Capital inflows to hurt post-event profit of London re/insurers: A.M. Best

by Artemis on August 24, 2016

London market insurance and reinsurance players have historically benefited from playing the re/insurance cycle, but in today’s highly competitive marketplace, post-event profits for the London market are under threat from sidelined capital, says A.M. Best.

Lloyd's of London buildingThe operating environment across the global insurance and reinsurance industry continues to change as the market and its participants look for ways to navigate challenging conditions.

An abundance of capital from alternative and traditional sources both in the market, and reportedly waiting on the sidelines for rates to return to more attractive levels, has changed the operating environment for London players.

A.M. Best, in a new report, explains that disciplined London market players have historically been able to pullback or cease underwriting unattractive, or unprofitable business during testing underwriting periods. Firm’s do this with a view to rapidly expand and deploy capital back into the market when rates improve.

“But in a changed operating environment, where diverse and plentiful capital is ready to quickly exploit any post-event market upturn, A.M. Best believes that insurers need to adapt their traditional soft market strategies,” said the rating agency.

Despite challenges in the Lloyd’s of London specialist insurance and reinsurance marketplace, traditional and more alternative investors remain attracted to its efficient structures and wide scope of international licenses.

The inflow of alternative reinsurance capital increased modestly during the first-half of 2016, says A.M. Best, so a reverse of the reduced entry of third-party capital reported at the key January 1st renewals as investors looked for better returns elsewhere.

Along with the notable slowdown in insurance-linked securities (ILS) capital at 1/1, the June/July renewal period is dominated by U.S. property catastrophe business, where ILS is most prominent, so this likely also contributed to the modest increase A.M. Best is referring to.

But whether a slight increase or minor decrease in the entry of alternative reinsurance capital in the re/insurance industry, the growth of the ILS space and heightened competition across the re/insurance industry suggests flatter market cycles moving forward, and reduced price surge post-event.

In order to remain relevant and increase efficiency in the challenging market, London players must adapt their soft market cycle strategies, warns A.M. Best.

“A more granular segmentation of portfolios, supported by strong data analytics, is increasingly necessary to identify pockets of profitable business and underwriting portfolios are being reshaped as a consequence,” said the ratings agency.

“In the property sector, a higher proportion of insurers’ catastrophe budgets are being allocated to binder business, where prices are proving more resilient to competition than in the reinsurance and open market segments,” continued A.M. Best.

Furthermore, London market participants have increased their focus on casualty as this is under less pressure from the competitive and efficient ILS capital, and emerging risks such as cyber also present an opportunity for insurers to adjust the business mix of their portfolio away from the most competitive areas.

“Overall, access to profitable business is becoming more challenging for the market,” confirmed A.M. Best.

The soft re/insurance market cycle shows little signs of turning anytime soon, and the flow of ILS capital is expected to persist and continue to expand its presence.

As this happens, and with investment returns increasingly difficult to come by, it’s likely that London players will have to continue rethinking and adapting their portfolios in order to mitigate the negative environment and take advantage of any pockets of profit, and ultimately remain relevant to the market.

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