Insurance – market developments

Insurance – market developments by Ed Gooda FCII SIRM, Managing Director, Fenchurch Park Ltd

September was incredibly busy at Fenchurch Park, we spent more time in Gibraltar than in London during the month. Gib motor insurers have been busily preparing to renew their reinsurance treaties into the London market and the reinsurance brokers have been burning the midnight oil to obtain the best possible terms for their clients.

There was interesting news from the Lloyd’s insurance market. The disastrous 2017 year of account has seen a slight improvement although losses to Lloyd’s still amount to an enormous £2.9bn for 2017. Following corrective action, the 2018 year of account is looking better but still a disappointing loss of £1.4bn despite some significant loss events to the market including hurricanes Michael and Florence as well as typhoon Jebi and California wild fires. Lloyd’s has taken further action throughout 2018 and 2019 to return the market to profitability; most of my contacts in the market expect 2019 to break even or make a small profit for this underwriting year.

During the year we have seen rates increase in certain lines of business such as marine and professional indemnity. This is because certain insurers and managing agents in Lloyd’s have been underwriting less of these classes due to losses over the past few years. There is more and more interest from suppliers of capital in purchasing run off / legacy business and as insurers reduce their interest in less profitable lines of business, certain legacy specialists are targeting an opportunity. Over the past few weeks, Lloyd’s managing agent ‘Charles Taylor’ was purchased by Premia precisely for this purpose – to give Premia a foothold in the Lloyd’s market but in particular in the legacy / run off space. Other legacy specialists are also preparing to enter the Lloyd’s market including CompRe who were also interested in acquiring Charles Taylor for reasons similar to Premia. Darag is another player in this space although they have made it clear that legacy in general is of interest to them, both inside and outside the Lloyd’s market. So, why all of this interest in so called ‘legacy’ or ‘run off’ insurance business? Well, PwC recently reported that global run off liabilities about to $730bn which possibly answers the question.

As a market, Lloyd’s has unveiled their plans for radical change this month. As a subscription market (IE co-insurance is rife within Lloyd’s and the London market insurers), critics argue that business takes longer to place and claims take longer to settle than other markets, especially insurers who can accept 100% of any one risk. This is certainly the case if every underwriter subscribing to a risk wants to get involved in setting terms, conditions and premium and again at the claim stage. For many years, Lloyd’s has encouraged all underwriters subscribing to a risk to delegate significant authority to the lead underwriter – the underwriter who usually takes the largest share of the risk.

In order to address some of these issues, Lloyd’s is focusing on a more sophisticated risk exchange for commoditised risks and a faster, more sophisticated way to process claims. Work is also underway to change the way that complex risks are broked and underwritten to make the risk placement process more efficient, faster and more cost effective. Last year Lloyd’s implemented a new electronic placement process as a part of its Target Operating Model (TOM) initiative which has widely been applauded as a great success within the market, reducing risk placement time and driving cost efficiency within the process.

Such change breeds opportunities and Lloyd’s is not only considering new underwriting models but also researching opportunities for allowing new forms of capital into the market. In this respect Lloyd’s will need to balance the desire for new capital to enter the market with the likely consequence of premium reduction if too many new entrants and / or too much new capital is permitted into the market.   

It remains to be seen exactly how these initiatives will be implemented but change is vital in the Lloyd’s market where the current cost ratio is almost 40%; a figure which is unsustainable in this competitive market and much higher than the cost ratio reported by most composite insurers. We can be certain of one key aspect, technology will play a fundamental part of the Lloyd’s change initiatives. Gibraltar based brokers and insurers would be wise to watch these developments closely: in particular domestic brokers with wholesale broking arrangements in London and domestic insurers with reinsurance arrangement into the Lloyd’s and London market.