Changes in market worry MGAs but Lloyd’s got it right: Manchester

Although some rate corrections are taking place in the market, they are inconsistent and inadequate given how many years of softening the market has endured.

It would still take a loss of “biblical proportions” for the market to “chase out surplus capital” and allow the market to truly harden again, Charles Manchester, chief executive of Manchester Underwriting Management, told Monte Carlo Today.

Manchester notes that in 2005 and 2006, in the aftermath of one of the most costly hurricane seasons on record in 2004, it was easier for the market to increase rates despite the fact that a number of new reinsurers formed on Bermuda that year.

Now, such are the high levels of capacity in the market and easy entry levels via sidecars and insurance-linked securities (ILS), it is much harder for the market to make meaningful adjustments.

“Certainly in short tail lines, the market still has a long way to go,” Manchester said. “In longer-tail lines they are hardening a little, and primary rates are seeing solid increases in some areas. But elsewhere it is very patchy.”

He said that while material increases are occurring on some loss-affected lines, the picture is very inconsistent.

“When you drill down into the data, it becomes clear that some carriers are even still achieving rate reductions, which is astonishing in this environment,” Manchester said.

“That also makes it hard for brokers to explain and justify against the backdrop of some seriously soft markets out there.”

He added that there is a dislocation occurring in some lines of business, partly as a result of Lloyd’s Decile 10 performance review last year which caused some syndicates to retract capacity on unprofitable lines. This has also meant less need for reinsurance in some instances.

Manchester is chairman of the Managing General Agents’ Association. Speaking with this hat on, he added that such uncertainty in the market and a potential hardening in the reinsurance space are making some managing general agents (MGAs) nervous as they fear re/insurers may pull back on delegated authority capacity. However, he stressed, MGAs that add value should have no reason to be concerned.

“There will always be instances where the baby is thrown out with the bathwater but if they are adding value, as MGAs always should be, they will be fine,” he said.

He added that overall, he believes Lloyd’s did a good job in the way it encouraged syndicates to review their business models last year and the result has been a healthier and more profitable market.

“They were criticised unfairly last year; you can’t bake a cake without breaking eggs,” he said.

That said, he does not believe the market will want to “upset the apple cart” too much again this year but added that syndicates that have failed to deliver on changes or promises made in last year’s business plan could have a difficult period getting their plans approved this year.