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London Market specialty re/insurance line profits shrinking: PwC


Pricing in the London Market continues to be under significant pressure across most business lines, so much so that rate adequacy concerns are increasing in offshore energy property, marine cargo and even casualty lines, according to PwC.

In a review of current pricing conditions in the London Market, PwC has underlined the thinning margins market participants are faced with in a competitive and overcapitalised insurance and reinsurance industry.

Offshore energy property risks that are exposed to natural catastrophes in the Gulf of Mexico, where PwC noes witnessed average rate declines of beyond 25% in 2015, are faced with increasing concerns over rate adequacy. In fact PwC notes that this line is near the break-even point and that even a normal catastrophe load could tip it into unprofitability.

Analysis from PwC states that the average initial 2016 planned combined ratio, after allowing for reinsurance, is around 100%, meaning that companies have little room for manoeuvre and are struggling to make a profit even when catastrophe losses are benign.

Furthermore, conditions in casualty and cargo classes pose a similar challenge for firms, with PwC explaining that “despite market average planned combined ratios being around 100% after allowing for reinsurance,” the business is at risk of being “wholly reliant on good fortune in claims experience and investment returns to make a profit.”

This is a potentially dangerous situation for insurers, reinsurers, and third-party capital from ILS players – with the latter increasingly participating in specialty lines via Lloyd’s of London syndicates and also backing energy and marine reinsurance placements – as a return to normal catastrophe losses, or an above average season could see profits decline very fast for some in the space.

“An ‘average’ catastrophe year would erode all profits for Energy offshore property risks in Gulf of Mexico,” said PwC.

Catastrophe losses have been benign in recent times and this has contributed to the favourable experience market participants have been treated to. However, even in a benign loss environment rates are declining across the board and London Market insurers, even after allowing for reinsurance, have to fight to keep combined ratios at or below 100%.

So while PwC warns that a return to an average cat loss year would see firms rely solely on good fortune ad investment returns, should losses rise above historical averages and there be a particularly high cat loss year, some London Market players would surely be in a very difficult position, very quickly.

Furthermore, relying on the investment side of the balance sheet in the current, low interest rate environment doesn’t hold too much promise for insurers, and with no signs of any meaningful uptick in rates anytime soon the pressures are surely going to mount in these business classes.

Elsewhere in the London Market, PwC’s analysis underlines the changing terror risk landscape, which has driven increased uncertainty for re/insurers over the frequency of losses as a result of recent attacks in Europe.

Terror premiums have grown in the last four years, says PwC, adding, “This growth has been outstripped by the growth in exposures and highlights ongoing rating pressure for this class.”

Challenges remain in the London Market and it’s very possible that without adequate and improved innovation, coupled with continued discipline, companies are going to find themselves in very uncompromising positions in the coming months and years.

In an effort to mitigate the impacts and address some of the persistent and expanding challenges facing London Market players, the Prudential Regulation Authority (PRA) and Lloyd’s of London have taken steps to increase scrutiny of the marketplace.

“It’s not surprising that Lloyd’s and the PRA have taken these actions given everything we are seeing in the Market. Our review points to a number of potential problem hot spots and numerous examples of the Market assuming a greater level of profitability than what may be supported by recent experience and rate changes.

“Regulators are sending clear messages and direction to the Market, and we encourage Managing Agents to heed the messages by looking carefully and critically at both their half year reserves, as well as ensuring they have the right pricing management information including bridging to reserves to avoid nasty surprises in terms of either financial results or regulator interventions,” said Jerome Kirk, London Market actuarial leader at PwC.

The ILS market is increasingly exposed to London market and Lloyd’s of London specialty lines of insurance and reinsurance, with a number of syndicate and special purpose syndicate (SPS) initiatives sponsored by ILS fund managers and other vehicles backed by third-party capital.

ILS capital is expected to grow in the London market and its specialty lines in years to come, making the pressure on these lines likely even greater, particularly where ILS players can find efficient structures to channel their lower-cost capital into London and Lloyd’s sourced re/insurance business.

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