Lloyd's faces major challenges in capitalising on post-hurricane opportunities

Third-quarter catastrophe events have heightened focus on the health of the Lloyd’s market, which has estimated it will face a £4.5bn ($5.9bn) hit from Hurricanes Harvey and Irma.

With the market still in the process of assessing its loss estimates from Hurricane Maria, attention is already shifting towards the market’s ability to recapitalise to take advantage of any opportunities that emerge in the fallout from this quarter’s events.

The shift in ownership of Lloyd’s syndicates towards corporate capital over the past two decades means many of those supporting underwriting in the market have deep pockets.

Lloyd’s management will require members to replenish the capital deficit from this year’s loss activity by December 1 this year as part of the "coming into line" process, ahead of approval for 2018 business plans.

Dominick Hoare, chief underwriting officer for Munich Re Syndicate, which oversees syndicate 457, has suggested this will be challenging for many syndicates.

Writing on his Linkedin page, Hoare suggested these capital constraints could force many re/insurers to rethink their underwriting aspirations.

However, rating agency S&P Global Ratings has said it believes the Lloyd’s market will be able to restore capitalisation following recent losses.

But it has still revised its outlook on the Society of Lloyd’s to negative because of the significant uncertainties that remain in the aftermath of the event.

These uncertainties include the potential for further losses. Insurance payouts for the ongoing wildfires in California will likely run into billions of dollars, while Lloyd’s has yet to announce a loss estimate for Hurricane Maria.

Hoare suggested a £6bn combined loss once Maria has been factored in would leave the Lloyd’s market facing a combined ratio of around 125%. This is against a backdrop of reserve releases running dry and a weak underlying performance even before this quarter’s losses had occurred.

Another uncertainty highlighted by S&P is weaker-than-anticipated rate recovery. A number of senior market figures, including Hiscox’s Bronek Masojada, XL Catlin’s Mike McGavick, and Talbot chairman, Rupert Atkin, have all spoken of a market turn following recent losses.

But other voices have questioned the extent to which this market turn will manifest given the abundance of capital that has been waiting to enter the sector.

S&P has also highlighted the potential for capital providers to take advantage of rate revivals outside their Lloyd’s platforms.

With most capital supporting underwriting at Lloyd’s coming from corporate backers, the provider will in many cases have more than one vehicle through which it can underwrite.

Lloyd’s has itself acknowledged the cost of doing business in the market is too high and committed to reducing the expense of trading in the market.

Rising broker commissions and high compliance costs are significant factors that may lead some to write business outside the Lloyd’s market.

Despite these challenges, Lloyd’s remains a very attractive market for many, as demonstrated by Hiscox’s intentions to increase the stamp capacity of syndicate 33 by £450m next year to take advantage of any upturn in conditions.

Jerome Kirk, London market actuarial leader at PwC, told Insurance Day he did not believe replenishing capital would be too much of a challenge for most.

And Kirk said he believes Lloyd’s remains a very efficient way of writing business, and this should prove an opportunity for the market.

“The biggest challenge right now is assessing the size of the losses. The hurricane season is still ongoing, and still a live event," he continued. 

“With loss assessment, it is a case of doing the best you can in the circumstances and not necessarily being deliberately conservative. If you unload for all possible uncertainties, you can come up with very large numbers that can then restrict your opportunities.”