By LEN WILKINS
With the U.K. and the EU at loggerheads over financial regulation, the London Market Group (LMG) decided to take advantage of the situation. The LMG wants to fill the regulatory void that currently exists in Europe with a business model which will make London the place to do insurance and reinsurance business.
At present, the only deal between the EU and U.K. relates to trade. Efforts to produce a financial regulation deal between the two have failed, partly because the EU insists that the U.K. follow its rules and the EU wants to grab the U.K.’s financial services business.
A financial services agreement was expected to follow the trade agreement. However, the agreement offered would result in a majority of the U.K. financial services industry being under threat.
The LMG looked for ways to prune the U.K.’s existing insurance regulation to improve its position and encourage brokers and insurers from abroad to the U.K. Until recently, the LMG concentrated on modernization issues, but the temptation to look for ways to grow London’s position as a market leader and its reputation as the global center of insurance excellence is too great. Seeing the impasse between the U.K. and EU, the LMG published a five-point plan which calls upon the U.K. government, regulators and insurance industry to work together for relevant regulatory and legislative changes.
The LMG expects the plan will help grow the London market’s insurance and reinsurance industries. At present, the London Market’s annual income is over $100 billion a year, and is growing at just under 14 percent per annum.
Security and regulation have never been a major problem for the U.K. When the U.K. joined the EU, the U.K. accepted Solvency II, which took 10 years to produce with a rulebook of over 3,200 pages. The LMG wants a more proportionate approach to regulation: the greater the risk, the more regulation. Currently under Solvency II, organizations with little exposure carry the same reporting requirements as major insurers.
The LMG wants different guidelines than the current one-size-fits all U.K. broker regulation used by the Financial Conduct Authority. A broker placing consumer business is dealing with individuals with no technical knowledge or financial or legal backup. A broker placing insurance for commercial hi-tech clients needs greater industry and market knowledge and needs substantial resources to service the clients’ needs. What the LMG wants is separate models for consumers, commercial clients, and reinsurers.
London competes with other international markets, and the LMG wants to ensure that the London market remains the most attractive for large risks. A current review by the FCA recommends having a competitiveness duty.
Already existing international markets are regulated by bodies that are mandated to promote their domestic markets and ensure they are attractive places to do business. The LMG doesn’t want to see a major reduction in regulation or major changes to Solvency II, which it sees as a benefit for London as a recognized market standard. However, there is a prominent role for competitiveness within the U.K regulatory framework which would show London is open for business and wants to trade.
The LMG would be happy to see regulators encourage more innovative products and services.
Being a bureaucracy, it was no surprise that the EU’s idea of the perfect solvency regime would cause insurers and reinsurers to weep, but anyone wanting to trade in Europe has to accept the regulations. Now that the U.K. is free of the EU’s rules, the LMG wants to tweak Solvency II to make it more user friendly, thereby encouraging other insurers and reinsurers to switch to London.
The LMG proposes a change relating to the treatment of reinsurance branches. U.K. regulators treat pure reinsurance branches in the same way as direct insurance branches. This means additional solvency requirements and duplication of reporting and governance. Where the U.K. branch of a European Economic Area based firm is not writing any U.K. business, the LMG believes there should be no involvement of U.K. regulators, and the firm’s home regulators will undertake compliance. If the regulator is recognized as Solvency II equivalent, there should be no U.K. additional regulation at the U.K. branch level. LMG wants this also to apply to U.S. firms’ non-EEA branches.
One effect of the current hardening of the insurance and reinsurance markets is the increase in captive insurers, and the LMG wants a U.K. captive market to be promoted. Currently, there are no captives based in the U.K. due to unattractive tax and regulatory rules. Only Lloyd’s has a specific regulatory framework for captives.
Many EU nations, such as Ireland and Luxembourg, interpret Solvency II in a different way than U.K. regulators, which reduces the captive’s cost. London has experience in captive management but only outside the U.K. Currently, many U.K. organizations manage captives based offshore, and the LMG hopes that changes to the U.K. regulatory system and the approach of regulators would encourage these organizations to base their captives in the U.K.
The last item on the LMG’s wish list is better access to new and emerging markets. The problem is that many economies have in place domestic regulatory barriers on the amount of reinsurance that can be purchased and do not allow the sale of direct business.
Sean McGovern, CEO of U.K. and Lloyd’s at AXA XL and sponsor of LMG’s government relations work, said, “Right now, the U.K. government is looking at how financial services should evolve in a post-Brexit world, and the London market wants to seize the moment while there is a willingness to support positive change that can benefit the insurance industry. The LMG has taken part in various government consultations on the future regulatory framework and Solvency II. This document will form the backbone of a comprehensive campaign by the LMG, working with ministers, parliamentarians and the regulators to reinforce the importance of the insurance market and to ask for what it needs to continue to grow globally.”
Lloyd’s expects loss for 2019
Lloyd’s syndicates have released their latest estimated results for the 2019 and 2020 underwriting years. These figures represent pure underwriting results from premium and claims and do not include any other income or expenditure, such as investment income or release of reserves from previous years.
