Lloyd’s of London’s diversity adds resilience to soft re/insurance pricing

The broad diversification found in the Lloyd’s of London insurance and reinsurance markets re/insurance portfolio provides it with a level of resilience to the softening of re/insurance prices, according to a report from Fitch Ratings.

Yesterday Fitch Ratings upgraded Lloyd’s of London’s (Lloyd’s) Insurer Financial Strength (IFS) rating to ‘AA-‘ from ‘A+’, saying that the oldest insurance and reinsurance market in the world’s future cross-cycle underwriting performance is expected to be more favourable than the market achieved historically, both in absolute terms and as compared with Lloyd’s peers.

Fitch said that it views the work undertaken by the Lloyd’s Performance Management Directorate as positive, likely contributing to the upgrade, in terms of establishing a sound platform for underwriting profitability going forwards.

Fitch said that this work gives it increased confidence in Lloyd’s ability to continue to see, on an aggregate basis, favourable prior underwriting year development across its rating horizon.

Fitch highlights that while the rating outlook for the Lloyd’s market is improved, it still faces headwinds. These headwinds are largely the persistently low yielding investment environment and the softening of pricing across certain major re/insurance classes of business. Because of these headwinds, Fitch says the greatest threat to Lloyd’s is a deterioration of its technical profit level.

However, Fitch says that the diversity contained within Lloyd’s re/insurance portfolio, by line of business and geography, provides the market with a level of resilience, perhaps even insulation, to a protracted period of price softening should that occur.

Further, Fitch notes that Lloyd’s revenues and profits from its property catastrophe reinsurance business, the segment likely most impacted by price softening and competition from the insurance-linked securities (ILS) market, are not at a level that would result in a sufficient deterioration of profit metrics to warrant a downgrade alone.

That suggests that Fitch believes that property catastrophe reinsurance price softening, while impacting on Lloyd’s revenues to a degree, will not be detrimental to the market as it has the diversity of its global and multi-line book of insurance and reinsurance to support it.

That also suggests that for Lloyd’s to really feel the pinch due to declining prices and increased competition it would need to experience price softening and growing competition across much more of its re/insurance book. That may be in the markets future, with reports showing that price softening is expanding and ILS and new forms of capital are moving into new lines of business, but for the moment Lloyd’s remains resilient to this threat.

Of course Lloyd’s has itself taken the recent decision to to proactively embrace reinsurance convergence trend which should, over time, see the market allowing an increasing amount of third-party capital into its underwriting capacity. That should enable the Lloyd’s market to fend off competition from new entrants and to a degree ILS, as it embraces similar sources of lower-cost capital.

So the future for the Lloyd’s market looks bright for the moment, again demonstrating the benefit of being a global player with a globally diverse book of insurance and reinsurance business in the current market environment. But if the competition, capital influx and softening prices continue and spread into other core areas of the Lloyd’s markets focus we will likely see this positive outlook become more cloudy.