Fitch Ratings maintains an overall negative outlook for the London Market Insurance sector in 2018, although a pricing upswing in loss-affected lines is on the cards.
Any increase in pricing isn’t expected to be significant enough to outweigh market pressures, with high expenses and lower reserve releases weighing on London Market insurers’ earnings.
Lines affected by the three major hurricanes and Mexico earthquakes will see a significant increase in pricing – Fitch said particularly U.S. property and catastrophe reinsurance.
Fitch believes the erosion of capital from 3Q17 catastrophe events will be manageable for most London market insurers, although a number of Lloyd’s syndicates are expected to be temporarily below their Lloyd’s capital requirement.
Some firms are expected to report capital losses; Fitch said carriers will “also attempt to increase pricing on non-loss affected insurance lines,” as they attempt to rebuild capital buffers.
“But the strong level of capital available in the market and intense competition mean any rate increases in these insurance lines could be short-lived,” said Fitch.
The rating agency pointed to patterns of pricing changes after the standout catastrophe years of 2005 and 2011 – highlighting that major loss years have had an increasingly smaller impact on industry prices due to the influx of capital into the market.
A major concern for London market players continues to be the high expense ratios brought on by high acquisition and broking, regulatory costs as well as increased IT spending.
The UK government recently announced it would be investigating broking pricing and practices, which some industry experts believe will help tackle the rising expense problems.
However, Fitch said it would take some time for any meaningful cost reductions to feed through to make London more competitive.
The industry is expected to rely less on reserve releases beefing up underwriting results next year, following a trend of less reserve releases in 1H17 than in 1H16.
Overall, the outlook for the London market is gloomy, with 2018 bringing profitability headwinds to London players.
With Fitch forecasting a 2018 combined ratio for the London Market at around 100% – insurers would be barely breaking even on an underwriting basis.
