Patrick Tiernan, Chief of Markets at Lloyd’s, explained this morning that catastrophe loss exposure remains a key focus at the insurance and reinsurance marketplace, with loss picks set to be continually scrutinised.
Delivering a May market message, Tiernan said that in the past Lloyd’s has seen catastrophe losses exceeding plan and that while things are improving, it remains a key target to keep the gap narrowed.
“We’ve done a lot of work with you to validate the cat loss ratios are appropriate, but this work is not complete,” Tiernan explained.
Adding, “When we spoke in March, we said that we expected certain features of recent reinsurance renewals, such as the lack of sideways cover, increased attachment points, and tighter coverage, to actually increase the volatility of cat exposed portfolios.
“This means it’s more important than ever, that we can have confidence in your understanding of the gross risk.”
He continued to say, “With that in mind, we’ll continue to scrutinise the entire catastrophe risk distribution, including modelled average annual losses and the SBF (Syndicate Business Forecast) catastrophe loss ratios at 1 in 10, 1 in 30 and in in 200 year metrics.
“We need to make sure that your cat loss picks are appropriate for the current risk environment.”
Tiernan also cautioned Lloyd’s market participants not to get over-excited in the current hardening reinsurance market environment.
“Just to be clear, the improving rate environment does not alleviate the need to understand your aggregations and manage exposure properly,” he said.
Adding that, “A rising tide will not float boats that are holed below the waterline.”
Moving on to discuss the use of reinsurance in the Lloyd’s marketplace, Tiernan noted that conditions for reinsurance buying are not so easy in the hard market.
“Given the relatively high ceding percentage to third-party reinsurers from Lloyd’s, at about 25%, we are sensitive to the current market volatility,” he explained.
Adding, “This is probably particularly the case for management of aggregations and systemic risk, there’s still a heightened level of execution risk associated with the outwards reinsurance purchasing.
“So if reinsurance coverage is not back-to-back with inwards business, we expect that your net line sizes and aggregations will reflect this gap in cover, and you will price and capitalise accordingly.”
He highlighted facilities as an area that Lloyd’s oversight will be directed, in relation to reinsurance and its sufficiency.
“We’ll be particularly focused on this misalignment where syndicates are writing on facilities with expansive wordings if the syndicate cannot demonstrate the aggregation of risk properly,” Tiernan told the market.
“I think the market did a very good job on this in last year’s planning round, so basically we’re asking for more of the same.”
