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Some syndicates at Lloyd’s said more cat exposed after renewals


A number of syndicates operating at Lloyd’s have stepped up at the renewals of Florida catastrophe reinsurance to increase their share of program layers and ramp up line sizes, all at a time when the Corporation itself is maintaining a focus on minimising or moderating cat exposure across its marketplace members.

We’re told by sources that some Lloyd’s syndicates have ramped up their appetites for property catastrophe risk underwriting at what was a challenging renewals for many.

In some cases we’re told the increase in risk taken on is going to prove significant and that some syndicates may face higher capital charges, unless retrocession or hedging can be secured to demonstrate a reduction in overall exposure to Florida wind.

These syndicates are said to have taken the opportunity that presented itself, due to the market featuring less reinsurance capacity focused on key program layers in Florida at the renewals.

In addition the improvements in rates have also made Florida risks more attractive to these syndicates, so some have ramped up their cat exposure, in some cases quite significantly, we’ve been told.

At the same time as this increased appetite for catastrophe risk emerged among syndicates, the cheaper sources of retrocession that Lloyd’s syndicates have been relying on in recent years have all but dried up.

Sources said this has left some syndicates in a potentially questionable position, exposure-wise, for the now ongoing U.S. hurricane season. At the very least some have entered the U.S. wind season with a higher level of hurricane exposed catastrophe exposure than they had last year, we’re told.

This has happened at a time when the Corporation of Lloyd’s itself has been ramping up its oversight of syndicates catastrophe exposure, as it looks to ensure that these exposures are both well-managed and not excessive in the market.

With enhanced risk-based oversight now in place for syndicates, especially the worst performing, Lloyd’s has also been increasing this oversight particularly in relation to catastrophe risk.

Hence you’d have thought that, given the poor performance of many Lloyd’s syndicates over recent years due to catastrophes, the oversight the market has in place and the lack of retrocession products that syndicates have relied upon, that they might have written less cat risk at this renewals?

Reports and sources would suggest otherwise.

With many third-party reinsurance capital players and insurance-linked securities (ILS) fund markets having reduced their shares in Florida at this renewal, partly due to the issues around trapped capital and the resultant lower capacity available but also as rates are in some cases still not deemed to have risen enough, some Lloyd’s syndicates are said to have stepped in and filled the void, so to speak.

In addition, while markets are said to have differentiated more than ever at this renewal, the worst performing Florida primaries have filled their reinsurance programs and it’s understood a decent chunk went into Lloyd’s.

It’s said that a number of syndicates increased their participations on some programs of these programs in 2019, when ILS funds and collateralised reinsurance markets had pulled back at this year’s renewals.

It’s certainly not widespread, we’re told a handful of players have been ramping up exposure, and the wider view is that Lloyd’s players were responsible at the renewals this year.

Peel Hunt analysts noted recently in a report, “There seems to be a significant capital loading on even marginally increasing property catastrophe exposures at Lloyd’s, which is holding underwriters back from increasing their risk appetite. As one underwriter said: ‘everyone’s modelling on Florida was wrong’ and Lloyd’s underwriters seem to be treading more carefully.”

But not everyone is treading more carefully it seems, at least the word around the market suggests otherwise. Hence it’s going to be interesting to see how this plays out over the coming months.

We’re already hearing of retrocession demand coming from some Lloyd’s syndicates after the renewals and we’ve also heard that some are struggling to find providers willing to take that additional cat risk off their hands right now.

As we wrote recently, there’s quite a lot of interest in buying more retrocession right now, but deals are not always finding capacity, as market’s are being particularly discerning in 2019.

How this could affect syndicates if they cannot secure retro and their cat exposure has grown remains to be seen. But it’s almost certain that Lloyd’s will encourage them to get protected, or face capital loading for holding excess cat risk on their books.

It’s all another sign of the interesting market dynamics that have emerged in 2019. As discipline becomes the watchword for some, but in other corners of the market any opportunity to bulk up on higher paying risks seems the preferred option.

Whether this could stimulate risk trading, cat swaps, or the use of industry loss warranty’s (ILW’s) and other index products by Lloyd’s syndicates remains to be seen.

There’s an opportunity to provide a capital relieving solution to Lloyd’s players that have become over catastrophe risk exposed, it seems. But whether there will be any takers for their exposure is at this point unclear.

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