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Lloyd’s performance pressured, but corrective underwriting actions will help: Fitch

9th September 2019 - Author: Steve Evans

The Lloyd’s of London insurance and reinsurance market remains under pressure as its underwriting performance has not lived up to expectations, but Fitch Ratings believes corrective actions taken will help.

chris-grimes-fitch-ratingsSpeaking with Reinsurance News, Director of Insurance at Fitch Ratings Chris Grimes explained why the rating agency maintains a negative outlook on Lloyd’s.

“Our Negative Outlook on Lloyds’ ratings reflects our view that its financial performance remains challenging, with high attritional losses and a stubbornly high expense ratio,” Grimes explained.

Fitch turned negative on Lloyd’s rating outlook right back in mid-2017 and has not lifted that outlook for the market yet.

But Grimes sees signs that a more positive future could be ahead, after the introduction of strict underwriting actions under Lloyd’s so-called Decile 10 initiative.

He continued, “We expect the corrective underwriting actions taken by syndicates should meaningfully improve the combined ratio for Lloyd’s but that it will take time for the benefit of these actions to have an impact on earnings.

“Pressure remains on Lloyds’ underwriting performance and we believe the market’s catastrophe risk remains high relative to that of its peers.”

That suggests Lloyd’s players may require additional retrocession to help in reducing the market’s peak catastrophe exposure.

Which is perhaps something that the use of alternative capital sources could assist in.

Grimes sees a more positive future for Lloyd’s, “Lloyds’ ability to continue to develop innovative and complex coverages along with managing capital market relationships in an effective manner provide the company with strong opportunities in the future.”

The ongoing initiatives to modernise and transform the Lloyd’s marketplace are viewed positively as well.

“The innovation outlined in the Lloyds Future prospectus lays the groundwork for the market to compete effectively in the evolving (re)insurance markets but may face challenges in implementation given its large breadth.

“Lloyds’ underlying underwriting results and catastrophe risk management are significant components of the prospectus and areas that Fitch has previously identified as rating sensitivities. Long-term improvement in these areas would be viewed as a credit positive for the market,” Grimes said.

On the subject of bringing third-party capital further into the market’s business model, Grimes believes it could make a significant difference.

Commenting, “A number of Lloyd’s peers, particularly in the market for property catastrophe risk, utilize third-party capital as a means of generating meaningful fee income along with putting less of their balance sheet at risk to a major cat loss.

“If Lloyds’ can incorporate alternative capital providers without alienating its existing members, it may provide a number of benefits to the market that competitors are currently realizing.”

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