The 2019 figures suggest an overall market loss of 7.85 percent in the worst case. The best case figures suggest the possibility of a breakeven, once investment income and released reserves are included, but the market is looking at an overall underwriting loss of 1.74 percent. The mid case figures show an overall market loss of 4.8 percent. According to the figures released, the non-third party corporate-owned syndicates seem to be performing worse than the traditional Lloyd’s syndicates. Corporate syndicates show an expected best case loss of 2.81 percent and a mid case of loss of 5.33 percent.
Individually the syndicates which merit a mention for their performances for the 2019 underwriting year are Astra Syndicate 6123 with a worst case loss of 38.62 percent, which reduces to a loss of 28.62 percent for its best case figure. As usual, Chaucer 1176 Specialist Nuclear Syndicate is the top performer with a best case profit of 35.0 percent. A special mention goes to MAP Syndicate 6103, which writes a U.S. catastrophe reinsurance account of MAP Syndicate 2791 and forecasts a best case profit of 27.5 percent.
2020 results look promising
For 2020, the market should move back into the black. While the worst case figures still show an overall market loss of 2.79 percent, the best case shows a 3.49 percent overall underwriting profit and the mid case an overall profit of 0.35 percent. For this year, the corporate capital syndicates are producing better results than the traditional syndicates. The corporate capital syndicates’ worst case figures show a loss of 1.62 percent and the mid case profit at 0.91 percent. The best case figures show a profit of 3.43 percent.
For 2020 the syndicate to avoid is Astra Syndicate 2288, which expects a worst-case figure of a 60.0 percent loss. As this is the syndicate’s first year, and it carries a lot of startup costs, perhaps it would be fairer to mention Coverys Syndicate 1991, which expects a 33.5 percent loss. On the profit side, apart from Chaucer Syndicate 1176 at an expected best case profit of 30.0 percent, applause please for QBE Syndicate 386, which forecasts a 22.9 percent best case profit.
Uncertainty will cause rates to harden
Swiss Re has brought joy to London underwriters by stating reinsurance rates will continue to harden to the end of next year. Rates were already boosted at the January and April renewal seasons, so reinsurers are beginning to feel confident about the future.
It is usual at this point in the underwriting cycle for new capacity to enter the London and European reinsurance markets and for the resulting overcapacity to cause rates to fall. That is not happening. Rate increases can be traced to a lower risk appetite by insurers and reinsurers rather than a shortage of capital.
The reason for the low-risk appetite is uncertainty. Insurers and reinsurers are worried about inflation, future pandemic losses and new natural catastrophe losses. No one wants to take too high a risk with this uncertainty, so rates are hardening as reinsurers play hardball, and the volatile capital market is unwilling to take on more risk. Investment returns are low, so underwriters have to rely on premiums to bail them out of trouble, hence their reluctance to reduce rates.
Lloyd’s advances to 22nd century
For a market that used to delight in using quill pens, it’s a shock that Lloyd’s has galloped into the future so quickly. The technical upgrades that failed in the past are now just a memory, and the reluctance of the market to innovate disappeared with them some time ago. These days one has to hang onto Lloyd’s shirttail to keep up on developments.
The latest development is an agreement among DXC Technology, the Lloyd’s Market Association and the International Underwriting Association, which supports the ambition set out in the Future Blueprint Two to build the world’s most advanced digital and technology led insurance marketplace.
The deal took many months of discussion, product development and early solution workshops to ensure the system will provide accuracy, speed and processing power to the London insurance markets. The new technology and digital processing capabilities will allow a customer to get cover more quickly and support faster claims payments.
Container ship losses worry market
The damages claim for the container ship Ever Given which blocked the Suez Canal for six days is worrying Lloyd’s and London underwriters. Now they also have the X-Press Pearl loss to add to their concerns.
While the primary carrier for the Ever Given is the U.K. Protection and Indemnity Club, it is backed by a $3.1 billion reinsurance program that is placed mainly in the Lloyd’s and London markets. The program has a $100 million deductible, but the potential for the Ever Given claim is way beyond this. The market’s cargo insurers are concerned because the vessel still has its cargo on board, which is valued at between $500 million and $1 billion.
The latest development in the case of the Ever Given is that the chairman of the Suez Canal Authority claims the vessel was traveling too fast and was out of control during its transit. The chairman claims the vessel’s black box shows speeds of 22 knots against a canal limit of 7.5 knots. The chairman alleged that bad weather was a contributing factor to the incident and said the vessel should not have entered the canal until conditions improved. The Suez Canal Authority reduced its initial claim for $916 million to $550 million, which includes a $200 million deposit to release the vessel.
Owners and insurers offered $150 million in compensation, but there is already a big legal bill to pay. The P&I Club confirmed that even though the ship’s captain is ultimately responsible for the vessel, the Suez Canal Authority’s own pilots were on board and must also take responsibility because the vessel was traveling in an Authority-controlled convoy. Meanwhile, the ship and cargo remain under arrest in the Great Bitter Lake.
Potentially, the loss of the X-Press Pearl, which caught fire off the coast of Sri Lanka on May 20, could be much greater than that for the Ever Given. While neither the hull nor cargo loss from the Pearl will keep underwriters awake at night, the potential liability loss will.
The London P&I Club is the primary insurer for crew liability, but it’s the pollution loss that will cause concern as the potential is for a loss of hundreds of millions of dollars. There are reports of oil spills and leaks from the containers carrying toxic materials, and local fisherman have been ordered to stop work.