high return

offering. At the end of 2016 JLT Re

estimated reinsurance sector capital

to be approximately USD 320 billion

(compared to premiums of USD 255

billion), a supply and demand imbalance

and a market awash with capacity.

Lloyd’s of London alone saw an average

of 7.5% increase in syndicates over the

three years prior to 2016 contributing

to this challenging environment and

ultimately leading to deteriorating returns.

Inevitably this was beginning to result

in push back on rate reductions in the

first quarter of 2017 (which at the same

time a year earlier was unheard of).

Insurer’s ability to further reduce prices

was becoming increasingly limited as

rates were in many cases already below

technical adequacy and therefore no

longer economically viable in the longer

term. In 2016 Lloyd’s posted a 97.9%

combined ratio, 7.9 percentage points

worse than in 2015.

2 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017

2016 COMBINED RATIO

ACCIDENT YEARPRIOR YEAR RESERVE MOVEMENT

CALENDAR YEAR

Reinsurance 102.3% (10.0)% 92.3%

Property 106.6% (3.2)% 103.4%

Casualty 102.9% (0.2)% 102.7%

Marine 108.4% (2.2)% 106.2%

Energy 106.4% (13.8)% 92.6%

Motor 108.9% 2.6% 111.5%

Aviation 106.9% (22.2)% 84.7%

Life 113.0% (2.6)% 110.4%

Source: Lloyd’s of London

Most of the factors behind this

deterioration matched the industry’s

general trends: higher catastrophic (CAT)

losses and major claims paired with

reduced levels of reserve releases which

more than offset a better underlying

performance. The true performance

in 2016 was additionally masked by

positive foreign exchange gains.

The rate of premium reductions was

therefore already moderating during the

early part of 2017 from the double-digit

falls that were typical just 18 months

previously and indeed even starting

to stabilise in some areas especially in

the reinsurance market (which would

inevitably start to feed through to the

retail purchaser in time). What was clear

was that reinsurance was propping up

the market with most other significant

lines losing money.

The sustained headwinds of modest

premium growth, low investment returns

and reduced reserve releases in an

environment of excess capacity had also

resulted in a number of important merger

and acquisition (M&A) deals reflecting

that difficult market conditions had

started to limit organic growth potential.

Towards the end of 2016 amid growing

incidences of reserve strengthening there

were already early signs of a pricing floor,

with some lines of business and regions

seeing rates stabilise for the first time

in years. Even the power sector, which

saw over USD 1 billion of losses to the

market in 2016, didn’t harden in the way

we would have expected as the continued

abundance of capital seemingly prevented

any meaningful increases in premiums.

*The combined ratio for the market and by

class of business is the ratio of net incurred

claims and net operating expenses to net

earned premium. The prior year reserve

movement represents the ratio of the surplus/

deficit arising on reserves set at December

2015 to overall net earned premiums in

calendar year 2016. The overall combined ratio

includes central adjustments in the technical

account in respect of transactions between

syndicates and the Society as described in

notes 2 and 8 to the PFFS (pages 55 and

72). The combined ratios and results for

individual classes of business do not include

these adjustments as the market commentary

for each class reflects trading conditions

at syndicate level as reported in syndicate

annual accounts. The underwriting results and

combined ratio tables include the results

of all life and non-life syndicates transacting

business during 2016. The results and the

net assets for life syndicates are not material

and have not been separately disclosed in the

profit and loss account and balance sheet. The

results for life business have been reported in

the segmental analysis, note 9 on page 73.

The combined ratio, the return on capital, the

investment return, the underwriting result and

the accident year ratio are considered to be

metrics which are consistently used to analyse

financial performance in the Lloyd’s Market

Result’s and/or in the Society Report. These

metrics (wherever used in the Annual Report)

are considered to be Alternative Performance

Measures (APMs) with further information

available on pages 196 to 197 of Lloyd’s 2016

annual report.

