London Market profitability to remain under pressure in 2018: Fitch

The profitability of London Market insurers is set to remain under pressure in 2018, according to Fitch Ratings.

Although rates have improved following the second half of 2017 catastrophe losses, the pricing environment in the London Market remains under pressure due to excess capacity in the market fuelling competition, Fitch said in a market report.

Expense ratios remain high and reserve releases are expected to provide only limited support to earnings, Fitch said. Catastrophe losses from the third quarter of 2018 events, including hurricane Florence in the US and typhoons in Asia, are likely to be within annual catastrophe budgets for London Market insurers given the benign first half of the year, the agency noted. However, any further large losses in the fourth quarter of 2018 could add pressure on earnings.

London Market insurers’ combined ratios benefited from the very low level of catastrophe losses in in the first half of 2018. Major losses contributed only 0.6 percent to Lloyd’s of London’s reported combined ratio in in the first six months of 2018, significantly below the 15-year average, Fitch noted.

However, expense ratios for London Market insures remain high. Lloyd’s of London initiated a number of projects in order to address high expense ratio issue such as making mandatory the electronic placement of risks. These initiatives seek to improve market efficiency and reduce back-office costs but Fitch believes that the benefits will take time to work through.

In preparation for Brexit, London market insurers with EU operations have set up subsidiaries in the EU to mitigate the impact of the loss of passporting rights and be able to continue writing EU business, Fitch noted. However, the legal ability of UK-domiciled insurers to pay claims on existing policies written in respect of EU business after a no-deal Brexit remains unclear, the agency warned.

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