The marine hull line is finally “off the Lloyd’s naughty step” as profitability has returned to the sector following a period of remediation, and is now starting to see capacity growth, according to a recent report by broking group Miller Insurance Services.
Hull capacity growth is now evident in some of Lloyd’s syndicates business plans, as is an increase in capacity for those syndicates already with a hull account focus, Miller noted.
Overall, Lloyd’s has provisionally forecast a 14.3% top line growth for all lines of business, which equates to an increase in written premium from £48.9 billion in 2022 to £56 billion for 2023.
An increase in hull capacity without an increase in hull insurance demand should equal a softening market, regarding this statement Miller explained that ‘cost of capital’ is a main contributing factor to these circumstances.
Analysts said: “[Cost of capital] is the return that capital providers require to continue to support the insurance market, rather than transfer to other industry sectors. Capacity in the Direct Hull market is reasonably abundant, but only at the current market level of profitability.
“That capacity will surely dissipate if the insurance market softens significantly. It should also be remembered that hull business is but a small fraction of overall insurance business.”
This years’ forecast for marine hull, according to Miller, is a continuing fragile equilibrium for the market. But the main issue will not be pricing, like it was in 2022, but coverage and wordings, largely brought about by the Russian invasion of Ukraine.
Historically, marine hull has been seen to fluctuate, with other lines of business outperforming it. However, turning to the present day, it is now helping to support these now under- performing lines of business.
As capital providers do not look at hull business in isolation, but at the insurance market holistically, if the market is generally under-performing, then all lines of business come under pressure, Miller explained.
Analysts said: “The prognosis is likely a continuing fragile equilibrium for the Hull market. This is predicated upon rates in the Marine market presently being broadly flat, despite losses from other lines of business.
“This reflects the attraction of the class to underwriters, the remedial action that has been taken and the perceived profitability given the current rating environment. Although, global inflation is providing upward pressure, making renewal negotiations challenging.”
The coverage and wordings issue revolves around three aspects. The first one is reinsurers restricting the aggregation of vessels to prevent a repeat of the multiple losses due to invasion.
Miller explained that the wordings being imposed restrict any recovery to a single risk. At a stroke, this shifts the accumulation risk from reinsurers to the direct underwriters and the potential for this increased retained loss instantly reduces the direct underwriter’s capacity for war risks.
The second aspect is sanctions. War risks are typically insured under covers and lineslips, whereby the leader assumes the sanctions checking responsibility for the market.
According to Miller, many underwriters are finding this unacceptable and are demanding to make their own sanctions checks. This requirement nullifies all value of these facilities if each underwriter is required to make their own decision as to sanctions.
The third aspect is the Russian nexus. Miller has observed that an increasing number of underwriters are looking to distance themselves from having any risks in the region, irrespective of whether the risks are exposed to war perils.
For hull risks, the broker explained, some underwriters are excluding any Russian exposure or touchpoint. This is in addition to any sanctions check.