The article below, by Rachel Cohen, Senior Treaty Broker at New Dawn Risk, was originally published in Insurance Day in March 2021.
The market is hoping that as Covid-induced losses start to come through, and reinsurance rates harden, it will drive further increases in underlying liability rates in the region.
Before the onset of the global pandemic and the subsequent lockdown at the end of March 2020, the reinsurance sector had certainly seen some hardening of rates in the January 1, 2020 renewals, compared to the recent past.
In the international casualty treaty sector, this hardening was more prevalent on loss-affected programmes. Reinsureds were achieving more and more increases in underlying rates, in particular on directors’ and officers’ (D&O) and the professional lines business, where increases were anything between 25% and 200%, even where accounts were claims-free. However, it could still be argued that rates were still not quite where they should be, mainly because of the abundance of reinsurance capacity in the market.
Modest rate rises
Fast forward to the recent January 1, 2021 renewals and it can be said that for the most part, casualty treaty reinsurers remain fairly subdued about the overall reinsurance rate changes that were achieved. There was certainly a hardening of rates, particularly on distressed accounts, but not the emergence of the hard market that many had speculated would finally occur post-pandemic.
In the Middle East, many cedants during the July 2020 and January 2021 renewal meetings told their reinsurers they were achieving underlying rate increases on bankers’ blanket bond and D&O business for the first time in a long time. These rate increases range from +5% to +30%, which is considered significant for the Middle East.
This certainly brings a glimmer of hope that the United Arab Emirates (UAE) market is turning, even if that turn is in its very early stages. Even on general liability policies where rate decreases have traditionally been recorded year on year, cedants were reporting that rates were finally holding flat, which can certainly be described as an achievement.
These rate increases bring welcome news to those reinsurers who participate on proportional placements and therefore directly benefit from these increases. In addition to this, the treaties that New Dawn Risk places in the UAE continue to remain even more profitable because of the absence of significant casualty losses, certainly compared to London market placements.
It was also apparent, particularly during the recent renewal season, that reinsurers were holding firm on the ceding commission and profit commission levels on their casualty proportional treaty renewals; certainly no decreases were being granted to the reinsureds, and reinsurance rate decreases on non-proportional contracts were also rarely seen.
One key trend in the Middle East market at the moment is the growth in single-project professional indemnity (PI) business risks because of the increase in construction projects in the region. ·while rate increases are being achieved on this line of business, many reinsurers remain cautious about the extensive longtail nature of this line of business, and some are reducing capacity, since 10 years of extended reporting period coverage tends to be standard in the territory.
Covid claims expected
In terms of Covid-19-related claims, liability claims are typically long tail with a lag in reporting, so general liability and workers’ compensation claims have not yet materialised. However, the prediction is there will be a significant rise in these loss notifications all over the world over the next few years.
Several outbreaks of coronavirus have already been linked to high-risk environments, such as gyms, hotels and cruise ships. There is a significant likelihood that all these environments will be sued for not taking proper care of their clients by either allowing them to enter against the government rules or failing to provide a Covid-19-safe environment, resulting in clients catching the virus.
The more of these liability losses that come to fruition, the greater the likelihood that underlying rate increases in the liability sector in the UAE will finally turn positive along with more hardening of reinsurance rates.
As a result of the fallout from the pandemic, closer attention is now being given to wording coverages and more questions are being asked in relation to any existing clauses in contracts that could be construed as ambiguous. Certainly, in the UAE, the majority of cedants are imposing the Covid-19 specific or communicable disease exclusions on all their new and renewal business. Most of our clients have informed us that they have not received pushback from their brokers on applying these clauses to the contracts, which is a great comfort for the reinsurers.
Finally, changes in the Middle East market continue, with insurers and reinsurers moving in and out of the Dubai International Financial Centre and some reinsurers making the decision to write the business out of their European offices instead going forward. In addition, new reinsurance capacity continues to be set up, with the capabilities to write Middle Eastern business.
As 2021 continues, time will tell if there will be an increase in casualty losses, particularly in relation to Covid-19, to continue hardening reinsurance rates or if new reinsurance capacities will continue to suppress this.