Efficient reinsurance helps offset pricing for Lloyd’s insurers: J.P. Morgan

Insurers at the specialist Lloyd’s of London insurance and reinsurance market saw rate declines continue to slow at mid-year, albeit not as much as some would have liked. However, the negative trend is somewhat offset by the continued attractive price of reinsurance, says J.P. Morgan.

In discussions with Lloyd’s insurers recently analysts at J.P. Morgan has revealed that firms continue to see a challenging pricing environment, and while rate decline deceleration continues, during the mid-year renewal season the slowdown wasn’t as much as some had wished for.

Larger business lines such as reinsurance, property catastrophe, marine, aviation, and energy continue to present the most challenges for Lloyd’s insurers, with high competition and the abundance of capacity in areas like the property cat space intensifying the softening landscape.

“Overall, this does suggest that underlying returns from the Lloyd’s market are likely to continue falling, although we would argue this is already well understood,” said J.P. Morgan.

A benefit of the softening marketplace that a primary insurer operating at Lloyd’s and elsewhere in the world can take advantage of is with the abundance of attractively priced reinsurance capacity.

Global reinsurers and alternative capital providers are operating in an increasingly competitive and overcapitalised environment, where cedents are able to secure larger, more efficient reinsurance programs as reinsurers’ fight for market share and supply outweighs demand.

“A benefit from the soft market is that the Lloyd’s insurers have been able to dramatically expand their own reinsurance, buying at very attractive rate. We believe that this suggests the risks in the business are lower than was the case in previous years, suggesting volatility in the returns outlook should fall as pricing declines,” said J.P. Morgan.

The reinsurance market remains favourable to buyers, and the push from primary players at renewals to expand their coverage at the same or a reduced rate, coupled with the ability to demand more from reinsurers and essentially loosen terms and conditions (T&C), is benefitting Lloyd’s insurers. But it does risk leaving some reinsurers potentially overexposed and vulnerable should losses normalise, or a truly significant event take place.

After all, losses in the first-half of the year spiked owing to a range of large single events, and a series of intense storms in the U.S. and Europe, so should the Atlantic hurricane season be an active one, perhaps bringing a landfalling hurricane, then the buyers market could start to turn and insurers could see rates rise, while certain ill-disciplined reinsurers might get caught out.

That being said, industry analysts and experts claim that an extremely large single event or series of substantial events are required for any material impact on re/insurance pricing trends to be felt, and that while losses in Q2 and H1 were higher than more recent quarters, it’s not enough to impact rates.

So for the time being at least, Lloyd’s insurers should continue to benefit from the more efficient, attractively priced abundance of reinsurance capital.

It’s possible that so long as rates are this low and the market remains soft, that insurers will continue to expand their reinsurance programs and make the most of the abundance of traditional and third-party reinsurance capital, to optimise their risk transfer needs and offset the persistent headwinds and resulting challenges.