Nigel Roberts, Head of Broker Relations — AEGIS London.

TS Elliot was the first to report the “whisper down the line at 11.39” suggesting the train was getting ready to depart.  At AEGIS London, we think it’s more likely to be first quarter 2018 when the Lloyd’s market may see real signs of hardening.

What whispers are we hearing?

Until the results are out in Q1 18, it is hard to be certain, but while the consensus is that 2017’s catastrophes have not been a capital event, they have certainly wrought damage to earnings and combined ratios. Lloyd’s and many of its syndicates will in all likelihood be reporting combined ratios north of 100. As a consequence, some syndicates are pulling back in many areas and reviewing their underwriting appetite – which will have a knock-on effect on capacity availability and pricing.

Brokers, too, are feeling the pinch from soft pricing, lower commissions, and from underwriters’ weakening risk appetite. When broker facilities were set up four or five years ago in response to the ongoing soft market conditions, there was some debate as to whether they represented a structural or a cyclical change in the market. The fact that cracks are now starting to show in several of these facilities seems to demonstrate that they were a cyclical phenomenon whose time may now be ending.

This is not to suggest that the market is about to perform a volte face.

There are simply not enough alternatives to match the returns on offer in insurance to entice capital away from the market for now, which means pressure on rates will remain. Lloyd’s itself is unsure of market firmness and is exercising proper caution as it reviews syndicates’ capital plans, which will ensure that any change is gradual and proportionate.

But when too many cross the totemic 100 CR mark, change has to come.

Where do we see opportunity?

Property and cargo are two areas where we are seeing some movement on rate. As rates on primary property increase as a result of this year’s catastrophes, so brokers are finding increasing appetite for deductible buy-backs on wind and hail damage. Our cargo underwriters likewise are finding that as broker facilities start to break apart so there is more opportunity to assess and underwrite risks on a case-by-case basis.

What does 2018 have in store?

We think there will be rate movement in 2018, particularly after the Q1 reporting season demonstrates what, if any, damage there has been to capital. As a result, underwriting Ts and Cs will likely harden and there will be some improvement in property and cargo rate as part of a timely review in the face of changing market conditions.

But will the market turn or simply firm a little? To put it another way: were Elliot’s railway cat, Skimbleshanks, to “appear and saunter to the rear” would he signal the Lloyd’s train is “off at last for the northern part of the Northern Hemisphere?” Unlikely. But we may well be headed for somewhere where more thoughtful underwriters are empowered to assess cases on their merits and tailor the cover, and the rate, to the risk that is in front of them.  

First published in Insurance Day 30 Jan 2018.