Carriers must hold their nerve, says Bolt

Re/insurers must hold their nerve on price in the current market conditions and be prepared to shrink if needed, Tom Bolt, Lloyd’s director of performance management, told Baden-Baden Today.

On this basis, he also expects that the Lloyd’s Market may, and probably should, contract until conditions improve.

Bolt describes the market conditions in the industry at the moment as approaching the worst he can recall in his career. He said his perspective is reflected by Standard & Poor’s (S&P), which recently moved its rating outlook on Lloyd’s A+ rating to stable from positive—a change the rating agency said was largely influenced by the wider market conditions.

“The key thing about the S&P change was that they have a dim view of reinsurance as a business proposition at the moment,” he said. “It is a bit like being a well-run company based in a country with a poor rating—the wider dynamics in the market will influence the ratings given to individual companies as well.

“I would certainly agree that the pressures on the market are as, or more, challenging than I have ever seen in my career. The underlying economy is not very robust, meaning less coverage is being purchased on either the insurance or the reinsurance side.

“Retentions are also up in both corporates and insurers and yet, against this backdrop, there is more interest than ever before from investors in taking on insurance-type risks.”

He said that these factors combine to make growth very difficult to achieve. “The challenge then becomes how to offer products to clients or consumers in a cost-efficient fashion,” Bolt said. “There is a lot of pressure. We have probably seen all of these at different times in previous markets but never all at the same time.”

One of the ironies for Lloyd’s in this environment is that, as new players continue to enter the re/insurance space, the prospect of securing a licence to underwrite under the Lloyd’s umbrella is more appealing than ever, offering an automatic high level of security and a global reach.

Bolt said the market is stringent in the way it vets such potential entrants to the market and careful of awarding licences.

“We have two broad criteria which we use to assess all potential new entrants,” he said. “They must have a robust business plan which we believe will be profitable. Second, they must offer something new either in terms of product line or access to a new market, or in terms of processes and technology.”

He stresses that the first of these criteria does not take into account an entrant’s cost of capital or expected return, measuring it on expected loss ratio only. “That creates a level playing field. If they have a more efficient capital model, that is good for them but we base our assessment on underwriting results alone,” he said.

In terms of the second criterion, Bolt explained that it is on this basis that Lloyd’s is open to welcoming international entrants into the market.

“This offers diversity and access into new markets as well as growth,” he said. “We will not see huge growth from these areas yet but all the indications are that emerging markets will represent a much higher proportion of global GDP in the future.

“We need to plant the seeds now to see the benefits in 10 years’ time.”

He does not believe all areas are as tough as some suggest. “There are niche lines and pockets of business where competition is weaker and good pricing is very achievable,” he said. “But as far as the wider business is concerned, it is tough and players will need to take tough decisions.

“It will be very difficult not to shrink in such an environment—given the downward change in rates, most companies’ books will get smaller just by writing the same pot of business.

“The same applies to Lloyd’s and this is a good thing. We want people to hold their nerve in this market. They need to know their minimum price and be prepared to walk away.

“The brokers may threaten they will never see that business again but those that have been in this business a while know this is never true. Many clients will respect them for sticking to their guns.”