Reacting to news that Willis Group Holdings is close to signing up insurers for a “passive underwriting scheme” at Lloyd’s of London, Moody’s Investor’s Services said the new scheme would be a credit negative for Lloyd’s market participants.
Explaining the assessment in an article in Moody’s Credit Outlook published in August, Helena Pavicic, an associate analyst, said that the incremental capacity supplied to the sector under the arrangement will negatively affect premium rates.
She noted that insurance brokers usually place complex specialty insurance and reinsurance policies into the London market on a subscription basis. In the typical arrangement, insurers decide whether to participate in the co-insured arrangement and, if so, what share of risk to accept.
In contrast, under passive underwriting schemes, a group of insurers agrees with the brokers to automatically subscribe to a predetermined share of all risks that have active Lloyd’s participation.
“These ‘passive insurers’ simply follow the decisions made by their London market rivals,” she notes.
The Moody’s piece comes in reaction to a Financial Times interview with Dominic Casserley, CEO of Willis Group Holdings plc, which was published last week. (Details of the interview were contained in two August 13, 2013 articles in the Financial Times, “Willis seeks return to its UK roots” and “Small insurers warn of risks in Willis plan for passive scheme” by Alistair Gray).
In FT interview, Casserley confirmed that Willis is in “deep conversations” with several London insurers who were ready to sign onto a deal similar to the sidecar facility that Aon and Warren Buffett’s Berkshire Hathaway announced in March.
Under that scheme, the predetermined share that Aon cedes to Berkshire is 7.5 percent of Aon’s Lloyd’s placements. (See related CM article, “Aon/Berkshire Deal Roils Lloyd’s Waters.”)
“Although Berkshire must rely on Lloyd’s underwriting expertise to price risks, it benefits from a lower expense base by avoiding the costs of using its own underwriters,” Pavicic noted, adding that this increases Berkshire’s chances of achieving better returns than the Lloyd’s syndicates it follows.
Pavicic also said the Willis scheme could be bigger than Aon’s because it would involve several leading insurers rather than just one.
The Moody’s article said the Willis arrangement would hurt smaller Lloyd’s syndicates most—those that do not have lead capabilities or operations outside Lloyd’s. These syndicates are most negatively affected by general market price changes and the downward pressure that could result from the “incremental amount of capacity” coming from these deals.
Moody’s noted that the proposed arrangement could spur similar broker deals, increasing the prospect of more difficult market conditions for all London market insurers.
In the FT article, Casserley, who said Willis hopes to launch its scheme in a matter of weeks, also acknowledged the prospect of lower premiums. In fact, because the impetus for the deal is to meet the needs of clients, the article suggested that this is a desired result.
According to the FT article, Casserley also believes the arrangement will make clients’ lives simpler in that they won’t have to go to London to explain their risks to every underwriter.