Competition and emerging re/insurance hubs combined with declining reserves and profitability headwinds suggests that the Lloyd’s of London insurance and reinsurance marketplace is to come under increasing pressure in the months and years ahead, according to Moody’s Investors Service.
In a new report, Moody’s has said that it expects premium growth at the specialist Lloyd’s of London marketplace to slow on the back of intense competition and tepid economic growth, with the market coming under additional pressure from the emergence of reinsurance hubs in places like Singapore, and Dubai.
“The pressure on rates reflects a combination of mounting competition stimulated by a steady supply of new capital, and suppressed demand due to tepid economic and trade growth,” said Helena Kingsley-Tomkins, an Associate Vice President (AVP) and analyst at Moody’s Investors Service.
Furthermore, the report states that declining reserves, the inflow of alternative reinsurance capital, and Brexit, are all additional pressures that Moody’s expects to challenge the profitability of the Lloyd’s marketplace through 2017 and into 2018.
Over the last decade Lloyd’s has managed to double its premium base with a compound annual growth rate (CAGR) of 6.9%. However, over the last five years this has slipped to 4% and Moody’s expects this trend of lower top line growth to continue and even decline in 2017/2018 as rates fall further.
Since 2012 the profitability of Lloyd’s has outperformed its peers, although the gap is now narrowing, highlighted by the market’s sharp reduction in underwriting profitability witnessed in 2016. Moody’s explains that absent reserve releases the Lloyd’s market would have actually recorded an underwriting loss in 2016, with a combined ratio of 103%.
“Moody’s expects lower premium rates and a slowdown in reserve releases to weigh on Lloyd’s underwriting performance again in 2017 and 2018. The market is however, taking steps to increase efficiency to counter this and some respite may also come in the medium term from rising US yields,” explains the report.
Adding pressure to the competitive position of Lloyd’s is the emergence of re/insurance hubs in places like Singapore and Dubai, which Moody’s says will see the Lloyd’s market come under pressure to develop innovative solutions and services in order to remain relevant and keep its market share.
“We expect current competitive conditions to prevail for some time. A central part of Lloyd’s strategy for maintaining its position in the specialty (re)insurance market is to strengthen its existing relationships, while building on its capability for product innovation and using technology to optimize its distribution chain and provide high-quality service to customers,” explains Moody’s.
Adding that Lloyd’s does continue to enhance its global market access with the establishment of new regional hubs in emerging economies, and by looking to embrace and facilitate the expanding insurance-linked securities (ILS) space.
Brexit provides another headwind for the Lloyd’s marketplace as increasing planning costs are to rise in 2017 as Lloyd’s establishes its European insurer in Brussels, says Moody’s. However, Moody’s does expect “the business impact of Brexit to be contained for both Lloyd’s and the UK insurance sector generally.”
Moody’s also stresses the declining reserves releases in the Lloyd’s market. Reserve releases have supported the underwriting profitability of Lloyd’s for the last 12 years, lowering its combined ratio by between 5% and 8%. However, in line with the global P&C industry Moody’s expects reserve releases to reduce in the coming years, meaning Lloyd’s will have less to fall-back on should losses mount and underwriting continue to decline.
“Despite Lloyd’s commitment to underwriting discipline, we believe underwriting margins will continue to deteriorate as a result of ongoing pressure on rates and slowing reserve releases. The slowdown in reserve releases, combined with still low investment yields, will further pressure profitability in 2017 and 2018,” says Moody’s.