UNDERWRITING RESULT BY CLASS*

£M

Reinsurance 548

Property (202)

Casualty (146)

Marine (129)

Energy 59

Motor (103)

Aviation 71

Life (8)

COMBINED RATIO BY CLASS*

%

Reinsurance 92.3

Property 103.4

Casualty 102.7

Marine 106.2

Energy 92.6

Motor 111.5

Aviation 84.7

Life 110.4

Source: Lloyd’s of London

www.jlt.com | Market Update 3

NATURAL CATASTROPHE LOSSES DURING FIRST HALF OF 2017According to Munich Re a series of

hailstorms and tornadoes in the USA

dominated the natural catastrophe

statistics in the first half of 2017. A total

of six severe, large-scale thunderstorms

were recorded, each causing billions of

dollars of losses.

Worldwide natural catastrophe losses

from January up to July were however

still below average. Overall losses came

to USD 41 billion. The corresponding

figure for the first half of 2016 was

USD 111 billion; the average for the last

ten years USD 102 billion. Insured losses

totalled USD 19.5 billion (previous year:

USD 32 billion; ten-year average

USD 29 billion).

This said Lloyd’s announced that

pre-tax profits fell by almost 17% to

GBP 1.22 billion (USD 1.64 billion) for

the first half of 2017 despite it being a

benign period for catastrophe events

and large losses.

The property market is braced for a

significant ‘man-made’ claim from Merck.

The US pharmaceutical giant is preparing

to file a claim which the market fears

could be as high as USD 1 billion to

USD 1.5 billion owing to losses resulting

from the NotPetya cyber-attack, as

revealed in The Insurance Insider.

Given that the loss stems almost entirely

from business interruption, the quantum

at this early stage is highly uncertain, but

a range of market sources pointed to

estimates in the above range.

Profit before tax (2015: £2,122m)

£2,107m

Gross written premium (2015: £26,690m)

£29,862m

Combined ratio* (2015: 90%)

97.9%

Investment return* (2015: £402m)

£1,345m

Pre-tax return on capital* (2015: 9.1%)

8.1%

2017 HALF YEAR LOSS OVERVIEW (UP TO JULY)

• Total economic losses from

natural catastrophes in the

first half of 2017 reached

USD 41 billion (down from

USD 111 billion in 2016)

• Insured losses from natural

catastrophe events totalled 19.5

billion (down from USD 32

billion in 2016)

• 75% of insured losses emanated

from the USA

• Hail remains the largest driver

of storm losses

• The event which incurred the

highest insured loss was a

large thunderstorm in USA in

early May, costing insurers

USD 1.8 billion

• 350 relevant events were

recorded on Munich Re’s

NatCat database in H1 2017

• The second most expensive

event of H1 2017 was Cyclone

Debbie in Australia, with

total economic losses of

USD 2.7 billion and insured

losses of USD 1.4 billion

• Approximately 3,000 people lost

their lives in catastrophe events

in the first half of 2017 (the

lowest for 40 years)

• Energy losses reached

USD 1.64 billion by the end

of July 2017

• The largest power loss was

USD 42.2 million emanating

from Saudi Arabia

• H1 2017 storms are expected to

cost insurers approximately

USD 14 billion.

Sources: Munich Re, Inside Fac, Insurance Insider, Insurance Journal

“Worldwide natural

catastrophe losses from

January up to July were

below average. Overall

losses came to USD 41

billion. The corresponding

figure for the first half of 2016

was USD 111 billion.”

