Findings from the KPMG General Insurance Performance Benchmarking Survey, based on the half-year results of nine London Market insurers, are dominated by the significant catastrophe losses we have seen so far in 2011, a similar picture to 2010.
2011 is now the highest ever loss year on record with approximately USD $265bn of economic losses, according to Munich Re; the reinsurer reports that these are likely to equate to some USD $60bn in claims.
With soft rating conditions and deflated investment returns also a continuing feature of the insurance landscape, eight out of nine of the London Market insurers have reported losses for the half year. With the Atlantic windstorm season still to come, we could see more significant claims in the months ahead.
However, the news for the London Insurance Market is not as bad as it might appear. Despite this record high level of claims, this sector of the market is robust and the insurers themselves are confident in their ability to meet claims.
Underwriting and rates
All the insurers in the KPMG survey have reported increased premiums in those territories that have been worst affected. Those increases are likely to continue as the year progresses and will buffer market players for the future.
However, with this challenging environment, insurers need to continue with a disciplined approach to underwriting, a characteristic that is, on the whole, a strong feature of the London Market. London market companies tend to have good level of underwriting experience throughout their businesses and often strong leadership teams.
While there is not one clear trend in evidence in the top line results, there are signs of increased underwriting discipline in certain cases, as well as growth from new income sources with this group of insurers.
Rates
The overall picture for rating conditions remains soft, with average increases of between zero and one per cent. It seems likely that we will see more in the way of rate rises, but not necessarily across the board. Insurers report that catastrophe rates have started to increase, with average increases of four to five per cent. The worst affected areas are likely to see much higher increases, the insurers report.
Property and transportation tend to be the lines of business that see the greatest fluctuation. Rates for Japan have risen by 60 per cent in some cases and further catastrophes in the second half of 2011 are likely to result in more rate increases. However, insurers need to remain circumspect on rate increases, paying close attention to what the market can stand, and the economic realities their insureds are still encountering.
Claims
With catastrophe losses for 2011 nearly five times higher than the average first-half catastrophe losses for the past decade, all the insurers surveyed reported increased claims, with an average of 25 per cent of their loss ratios attributable to the events of the first half of this year. The net catastrophe losses for 2011, as a proportion of total assets for this group, ranged from two to eight per cent, according to our findings.
Insurers appear to have capital to absorb those hits as confirmed by a couple of firms.
Costs
One area of continued focus for insurers is their cost base. Costs are not inconsiderable in this market, with insurers also having to factor in expenses relating to Solvency II preparation. The benchmarking survey found the average expense ratios for the period to be 36 per cent, which is in line with 2010 and represents a two per cent increase on the first half of last year.
Given the soft rating conditions overall and a challenging investment climate, cost management may well be a discipline that comes under scrutiny, with many companies already looking to outsourcing or to undertaking reviews of their regional networks, as a means of helping them to achieve savings.
The focus on costs has been in place for quite some time. In 2011 and in recent years, companies have grown by acquiring businesses or underwriting teams. Often these are bolted on to existing set-ups in a piecemeal fashion and, after a time, an opportunity arises to look for a co-ordinated design of those structures to streamline and achieve further savings.
One of the advantages of operating in the London Market is the opportunity to look at market-wide costs. Historically, this has been a case of easier said than done, and it has proved hard to make an impact on those costs. The market as a whole could make itself more efficient. It’s taken a while to implement electronic placement, for instance, and there may be more efficiency to be gained on that front. Market-wide claims initiatives is another area that might draw renewed attention.
Consolidation
One thing that does seem likely is a focus on mergers and acquisitions in the short and medium-term. This will be fuelled by the desire for growth or, in some cases, investor frustration with poor returns. Solvency II, which is demanding a greater level of requirement around capital, will also act as a catalyst for consolidation.
In the meantime, mostly modest rate increases are anticipated to continue during the second half of 2011, but with further significant losses, we could see sharply increasing rates to follow. In the meantime, challenging times are ahead.
