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Analysts at Fitch Ratings expect the London market to write less premium in 2019 as a result of the market-wide Lloyd’s of London profitability review, which kicked-off in 2018.
It’s been a challenging few years for Lloyd’s of London. The specialty lines market has been operating against a backdrop of high expense ratios, growing attritional losses, and significant pressure upon underwriting profitability. As a result, the Fitch Ratings sector outlook for the London market in 2019 remains negative.
“In the last few years, attritional loss ratios have been increasing as a result of the soft market,” said Ekaterina Ishchenko, director at Fitch Ratings. “We’ve also seen that expense ratios have been increasing [and that] reserve releases are contributing less to underwriting profitability than they were in the past. These are the natural consequences of the softer market.”
Reserve releases at Lloyd’s of London have reduced quite significantly since 2014 as the market moves further away from hard market underwriting years and battles. As the soft market continues, the London market’s potential pool of reserve redundancy continues to diminish.
“It’s not all bad news,” Ishchenko commented. “We’ve seen the market take a number of steps to address these issues. That includes the wide-scale modernization program that has been implemented at Lloyd’s, which looks at how Lloyd’s can be more cost-efficient and more innovative.”
The strategic profitability review aims to improve underwriting results, reduce attritional loss ratios and expenses, and improve cost efficiency throughout Lloyd’s. Market participants have been asked to review their portfolios to identify all loss-making lines and 10% of worst-performing portfolios, and then come up with plans for how to turn those portfolios around and bring them back into profitability.
“As a result of the review, we expect the market will write less premium in 2019, but this will allow for the renewed focus on underwriting profitability,” Ishchenko added. “We do expect profitability to start improving slowly, but because this is a multi-year project, we think it will take some time for the full benefits to come through.”
According to Fitch, the pricing environment remains challenging for the London market. Rates improved in 2018 after significant catastrophe losses in the second half of 2017 – notably, hurricanes Harvey, Irma and Maria, which battered Lloyd’s with catastrophe property losses. However, rate improvements lost some momentum through 2018 because of continued excess capacity-fueled competition.
The first half of 2018 was relatively benign with regards to catastrophe activity, but that changed in the second half of the year, with typhoons Mangkut, Jebi and Trami, hurricanes Florence and Michael, and the Californian wildfires, all resulting in significant catastrophe losses. As a result, there have been some modest rate improvements in catastrophe-exposed lines, but Fitch expects ongoing market competition to limit pricing improvements.
All in all, Ishchenko said “the loss experience combined with the profitability review at Lloyd’s could have some positive impact on the pricing in the London market in 2019,” but that positive changes this year will be limited.
