Fitch Ratings expects London market insurers’ underwriting earnings to remain subdued in 2018 due to the difficult pricing environment, high expense ratios and limited impact from prior year reserve releases.
According to Fitch, catastrophe losses in Q318 experienced by London market insurers are likely to remain within annual budgets allocated to large losses. It’s worth noting, however, that Fitch’s report does not include potential impacts from hurricane Michael, which are ongoing.
In an attempt to improve underwriting results, Lloyd’s initiated a market-wide profitability review in H118, asking syndicates to review the worst-performing 10% of its portfolios and to provide remediation plans.
Given that this is a multi-year project, Fitch expects any meaningful improvements in profitability to materialise not earlier than 2019.
Investment returns have fallen significantly in H118 for London market insurers, says Fitch. Rising interest rates in the U.S were the main cause of reduced investment returns, as higher yields led to capital losses on fixed-income portfolios.
Following the significant catastrophe losses of H217, the market saw some improvement in rates, with Brit, Lloyd’s of London and Beazley reporting overall rate increases on their renewal portfolio of 3.5%, 3.0% and 3.0% respectively at H118.
Capitalisation in the London market remains very strong, with excess capacity in the market fuelling competition, adds the report. As a result, Fitch expects pricing to be broadly flat in the absence of significant losses in Q418.
Elsewhere, expense ratios for London market insurers remain high. Lloyd’s of London initiated a number of projects in order to address high expense ratio issue such as making mandatory the electronic placement of risks.
These initiatives seek to improve market efficiency and reduce back-office costs but Fitch believes that the benefits will take time to work through.
