Lloyd’s gross written reinsurance premium dropped more than 5 percent from 2013 to 2014, underscoring the competitive threat to the London market posed by local and regional reinsurance hubs, A.M. Best concluded in a new report.

Specifically, gross premiums written for property, casualty and specialty reinsurance came in at $12.9 billion in 2014, down from $13.67 billion in 2013.

A.M. Best’s industry run-down identifies this as just one of many challenges surfacing for the London Market in the months ahead. Among the concerns: global economic uncertainty, a continued surge of alternative capital and changing buying habits.

A.M. Best said that the broader Lloyd’s market produced a pre-tax profit in 2014 surpassing $4.8 billion, down slightly from just under $4.9 billion in 2013. Additionally, the combined ratio came in at 87, down two points from the previous year. But net investment return, including gains, jumped year-over-year to 2 percent, versus 1.6 percent in 2013.

Lloyd’s gross premium written grew 3 percent for property, 2.3 percent for casualty, 2.4 percent for motor and 3.6 percent for aviation. But it declined 2.4 percent for marine and more than 8.1 percent for energy.

Here’s a roundup of the broader London market worries as illustrated by the A.M. Best report.

Worsening market conditions

The report notes that pricing pressure is the worst in the property catastrophe market because of an enormous amount of both traditional and alternative capacity. Also noted: double-digit rate decreases and wider contractual terms as of Jan. 1 renewals. A.M. Best pointed out as well, that rate reductions have spread to other lines of business, particularly large property and energy risks, as companies seek to deploy their capital elsewhere.

Under this category, sidecars and catastrophe bonds have also been added to the alternative capital mix, with long-term institutional investors providing the funding. Because insurance-linked securities are only a small part of the broader asset portfolios and provide good diversification, A.M. said it “does not anticipate a material withdrawal of this source of capacity after large catastrophe losses or a growth in returns for other asset classes.

Protecting Market Share

The A.M. Best report said that traditional London market insurers are trying to protect their market share by being unique. In other words, they are offering terms and conditions difficult for third-party capital to replicate, including multi-year deals, reinstatements or wider coverage. A.M. Best said it was worried that relaxing terms and conditions will harm results in the London market over the next few years, and will monitor conditions.

A.M. Best said that companies planning ahead are developing products to cover new and emerging risks such as cyber as competition in traditional lines intensifies. These present good growth opportunities for the London market, though the report pointed out that a lack of loss history “makes these nascent risks extremely difficult to price.” As a result, A.M. Best said it expects companies that target these new markets to put strict loss limits in place and also “closely monitor potential aggregation of such exposures.”

Broker relationships under pressure

The relationship between brokers and risk carriers is changing in the current, highly-competitive market, A.M. Best said, leaving major brokers to supplement their commission payments by exploiting collected data and analytical tools in order to become more efficient. With that in mind the use of broker facilities, or pre-arranged schemes involving multiple risks, is growing, in particular for smaller-scale business, A.M. Best noted.

This trend gives insurers access to a larger variety of business but adds new competition to the traditional subscription market (fewer risks are placed on the open market as a result). A.M. Best warns underwriters to be cautious about relying on pre-brokered facilities, “mindful of the diminished ability to influence risk selection and pricing, as well as the associated costs.”

More Competing Hubs

A.M. Best sees the London market as vulnerable to newer local and regional insurance/reinsurance hubs sprouting globally.

“As clients are increasingly able to access underwriting expertise and capacity in their local markets, wholesale insurers have to compete hard on price and service to maintain the flow of international business into London,” the report states.

The solution: Establishing local offices. A.M. Best credits carriers such as Catlin, Beazley and Amlin, among others, with expanding their reach this way.

Source: A.M. Best