Capacity cuts and losses push LatAm fac pricing at 1.1

23/12/19

Withdrawals of capacity and a series of major losses have made the first of Latin America’s major renewal dates typified by significant pricing changes for facultative business.

• 40 percent of Latin American fac market renews at 1 January
• Capacity falls as various markets exit, notably several Lloyd’s players
• D&O pricing “totally nuts”
• Property rates up 15-20 percent, energy up as much as 25 percent
• Concern mounts over rising losses, with mining a particular worry

About 40 percent of Latin America’s fac renewals take place at 1 January and, as sources explained, progress to the upcoming contractual negotiations has been tough going.

Companies such as Brit and Aspen have both closed their Miami-based reinsurance operations this year, while Lloyd’s carriers such as Talbot and Beazley have both exited construction – a key Latin American class of business. Furthermore, Lloyd’s continued push to improve its underwriting performance has led other syndicates to cut back their commitments to the region.

n some cases, that has led to reduced capacity being made available to various syndicate-affiliated platforms within Miami and Latin America itself. In others, Lloyd’s players are understood to have withdrawn their support for several managing general agents (MGAs) serving clients in the region.

This withdrawal of capacity has strengthened fac underwriters’ ability to push for price increases at the upcoming Latin American renewal, market sources told The Insurer.

“In general, all the underwriters have seen they can get more pricing,” one senior reinsurance executive explained.

“Part of the reason is a lack of capacity within Lloyd’s,” he said, adding: “A lot of MGAs have lost their paper when Lloyd’s syndicates lost their budgets.”

Another reinsurance executive commented: “It’s a supply and demand situation. It’s reduced capacity because the loss experience has been poor. The coverages were also way too broad with inadequate pricing.”

The source added: “Some classes have had losses like energy and financial lines, and they’ve had increases just because they need them.”

D&O, a Miami-based broking source said, “is totally nuts”.

“The rates were very depressed, and they are now going from one extreme to the other,” the source explained, adding: “Clients are struggling to handle the massive increases – it’s very similar to what happened after the September 11 attacks.”

One contact said: “Overall prices are up, particularly on larger, loss affected programs.”

Another broking source said it was difficult to give a precise range on the level of rate increases for D&O accounts.

However, the source said pricing for property fac placements has increased between 15-20 percent, while for energy, rates have gone up by as much as 25 percent on some accounts.

This has caused issues for some placements covering state-owned assets in the energy and mining industry, for example. Budgets are agreed well before the renewals arise, and the level of increases being sought by some insurers puts the cost of insurance above what has been allocated by the state.

As such, some placements are being extended at their existing terms with renewals pushed back to the first or second quarter as additional funds are sourced to cover the increased cost of coverage.

While some markets have withdrawn, new MGAs have also been formed. The former divisional director of Brit’s Latin American and Caribbean operation, Juan Calvache, has launched a new MGA called Brickell Underwriting Agency (BUA).

Understood to be underwriting on paper provided by Everest Re, BUA will write property fac business for the property, energy and engineering sectors.

Calvache’s former Brit colleague, Yesid Rodriguez, has also launched his own MGA, offering construction and property fac cover. It is backed by the People’s Insurance Company of China and boasts $25mn of capacity.

A shortage of capacity is being blamed in part for the shift in Latin America’s fac pricing dynamic, but it does not tell the whole story, with losses also pushing underwriters to impose increases.

While Hurricane Dorian missed Florida, it hit the Bahamas as a Category 5 storm on 1 September, causing devastating wind and storm surge-driven damage to Grand Bahama and the Abaco Islands. The latter is home to the Bahamas’ main airport, while Freeport Harbour and the Grand Lucayan resort on the former suffered significant damage.

As The Insurer reported back in September, RMS believes (re)insurance industry losses in the Caribbean from Hurricane Dorian will range between $3.5bn and $6.5bn, while AIR Worldwide predicts claims in the region will be between $1.5bn and $3bn.

The loss estimate from Karen Clark & Company (KCC) after damage on Grand Bahama and the Abaco Island stands at $3.62bn.

More recently, the civil unrest in Chile has brought about significant claims to the market, with some estimating total insured losses could reach as much as $2.5bn. Grocery giant Walmart is reported to have suffered as much as $500mn in damage.

At the same time, (re)insurers have grown increasingly wary of providing coverage to Latin American mining projects after a spate of disasters. Back in January, the Vale-owned Brumadinho tailings dam suffered a catastrophic failure, leaving more than 250 people dead. This disaster occurred just over three years after the Mariana tailings dam failure which killed 19 people.

Carriers continue to count the cost of the Ituango dam loss which, market sources said, could hit more than $2bn.

Artiucle from: Insurance Insider