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Contingency market begins recovery following Covid loss crisis​​​​​​​

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The loss-hit contingency market has begun to emerge from a long hibernation, with an influx of business giving an early indication of likely future conditions in the embattled class.

Sources told this publication that there had been a notable uptick in business flowing into the London market from the US as the economy began to open, especially in event cancellation, where rates were moving at around 50% on average, based on prior pricing structures.

The return of non-appearance business has been less pronounced, and sources said that the logistics of organising tours remained highly challenging due to Covid-19 travel measures.

The amount of business is still way down on pre-pandemic levels, above all in the UK and Europe, but sources said an early picture was emerging about how market dynamics would play out, with underwriters looking to boost premium levels without deterring clients from taking out cover.

The contingency sector has faced a twin crisis of devastating losses due to the pandemic followed by a collapse of business, with prolonged lockdown measures across the globe meaning that a negligible amount of cover has been sold in the past year.

Underwriting sources stressed that adjustment of rating had been needed prior to the pandemic, with a spell of festival and prize indemnity claims already having driven some carriers into the red.

Meanwhile, there has been a repositioning in the class, with several lead markets opting to enter run-off, new contingency books being launched, and high levels of staff displacement.

Sources said that new markets Convex, Cincinnati Financial, and Fidelis had all made an impact in the class, with the ability to lay down large lines unhampered by legacy challenges from prior years.

Despite the new entrants, it is more challenging to secure capacity on risks, with increased underwriting scrutiny and smaller line sizes across the market meaning more carriers are required to fill a slip.

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However, there has been little evidence of legacy-free markets pursuing aggressive pricing to undercut competitors. “We haven’t seen anything silly,” one broking source said.

Cover for communicable diseases remains next to impossible to come by, except in very limited circumstances, and underwriters said that the precedent created by global lockdowns made it an uninsurable exposure.

Sources said that the challenge for the class remained providing an attractive product to clients that produces worthwhile underwriting returns.

“It is a luxury product,” one source said. “There is a limit to how much you can put up rates.”

It was highlighted that rating growth at present must be balanced with clients’ ability to pay, with many event organisers on their knees financially after a torrid 16 months of lockdowns, cancellations and uncertainty.

There was some speculation that alternative markets such as ILS may be weighing up the possibility of providing some kind of pandemic cover, but sources in primary markets were sceptical, citing the huge aggregation issues demonstrated by the pandemic and the small scale of potential returns compared to larger classes of business, like property.

A restructured market

The disastrous losses caused by Covid-19 led to a major reshaping of the contingency market in London.

Several prominent participants opted to place their books into run-off, whilst carriers without a legacy sensed an opportunity to build a book off the back of likely rating improvements.

Major exits from the class include Talbot, Markel International, WRB Underwriting and Chubb, which retreated from event cancellation, film and non-appearance business in London.

New markets to enter the space include Convex, Fidelis, Cincinnati Global, IGI and Arch.

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Broking sources said that it was difficult to gauge accurately the total capacity available in the market because none of the largest risks had yet gone through, but that it was likely to be significantly lower than pre-pandemic.

Carriers are expected to be far more reluctant to put down large excess lines on the biggest risks, after the unanticipated loss activity in 2020.

Limited coronavirus cover is available for events such as delays in production, with MGA SpottedRisk and TigerRisk having launched a tailored product.

Covid-19: A loss like no other

Of all the classes of business impacted by the coronavirus, nowhere has it been as severe than in the contingency sector.

The class of business accounted for almost half of gross Covid-19 claims in Lloyd’s with £2.9bn ($4bn) of gross losses, despite the modest scale of the class compared to other staples such as marine, energy and property.

Underwriters had long perceived cancellation due to disease as a threat, and it had been a common exclusion on policies since the Sars epidemic in 2003.

However, a global shutdown on the scale seen in 2020 had been totally unforeseen, and the cover had commonly been offered as a buy-back, which was taken up by many clients.

When countries began to shut down in March 2020, losses began to mount.

Insureds such as the All England Club, which organises the Wimbledon tennis championship, were entitled to substantial payouts.

One of the largest losses came from the delay of the Tokyo Olympics, where overall exposure is thought to be around $2bn, although the fact the event was delayed rather than cancelled will moderate claims.

Lloyd’s is one of the major global hubs for event cancellation business, and a number of syndicates with a sizeable contingency exposure saw their combined ratios suffer as a result.

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In one dramatic incident, WR Berkley 1967 reported a combined ratio of 171.5%. The business said that excluding Covid-19, the combined ratio would have been 88.1%.

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