4 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017

MAN MADE

NATURAL CATASTROPHE

DATE EVENT COUNTRYINSURED LOSS (USD M) EVENTS ABOVE 25M

Jan-17 Major Fire at Refinery UAE 1000

Jan-17 Lost Oil Shipment - Refinery Shutdown Morocco 400

Jan-17 Offshore Well Blowout UK 79

Jan-17 Major Fire at Refinery Japan 125

Jan-17 Petrochemical Plant Fire Abu Dhabi 35

Jan-17 Major Fire at Refinery Ivory Coast 175

Jan-17 Coal-fired Turbine Failure Saudi Arabia 42

Jan-17 Apartment Block Fire US 36

Jan-17 Automotive Factory Fire Czech Republic 212

Jan-17 Riots Mexico 225

Jan-17 Chemical Factory Fire Finland 578

Jan-17 Wildfires Chile 890

Feb-17 Apartment Block Fire US 32

Feb-17 Petrochemical Plant Fire Canada 29

Feb-17 Fraud South Korea 100

Feb-17 Aquaculture Algae Bloom Loss Mexico / Chile 45

Feb-17 Petrochemical Plant Mechanical Failure US 32

Mar-17 Loss of Cargo Ship Korea 40

Mar-17 Oilsands Fire Canada 566

Mar-17 Apartment Block Fire US 25

Apr-17 Fire and Explosion at Fertiliser Plant Norway 46

Jun-17 Tower Block Fire UK 65

DATE EVENT COUNTRYINSURED LOSS (USD M) EVENTS ABOVE 25M

Jan-17 Severe Storms - Mississippi US 200

Jan-17 Multiple Tornadoes US 300

Jan-17 Windstorm Egon UK & Europe 248

Feb-17 Texas Tornadoes US 120

Feb-17 Extra-Tropical Cyclone Thomas / Storm Doris UK & Europe 280

Feb-17 Floods Peru 380

Mar-17 Cyclone Debbie Australia 1400

Mar-17 Severe Snowstorms US 125

Mar-17 Severe Weather - Midwest, Southeast US 500

Mar-17 Extra-Tropical Cyclone Zeus Europe 303

Mar-17 Texas Hailstorms US 300

May-17 Severe Weather - Plains, Mississippi Valley, Southeast US 125

May-17 Colorado Hailstorms and Severe Weather US 1800

May-17 Severe Weather - Midwest, Plains, Rockies US 700

May-17Severe Weather - Midwest, Plains, Mississippi Valley, Southeast, Rockies, Mid-Atlantic, Tennessee Valley

US 1200

Jun-17 Floods Canada 100

Jun-17 Hailstorm Paul Germany 455

Jun-17 Severe Storms - Midwest, Plains US 100

Sources: Swiss Re Sigma, Munich Re, Inside FAC

Sources: Swiss Re Sigma, Munich Re, Inside FAC

www.jlt.com | Market Update 5

NATURAL CATASTROPHE LOSSES SINCE 1 JULY 2017In sharp contrast losses in the second

half of 2017 have been dominated by

a series of major catastrophe events

occurring in a relatively short period of

time in particular Hurricanes Harvey,

Irma and Maria which made landfall

on a number of Caribbean islands

before turning towards the US causing

significant damage in the states of Texas

and Florida.

These losses have been supplemented

by Typhoon Hata (which made landfall

in the Pearl River Delta of southern

China battering Zhuhai, Macau and

Hong Kong), widespread flooding during

August across the Indian sub-continent

and a serious Earthquake in Mexico all

causing both loss of life and significant

property damage. Mexico’s Evaluacion

de Riesgos Naturales (ERN International)

has provided an insured loss estimate of

up to USD 4.8 billion for the Magnitude

7.1 earthquake that struck around

120km southeast of Mexico City.

Fitch ratings has warned that

catastrophe losses for the global

insurance and reinsurance sectors in

2017 will exceed USD 100 billion and

could reach close to USD 190 billion

on a pre-tax basis, which would be the

highest on record in a single year adding

that losses on this scale could weaken

capital at some (re)insurers and increase

the risk of rating downgrades.

Citigroup have warned that the recent

hurricanes could wipe out 2017

earnings for three out of Europe’s four

largest reinsurers, with the exception of

Hannover Re.

Lloyd’s meanwhile stated in its interim

report that “Windstorms Harvey and

Irma have caused significant damage

in the states of Texas and Florida in the

US and to a number of islands in the

Caribbean. It is currently too early to

reliably estimate the financial impact of

these loss events to the Lloyd’s market

given the level of uncertainty at this stage

of development. Our preliminary analysis

indicates net claims, after reinsurance,

to the Lloyd’s market in the region of

USD 4.5 billion” and adding that there

“remained a high degree of uncertainty

around the insured loss value for damage

caused by Hurricane Maria, and that the

marketplace had not yet quantified the

financial impact.”

