Insurance and capital markets quantitative analysts ICMR have forecast that the Lloyd’s market could turn its first underwriting profit since 2015 if this year turns out to be a ‘normal’ one in terms of losses.
Lloyd’s recently reported another loss-making year for 2020, with a pro-forma combined ratio of 110%.
Overall rate increases of 10.8% were reported for its renewal book, but ICMR notes that the impact of the COVID-19 losses blurs the picture.
Excluding those losses, analysts observe a considerable shift in the combined ratio distribution, which would substantiate the rate hardening claimed by Lloyd’s.
And looking at the trends in Lloyd’s Pro-Forma financial statements, Lloyd’s suggests an attritional combined ratio of 87%, to which must be added a normalised catastrophe load.
ICMR calculate that Lloyd’s long term trend is for major claim “background noise” of around 3% of net earned premium whether in an event year or not.
Combined with the average annualised catastrophe event claims this give a normalised annual major claim impact of 9%-10% of net earned premium, which accords with Lloyd’s assertion of a “normalised” 2020 standing at a combined ratio of 97%, compared with the long term actual combined ratio of 98.5%.
“Despite the challenges over the last 12 months, Lloyd’s has shown again its ability to adapt,” ICMR noted. Not only did trading continue almost uninterrupted, but the losses due to the pandemic have not unduly stressed Lloyd’s capital.
“Signs that underlying pricing has turned for the specialty markets have become more evident, despite the losses of last year, which augurs well for 2021. A more “normal” event year should yield the first market-wide underwriting profit since 2015, which would be a welcome relief to investors.”
“Although even then, in line with our previous articles and given Lloyd’s mix of business, the trend for the majority of investors’ returns to derive from investments rather than underwriting looks set to continue.”