25.08.2016, 17:43
London Market Insurers Adapting to an Evolving Operating Environment
OREANDA-NEWS. London market insurers performed well in the first half of 2016 and entered the second half of the year with strong balance sheets. But recent good performance conceals fundamental challenges to the market’s competitive position and prospective profitability.
A new report from A.M. Best titled, “London Market Insurers Adapting to an Evolving Operating Environment,” notes that the operating environment for London market insurers is set to remain difficult. Traditional business models are under threat from consolidation, alternative insurance structures and changing buying patterns. Although companies’ capital positions are generally strong, enhanced by several years of positive earnings, underwriting profitability is under pressure from lower premium rates and higher expenses.
Catherine Thomas, senior director and author of the report, said: “Premium rates across the market continue to fall, as traditional and alternative capital compete for business. Large property and energy risks, particularly those that are catastrophe exposed, remain under most pressure.”
The report also notes that disciplined London market players have been able historically to materially shrink their businesses during difficult underwriting periods, ready to expand rapidly when rates improve. But in a changed operating environment, where diverse and plentiful capital is ready to quickly exploit any post-event market upturn, A.M. Best believes that insurers need to adapt their traditional soft market strategies.
“A more granular segmentation of portfolios, supported by strong data analytics, is increasingly necessary to identify pockets of profitable business,” added Catherine Thomas. “In the property sector, a higher proportion of insurers’ catastrophe budgets are being allocated to binder business, where prices are proving more resilient to competition than in the reinsurance and open market segments.” There also has been an increased focus on casualty business, which is less vulnerable to competition from capital markets.
Maintaining access to profitable business is increasingly difficult and some insurers will need to expand their global footprint in order to remain competitive. However, A.M. Best believes that the subsequent pressure on expense ratios likely will necessitate an increase in scale. For others, superior niche expertise and strong relationships with clients, brokers and MGAs may be sufficient to maintain their competitive positions.
A new report from A.M. Best titled, “London Market Insurers Adapting to an Evolving Operating Environment,” notes that the operating environment for London market insurers is set to remain difficult. Traditional business models are under threat from consolidation, alternative insurance structures and changing buying patterns. Although companies’ capital positions are generally strong, enhanced by several years of positive earnings, underwriting profitability is under pressure from lower premium rates and higher expenses.
Catherine Thomas, senior director and author of the report, said: “Premium rates across the market continue to fall, as traditional and alternative capital compete for business. Large property and energy risks, particularly those that are catastrophe exposed, remain under most pressure.”
The report also notes that disciplined London market players have been able historically to materially shrink their businesses during difficult underwriting periods, ready to expand rapidly when rates improve. But in a changed operating environment, where diverse and plentiful capital is ready to quickly exploit any post-event market upturn, A.M. Best believes that insurers need to adapt their traditional soft market strategies.
“A more granular segmentation of portfolios, supported by strong data analytics, is increasingly necessary to identify pockets of profitable business,” added Catherine Thomas. “In the property sector, a higher proportion of insurers’ catastrophe budgets are being allocated to binder business, where prices are proving more resilient to competition than in the reinsurance and open market segments.” There also has been an increased focus on casualty business, which is less vulnerable to competition from capital markets.
Maintaining access to profitable business is increasingly difficult and some insurers will need to expand their global footprint in order to remain competitive. However, A.M. Best believes that the subsequent pressure on expense ratios likely will necessitate an increase in scale. For others, superior niche expertise and strong relationships with clients, brokers and MGAs may be sufficient to maintain their competitive positions.
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