Hurricanes Harvey, Irma and Maria will

have a particularly concentrated impact

on the property insurance portfolios

of the major Lloyd’s Syndicates since

35% of the revenues underwritten in the

Lloyd’s market as a whole emanate from

US and Canada.

6 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017

LLOYD’S CLASS OF BUSINESS BREAKDOWN BY REGION

US AND CANADA

OTHER AMERICAS

UNITED KINGDOM

REST OF EUROPE

CENTRAL ASIA & ASIA PACIFIC

REST OF THE WORLD

TOTAL FOR ALL REGIONS

Reinsurance 22% 70% 28% 29% 46% 62% 31%

Property 35% 8% 26% 20% 14% 11% 27%

Casualty 26% 10% 25% 22% 28% 10% 24%

Marine 7% 7% 6% 18% 7% 6% 8%

Energy 5% 2% 2% 4% 2% 2% 4%

Motor 3% 1% 11% 3% 1% 5% 4%

Aviation 2% 2% 2% 4% 2% 4% 2%

Total GWP 50% 7% 15% 14% 10% 4% 100%

LONDON PROPERTY AND BUSINESS INTERRUPTION INSURANCE MARKET ENVIRONMENT POST US HURRICANESFollowing hurricanes Harvey, Irma and

Maria many London based underwriters

have already been advising that, in

their view, a pricing floor has now been

reached and they are definitely now

expecting to see an uptick in their

reinsurance costs at year end in addition

to the costs of the losses that they must

now settle.

In view of this we have received

numerous indications from the London

property underwriters that the best they

will currently consider offering in terms

of rating will be flat to a small increase

where an account has run well and

does not include significant natural

catastrophe exposure. There is also an

increasing resistance developing against

policies of more than 12 months in

duration / long term agreements. Critical

natural catastrophe aggregate is getting

the greatest attention, becoming harder

to obtain and more expensive.

We are seeing many similarities to

1999 during which year the reinsurance

market also bottomed out following five

years of steep pricing declines that had

resulted from excess capacity, historically

low reinsurance rates, volatile equity

markets, stagnant premium growth,

lacklustre returns, a flurry of mergers and

acquisitions (M&A) activity and questions

about the future of the reinsurance

business model as a whole. The market

then experienced a period of rates

hardening triggered by the 9/11 attacks,

an equity market crash, a reserving crisis

and a succession of devastating land

falling hurricanes in the United States.

At this stage it remains difficult to predict

the longer term impact of the 2017

losses though it is clear that clients

and property brokers need to be aware

that the London property and business

interruption insurance market, and

Lloyd’s in particular, is definitely entering

a period of significant reflection. The

immediate market push is for increased

premiums but to follow are possible

amendments to risk models and reduced

aggregate available for critical natural

catastrophe exposures. Rate reductions

are looking rarely achievable in the

months ahead and possibly beyond.

In summary it is evident that many in

the Lloyd’s market are now looking to

achieve a greater return ‘from the many’

to contribute more towards balancing the

costs of “the losses of the few”.

THE LONGER TERMWhilst as mentioned above longer

term predictions cannot be made with

any certainty there is an underlying

expectation from some over increasing

frequency and severity of catastrophe

losses from the increasing impact of

climate change. In addition some expect

the greater complexity of businesses,

and higher levels of interconnectivity

between them, will inevitably fuel

a growth in the scale of business

interruption claims, especially from

supply chain interruption where just in

time management is now more than

often the norm.

Concerns about rising flood exposures

in particular are well documented and

reflected within the developments made

to the latest flood models. The results

from these models in turn could

impact on future risk pricing and

reinsurance costs.

Furthermore and ahead of a busy year

end treaty season, unlike in 2016,

reinsurance is bound to make a loss in

2017 and the likely increased cost of

treaty renewals will probably have an

impact on to pricing generally as we

move into 2018.

