Catastrophe losses from the recent U.S. hurricanes and Mexican earthquakes will lead to price rises on London market insurers’ loss-affected lines and could also affect wider market pricing trends, according to Fitch Ratings in a new report.
The total industry insured losses from hurricanes Harvey, Irma and Maria could be in the range of $75-$120 billion, said Fitch, quoting estimates from Newark, Calif.-based catastrophe modeling firm RMS.
“We expect 2017 earnings of London market insurers to be significantly reduced from 2016 due to catastrophe losses and the combined ratio for the Lloyd’s market to be significantly above 100 percent,” Fitch said in its report, “London Market Insurance – Autumn Dashboard.” [Editor’s note: The Fitch London market dashboard can be downloaded from the ratings agency’s website via the dashboard link].
Fitch noted, however, that considerable uncertainty remains around the size of the losses, although some insurers, such as Lloyd’s of London and Beazley, have already announced their preliminary estimates.
Lloyd’s estimated net claims from Harvey and Irma to be around $4.5 billion, while Beazley said the impact of the three hurricanes on 2017 earnings would be around $150 million—equivalent to around half of 2016 earnings, Fitch continued.
Low Catastrophe Losses
Discussing the trends seen in London market insurers’ first-half results, the Fitch report said that companies benefited from “an exceptionally low level of catastrophe losses, which masked some loss ratio deterioration due to pricing pressures for some insurers.”
For example, Fitch said that major catastrophe losses contributed only 1.9 percent to Lloyd’s of London’s reported combined ratio in 1H17, significantly below the 10-year average of 8.7 percent.
Lower Reserve Releases
Another trend in the first half: generally lower reserve releases from those seen in the same period in 2016, although this wasn’t seen across the market.
“Reserve development was affected by reserve strengthening in motor re/insurance lines, driven by the change in the Ogden discount rate in February 2017 and reserve strengthening in property lines, which offset positive reserve development in other classes,” said Fitch.
The ratings agency noted that reserve releases reduced Lloyd’s of London’s combined ratio by 1.6 percent in 1H17 compared to 5.7 percent in the first half of 2016.
Some companies reported stronger reserve releases, including:
- Lancashire’s reserve releases cut its combined ratio by 18 percentage points (2016: 23 percentage points).
- Hiscox’s reserve releases cut its combined ratio by 10 percentage points (2016: 13 percentage points).
- Beazley’s reserve releases reduced its combined ratio by 9 percentage points (2016: 9 percentage points).
Renewal Rate Declines Slowed
While premium rates continued their downward trajectory in 1H17, they dropped at a slower rate than in 1H16, the Fitch dashboard said.
For example, Fitch said Novae reported an overall rate reduction of 1.8 percent (1H16: 3.9 percent) during the first half; Beazley had a 2.0 percent decline (1H16: 2.0 percent); and Brit had a 2.2 percent drop (1H16: 3.7 percent).
“The biggest rate declines were experienced by large property, energy and terrorism lines, with Beazley reporting an overall rate reduction on renewal business of 9 percent for energy and 11 percent for terrorism,” Fitch said. “Pricing pressures remained, due to strong competition and overcapacity in the market, leading insurers to shrink their exposures or exit lines of business where margins are no longer adequate.”