Aon Financial Lines Insurance Market Review

Q1 2017

Please find below our latest financial lines market quarterly update. If you have any questions or would like to speak with us about any of the points raised, please call your usual Aon contact or get in touch here.
  In this issue:
Market Overview
- Capacity
- Lloyd’s
- Claims
  Market concerns
- Coverage
- Legal
- Regulatory
- Industry
Market Moves
- M&A
- Companies
- People

Market Overview

January 1st 2017 reinsurance renewals presented few surprises, with capacity abundant and competition strong. Munich Re commented: “Market conditions for the renewals were once again challenging, even though the trend towards price reductions had continued to slow”[1]. From a financial lines perspective, renewals were generally uneventful, despite concerns voiced by individual carriers over mounting losses and the long-term viability of current premium rates.

Generally, the market remains significantly overcapitalised, with estimated D&O capacity of over £1billion. Capacity for financial institutions’ professional liability is between £400million and £500million. [We note from a market overview prepared just over ten years ago, in late 2006 that“the current market capacity for Directors & Officers liability for SEC exposed publicly traded financial institutions is approximately €400 million.”]

In an end-of-year letter to the Lloyd’s market, written in December 2016, the Chairman and Chief Executive of Lloyd’s comment that, despite the difficult industry conditions, Lloyd’s has performed well in 2016. However with pressure on rates remaining, the market’s latest results mask “a deteriorating and worrying trend; that current year underwriting is not profitable in aggregate at the moment”. This reflects the 2016 interim results where a combined ratio of 103.7% was reduced to 98% only by prior year reserve releases[2]. Lloyd's will announce its 2016 annual results on 30 March 2017.

Informal market intelligence suggests high levels of claim activity on the crime side with loss ratios reportedly running at around 160% across Europe, 140% in the UK. Some insurers have stopped writing crime business in certain territories, specifically Scandinavia.
Media reports indicate that RBS’ settlement with three of the five shareholder action groups pursuing claims arising out of their 2008 Rights Issue still leaves an estimated 23% of shareholder claims (by value) unsettled. With an overall settlement of £800m offered by RBS and very considerable costs continuing to accumulate, (though the proportion recoverable from various insurance policies remains confidential), the London market is believed to be facing substantial losses from this litigation.
Fallout from the FCA Thematic Review into non-advised annuity sales practices, published in October 2016, continues to concern markets with close underwriting scrutiny of any insured involved in the sale of these products.
LIBOR / EURIBOR trials are scheduled for September 2017.

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Market Concerns

“Social engineering”, a term which properly describes the use of deception to manipulate individuals into divulging confidential or personal information that may be used for fraudulent purposes, has come to be used (in the context of crime insurance at least) to mean specifically the impersonation of individuals to authorise “emergency” fund transfers into fraudsters hands (known as “fake president” fraud in the US). The insurance market has reacted to rising loss levels in this area with a bewildering variety of definitions, exclusions and sub-limited coverage “grants”. It is important that crime policies are correctly drafted to ensure the broadest coverage for this exposure, with no limitation of the sum insured and that they reflect any other policy(ies) that could come into play (in particular, cyber).


2016 saw 270 federal court securities class actions filed in the US, an increase of 43% on 2015’s total of 189[3]. This can in part be attributed to a spike in merger objection suits (described by some commentators as an “anomaly” although the regularity of such anomalies impacting annual SCA figures suggests that their absence over a longer period would itself be anomalous). More fundamentally, we are seeing a marked increase in the activities of smaller plaintiff law firms, often against smaller public companies. As the number of US publicly-listed companies falls and securities class actions increase, the ratio of one to the other rises. This ratio has gone from an annual average of 2.9% between 1997 and 2014 to 3.9% in 2015 and 5.6% in 2016[4].

On May 4th 2017 the Enterprise Act of 2016 will come into effect. An amendment to the Insurance Act 2015, the Act will apply to any policy of (re)insurance that is subject to the laws of England and Wales, Scotland and Northern Ireland and incepts after May 4th, 2017. Among other reforms, the Act changes English law's approach to remedies for late payment of insurance claims, introducing an implied term into every insurance contract that "the insurer must pay any sums due in respect of the claim within a reasonable time" and giving policyholders a potential right to claim damages in the event of late payment. Whilst we do not anticipate an immediate surge of litigation arising from these changes and the UK remains a long way from US-style “bad faith” litigation”, the changes appear likely to affect the dynamic of the claims-handling process in a shift that can only be positive for policyholders.


As part of the inexorable regulatory movement towards individual accountability, the FCA is consulting on extending the Senior Managers and Certification Regime (SM&CR) to all regulated financial services firms in 2018. Introduced in March 2016, the SM&CR was to a large extent intended to address criticism of the Approved Persons Regime by the Parliamentary Commission on Banking Standards. As well as extending its scope, the new regime will implement new rules for Senior Managers, and impose a new certification regime, new conduct rules and changes to the rules for regulatory references. Details of these changes will not become clear until the consultation process is completed but the early 2018 “live” date means that firms affected need to start their implementation planning as early as possible.

Lloyd’s plans to establish a European subsidiary, thus ensuring long term market access to Europe. In a speech to the London 100 Forum on January 26th, (shortly after Theresa May’s statement that the UK would pull out of the single market when it leaves the European Union), Lloyd’s CEO Inga Beale commented:“The subsidiary model is our preferred alternative trading option, and our Brexit team is now reviewing which country within the EU would make the best location for a Lloyd’s subsidiary to be based. There are various factors to consider here and we are taking the views of the Lloyd’s market on board through our various advisory groups.We have a shortlist which we are working on extremely hard and we continued to talk to the respective governments in Davos last week. We will announce our first choice by the end of Q1“[5].

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Market Moves

Argo Group’s acquisition of Ariel Re completed early February 2017
Liberty Mutual acquisition of Ironshore ($3bn) – announced December 2016
Fairfax acquisition of Allied World ($4.9bn) – announced December 2016

Beazley have established a new International Financial Lines team, represented in London by Gerard Bloom, Neale Stevenson, Darren Keane, Adam Parr and Adam Brown. They comment that: “In January 2017 Beazley launched the International Financial Lines team of international management liability and financial institutions. We have recruited 9 underwriters so far in London, Barcelona and Miami with more in the pipeline. We are looking to grow a strong international brand with broad risk appetite servicing the needs of our clients and brokers.”
Berkshire Hathaway Berkshire Hathaway Specialty has announced that it has established a new office in London as of 1st June 2016. Their head of executive and professional liability, Patrick Brown, started on the 18th of January and advises that they ”are looking to write a book of blue chip financial institutions, commercial companies and professional firms with no geographical restrictions and an emphasis on primary and lower excess layers. We want to develop lasting, sustainable and strategic relationships with our client base where we can add tangible value across their insurance needs. We understand the importance of claims service in such relationships so it is no surprise that one of our first hires is Andrew Walker with more than 24 years claims experience and who is now embedded in the business. We don’t have any of the traditional restrictions on what we can and can’t do and are therefore able to structure innovative and bespoke solutions for our clients”.

Sid Kaushik Ace to Zurich (started on February 22nd)
Hans Sherman CV Starr to Barbican
Peter Tjong (Travellers), Mark Bachl-Cohen (Axis) to XL Catlin

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[1] Torsten Jerrowek, member of Board of Management, from press release 07.02.17
[2] Lloyd’s interim report 2016, p 5.
[3] & [4] Cornerstone Research – Securities Class Action Filings, 2016 year in review
[5] Inga Beale, speech to the London 100 Forum on 26.01.17