Source: Lloyd’s of London

www.jlt.com | Market Update 7

100

90

80

70

60

50

40

30

20

10

0

400

350

300

250

200

150

100

50

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Economic Loss (bn) Uninsured Loss (bn) Number of Floods

Num

ber

of F

lood

s

US

D (B

illion

s)

FLOOD - INTERESTING FACTS

Economic losses from European

flood damage are expected to

increase four fold to EUR 23.5

billion by 2050

Extreme floods, like those in

2013, are expected to increase

in frequency from 1/16 year

events to 1/10 years, while also

increasing in duration

The leading factor in increased

insured losses will be socio-

economic growth, with more

buildings being located in flood

prone areas

Climate change will also play a

significant role as heavier rain,

swells rivers and causes sea

levels to rise

Rising sea levels will

have a severe impact on

coastal flooding

These predictions are the

result of new modelling

techniques which recognise

the link between different river

basins, rather than treating

them independently

Low-latitude coastlines will be at

risk first; however sea level rises

of 10-20cm will put almost every

coastline at twice the risk

of flooding

Sea level rises make large

waves and storm surges

increasingly likely to

overwhelm coastal defences

As many as 670 coastal

communities in the USA may

become uninhabitable due to

the persistent flooding by the

end of the century.

NUMBER OF FLOODS AND LOSS AMOUNTS

Source: Munich Re

Sources: European Commission, National Geographic

8 SPECIALTY, PROPERTY & CASUALTY BULLETIN | Market Update | October 2017

JLT provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference – using insight, intelligence and imagination to provide expert advice and robust – often unique – solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles.

Our Specialty Property & Casualty (SP&C) division has over 150 individuals based in London and Birmingham. We have enhanced focus on property and casualty programmes for complex, risk managed clients worldwide, with particular knowledge and experience in the following sectors: Power, Mining, Professions, Life Science, Transport, Food & Agri and Communications, Technology & Media.

Jardine Lloyd Thompson Group plc, incorporated and registered in England and Wales. Registered Office at The St Botolph Building, 138 Houndsditch, London, EC3A 7AW. Registered number 1679424.

© October 2017 275526

CONTACTS

CHRIS STEVENSONSenior Partner+44 (0) 20 7466 6210 chris_stevenson@jltgroup.com

This document is compiled for the benefit of clients and prospective clients of companies of the JLT group of companies (“JLT”). It is not legal advice and is intended only to highlight general issues relating to its subject matter; it does not necessarily deal with every aspect of the topic. Views and opinions expressed in this document are those of JLT unless specifically stated otherwise. Whilst every effort has been made to ensure the accuracy of the content of this document, no JLT entity accepts any responsibility for any error, or omission or deficiency. If you intend to take any action or make any decision on the basis of the content of this document, you should first seek specific professional advice. The information contained within this document may not be reproduced and nothing herein shall be construed as conferring to you by implication or otherwise any licence or right to use any JLT intellectual property. If insurance and/or risk management advice is provided, it will be provided by one or more of JLT’s regulated companies depending on the territories requiring insurance and/or risk management advice. www.jlt.com

2011 THAILAND 16.0BN

2016 US – LOUISIANA 3.0BN

2013 GERMANY 16.0BN

2007 UK 2.9BN

3.4BN2016 WEST/CENTRAL EUROPE

2007 AUSTRALIA 2.3BN

2.1BN2010 US – MID ATLANTIC

2.0BN2010 AUSTRALIA

1.9BN2013 CANADA

1.6BN2013 US – NORTH EAST

TOP 10 FLOOD LOSSES (USD)

TOP 10 FLOOD LOSSES (USD)

350

300

250

200

150

100

50

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Natural Catastrophes Man Made Disasters

Insured Losses

US

D (B

illion

s)

Num

ber

of D

isas

ters

400

350

300

250

200

150

100

50

0

Economic Losses

Source – Swiss Re

Source – Swiss Re, Sigma Explorer

Flood events together with wind storm events are the two perils

where we see the biggest increase in frequency worldwide.

Source – Ernst Rauch, of Munich Re’s Corporate Climate Centre