Following a strong underwriting performance in the first-half of 2022, remediation efforts at the specialist Lloyd’s insurance and reinsurance marketplace are proving successful, which puts the sector in a good position ahead of the important January 1st, 2023, reinsurance renewals.
While investment losses dented the market’s overall result for H1, Lloyd’s reported an improved underwriting gain of £1.2 billion with a stronger combined ratio of 91.4%, it’s best since 2015, despite reserving a significant amount for the ongoing war in Ukraine.
Against this backdrop, Reinsurance News spoke with Patrick Davison, Underwriting Director at the Lloyd’s Market Association (LMA), about the state of the Lloyd’s and broader re/insurance market as we approach the key end of year renewal season.
“The Lloyd’s market is in a good place,” said Davison. “There’s obviously been a significant amount of remediation over the last three years or so, and that is now bearing fruit.”
“There’s been a lot of good rate in a number of markets, and rate that was needed, frankly. The foundations are there, the conditions are there. I think Lloyd’s is well positioned to take advantage of opportunities that are likely to come up, but equally, there’s a lot of uncertainty around at the moment,” he continued.
Lloyd’s players operate in a volatile marketplace, and recent years have shown that events can come from any angle and in many forms – from wind to wildfires and floods, to pandemics and war in Europe. Add to this now rising interest rates and a high inflationary environment, it’s clear that re/insurers have been navigating a particularly challenging operating landscape.
But in spite of all the challenges, Davison feels that “most areas have good opportunity,” and this includes the much-discussed property catastrophe space.
“I think in property cat there’s a huge opportunity. If you’ve got the capital and you’ve been able to stick through the last five years, there’s a real opportunity. But look, we’ve seen people who haven’t been able to stick it out, and that tells you that it’s a tough market and it’s been a tough market. But if you’ve stuck it out and you’re still here, there’s a real opportunity to recoup some of the losses,” said Davison.
Expanding on the property catastrophe market, Davison stressed that there’s a need to understand whether the previous five years’ loss record, which now includes a significant but still unknown financial toll from hurricane Ian, is an outlier or an accurate reflection of what’s to come.
“At the end of the day, though, it is property cat, which is very volatile. You don’t write that business and expect to make money every single year,” said Davison.
“Clearly, there are some challenges in that line, and it’s been difficult to make money. I think that’s changing now, particularly in the U.S., where Lloyd’s writes a lot of its cat business. With inflation and the valuation increases associated with that, demand is going to go up from cedents and the insured simply because property is worth more. And that is happening at the same time that supply is decreasing.
“I think at 1/1 it’s going to be challenging. But it’s important to understand that that is both a risk and an opportunity for the Lloyd’s market because there are plenty of people who write property cat treaty in this market, and there are plenty of people who buy it, and my view is very much that that’s going to push rate well into 2023,” he added.
Another class of business where Davison expects risks and opportunities is cyber.
“It’s a young market, frankly, and they’re still finding their feet. They got their arms very quickly round the ransomware problem, and although that hurt in 2019 and 2020, that has been addressed. We haven’t seen the big systemic loss yet, but I think everyone accepts that the potential for it exists. How do we deal with it as a market? Can it be priced? All those classic questions are being asked,” said Davison.
“It’s an interesting market to look at. It’s been around for 20 years now, but it’s still young and developing, and highly competitive. Everyone’s got their own wording and there’s a lot of interesting intellectual discussions that go on in that market, and it’s an increasingly large part of Lloyd’s revenue. And just on the back of rate increases over the last year as well as additional exposure growth, next year, it will grow significantly,” he continued.
Being faced with a plethora of challenges and opportunities, it’s important that underwriting discipline is maintained at Lloyd’s and market participants retain a focus on recent efforts.
“There’s a lot of work going on in Lloyd’s and we’re working closely with them on promoting best practice around technical price, benchmark price, all the things that everyone is aware of around underwriting and bringing them up the agenda and making sure they remain in focus,” explained Davison.
“As we move into this relatively uncertain environment, dynamically adjusting your rating approach in classes of business is going to be crucial, as inflation develops and whatever else the world will bring in 2023. So, yes. I think the underwriting actions have gone far enough, but that doesn’t mean we stop and go back to where we were,” he concluded.