Lloyd’s needs discipline in face of rising expense ratios
Lloyd’s needs to maintain strong underwriting discipline and drive business process improvements to deal with expense ratios in the market rising, according to Aon Benfield.
The observation from Aon Benfield came as it published its latest Lloyd’s update, which showed rising combined ratios and a fall in pre-tax profits in the market for the first half of 2015, compared to the same time period last year.
Results showed pre-tax profits fell by 28 percent in H1 of this year to £1.2 billion, representing an annualised return on capital employed of 10.7 percent compared with 16.3 percent in the same period a year earlier.
Its underwriting profit fell by 12% to just under £1.1 billion while its combined ratio increased to 89.5 percent compared with 87.4 percent a year earlier, with major losses contributing 2.7 percentage points.
Gross written premiums were up by 1.4 percent for the first half of the year, however, to £15.5 billion at constant exchange rates, compared with H1 2014.
The report also detailed opportunities for Lloyd’s next year, claiming it continues to attract strong interest from new and existing investors, as evidenced by high levels of corporate activity in the market.
Five Lloyd’s managing agents are likely to change hands in the next few months, as part of broader acquisitions (Amlin, Chubb, HCC, Pembroke and Sirius) and three new syndicates (Probitas 1492, Everest Re 2786 and Credit Suisse 1856) and at least two new special purpose syndicates are being formed for the 2016 year of account.
The firm has also been considering ways in which structures could be developed that would be attractive to alternative capital and has opened a Beijing office and launched a Dubai platform in March.
Since then, the market has received formal permission to open offices in Colombia and Mexico.
Lloyd’s has also submitted its Solvency II internal model application to the Prudential Regulatory Authority and is seeking approval by the year-end.
Efforts to streamline operations and reduce costs across the London market have also been made and have gathered pace over the past year, as leading industry bodies cooperate to drive a five year modernisation plan, according to the report.
“Lloyd’s continues to produce solid headline results, thanks to the combined effect of below average major losses and material favourable development of prior year reserves,” said Mike Van Slooten, author of the report and international head of market analysis at Aon Benfield Analytics.
“Beneath the surface, weakening pricing is impacting accident year underwriting margins and the market’s overall expense ratio is rising, giving renewed impetus to the need to maintain underwriting discipline and drive business process improvements. On the plus side, the balance sheet remains strong and the inherent advantages of operating at Lloyd’s continue to attract strong investor interest.”
