While it might be tempting to bank on improved pricing conditions in the coming year, Fitch Ratings fears that might not be enough against continuing pressures on London Market insurers’ underwriting results.
In fact, the credit rating agency expects underwriting results to suffer from high expense ratios and lower contributions from reserve releases, maintaining its negative sector outlook for the industry. A number of Lloyd’s syndicates are forecast to see themselves below the capital requirement, at least temporarily.
“Fitch expects that the 3Q17 catastrophe losses will be a capital event for some companies and insurers will want to rebuild their capital buffers by increasing premium rates,” read the
Fitch 2018 Outlook: London Market Insurance report. “But strong levels of available capital in the market and intense competition could mean that sustainable rate rises on non-loss affected lines are harder to achieve and rate increases could be short-lived.”
As for loss-affected and catastrophe-exposed lines, Fitch said significant price rises are expected following several years of declining rates. Total insured losses are estimated at as much as $100 billion after hurricanes Harvey, Irma, and Maria, as well as two Mexican earthquakes, hit the market in the space of a month.
“Pricing for the whole market increased significantly in 2006 following large losses from 2005 hurricanes Katrina, Wilma, and Rita; however, rates moved only modestly following even larger losses in 2011 as the market’s capital position was stronger,” explained the credit rating agency. “Fitch expects price rises in 2018 to be similar to those in 2012 as there remains significant excess capital in the market to absorb risk.”
It added that the magnitude of price correction will also depend on whether there is a significant upwards or downwards revision to the loss estimates previously announced by insurers and their potential effect on capital. Another factor it cited is the impact of losses on the attractiveness to investors of catastrophe bonds and other insurance-linked securities.
In terms of capital woes, while manageable overall, not everyone is as ready for the hit.
“We believe the erosion of capital from 3Q17 catastrophe events will be manageable for most London market insurers, although we expect a number of Lloyd’s syndicates to be temporarily below their Lloyd’s capital requirement,” said Fitch.
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