As headwinds continue to pressure and challenge the global insurance and reinsurance sector, JP Morgan highlights the benefits a Lloyd’s participant receives through the market’s access to niche business lines and proven capital efficiency.
Financial services and international banking organisation JP Morgan has published a new Europe Equity Research report, titled “Lloyd’s Insurers, Capital discipline worth paying a premium for,” examining the Lloyd’s market with a focus on the advantages Lloyd’s participants have over other large insurance and reinsurance firms, during testing market conditions.
“The Lloyd’s market allows its members to access a diverse range of specialty risks that are well diversified by business line and geography,” explains JP Morgan.
Adding; “The bespoke nature of the cover provided and the overall capital efficiency of the Lloyd’s structure have allowed members to generate strong returns over time, with our covered companies comfortably outperforming larger European reinsurance peers in recent years.”
It’s no secret that ample capacity from traditional and alternative reinsurance sources, coupled with a lack of major catastrophe losses has negatively impacted pricing in the global re/insurance space.
But JP Morgan explains that players that operate in the Lloyd’s market can utilise its niche, specialist nature in order to allocate their capacity in line with market-wide pricing conditions.
Ensuring that while reinsurance pressures have caused a downward trend in property catastrophe rates and other large business lines, Lloyd’s players can still achieve solid returns through niche areas, which have “more resilient pricing dynamics.”
JP Morgan emphasises this point; “Having access to a diverse set of risks allows them to be nimble in their underwriting, and shift business mix toward different markets as they reach different points in the insurance pricing cycle.”
The company continues, explaining that the resilience to pricing declines, shown by niche areas of the Lloyd’s market, is proof of the expertise required when underwriting these business lines, concluding that “it adds a layer of insulation that protects from the newer forms of competition.”
Another area that Lloyd’s insurers and reinsurers can gain an edge on their peers is linked to the market’s improved capital efficiency, which results in Lloyd’s participants ROE’s typically outperforming larger reinsurance peers, notes the report.
The study signals that writing insurance or reinsurance business via a Lloyd’s platform provides enhanced capital efficiency, helped by the fact that every policy written by a Lloyd’s syndicate is also backed by the Lloyd’s market, ensuring a strong financial rating.
JP Morgan explains the impact of this; “The result for Lloyd’s companies is that capital requirements are generally less onerous than those imposed on other insurers.”
Which, the report explains, allows firms to maintain the most efficient level of capital, “which in turn serves to enhance ROE in our view.”
As an example, JP Morgan notes that the average ROE over the last four years for Lloyd’s companies under its coverage is 14.1%, compared to 11.4% for Hannover Re, Munich Re, SCOR and Swiss Re.
So, as a host of pressures continue to stress the insurance and reinsurance sector, it’s evident there are still areas where desirable returns can be achieved, as highlighted in JP Morgan’s report.
It’s no surprise, therefore, that the insurance-linked securities (ILS) market is also attracted to putting capital to work in the Lloyd’s market, with names such as Nephila Capital, Securis Investment Partners and Credit Suisse all operating there in some way already.
This attraction to Lloyd’s is unlikely to go away, even if the some of the insurance and reinsurance lines written in the market begin to look less attractive and profitable over time. It remains a unique place to do business, with unique opportunities for investors and participants, so the attraction will remain.