Larger re/insures pose risk to Lloyd’s: Fitch

The wave of merger & acquisition (M&A) activity sweeping over the re/insurance industry could pose a threat to Lloyd’s.

This is according to Fitch’s latest report, which explained that larger specialist re/insurers will have more flexibility in choosing whether they want to underwrite through their own brand or use the Lloyd's platform.

“For transactions involving one or more Lloyd’s players, the greater scale of the merged entities could make it more attractive for groups to underwrite directly through their own brand,” said the rating agency.

“Drivers include an enhanced ability to access business on global programmes external to Lloyd’s, as well as being able to write the business more efficiently from another jurisdiction. Business volumes may also be lowered as a result of increased risk concentration in a post-merger entity, which the re/insurer may wish to reduce.”

Fitch added that when overheads and acquisition costs are considered, operating through Lloyd’s is typically more expensive than via a traditional insurance entity. This means that post-merger entities may find Lloyd’s less attractive.

“However, Fitch believes that any potential cost savings could still be offset by the capital benefits that syndicates enjoy when operating through Lloyd’s. The market continues its efforts to modernise and streamline systems and processes to further reduce operating costs,” said Fitch.

In order to remain competitive, Fitch believes that Lloyd’s must retains its advantage relative to larger specialist insurance players in product innovation, which is viewed as a key factor in capturing market share in new and emerging markets.

The rating agency added: “Positively, Fitch believes that Lloyd’s has a strong track record of underwriting expertise, reinforced by the emerging risk unit providing support in identifying, accessing and promoting emerging risks to the market.”