With growth opportunities limited in mature markets, many insurers are looking to emerging markets for future expansion, in particular China, Southeast Asia and Central and Latin America. Figure F-10 highlights gross written premium (GWP) growth in emerging markets compared to developed markets from a 2003 base.
Posts Tagged ‘Lloyd’s’
Here we bring together recent GC Capital Ideas’ posts that have focused on the BRIC (Brazil, Russia, India and China) countries.
Increased Flood Loss Potential: Making use of all available tools and practicing comprehensive exposure management will both strengthen (re)insurers’ ERM practices and allow them to make informed risk management and reinsurance decisions as they enter new markets. Certainly, flood risk is prevalent and increasing in almost every developing economy.
Lloyd’s: What Will Success Look Like? If Lloyd’s is successful in achieving the growth and diversification outlined in its near-term and long-term strategic plans, it can expect to capitalize on business opportunities in emerging market economies such as the BRIC countries (Brazil, Russia, India and China). Growth, however, will not necessarily be limited to these markets. Other countries in Southeast Asia, Eastern Europe and Latin America are experiencing strong growth and increasing insurance penetration, and these territories also present attractive opportunities for Lloyd’s.
Growth Potential in Developing Markets: Positive premium growth trends in developing markets are expected to be sustained over the next decade. During this time, emerging markets are expected to drive global economic growth, and foreign direct investment in these emerging regions is likely to increase. In Brazil alone, investment in infrastructure is expected to amount to USD550 billion over the next few years as the country prepares to host the soccer World Cup in 2014 and the summer Olympics in 2016. China and India too are expected to continue to see robust growth in the next ten years.
State of the Reinsurance Market, Part II: Inflation/Deflation Expectations, Investment Returns: Expansionary monetary policy has fueled concerns that inflation could increase in the medium term, but the picture is less clear in the near term. While consumer price indices in Brazil, Russia, India and China (BRIC), the United States and the rest of the G7 currently exhibit positive trends, consensus forecasts show borderline disinflationary trends in the nearer term in the United States and many developed markets.
The Market ratings remain the principal measure of financial strength to be applied to operations underwriting at Lloyd’s, but several rating agencies separately provide syndicate-specific analysis. These analyses can support the reinsurance-buying decision-making process, but it is dangerous to rely on them without understanding the varying underlying methodologies. (None of these products are endorsed by Lloyd’s.)
The financial strength ratings assigned to Lloyd’s by S&P, A.M. Best and Fitch have been relatively stable in the 15 years since the first rating was assigned. During this period, the (re)insurance industry and Lloyd’s itself have undergone dramatic change as they responded to the major challenges of the September 11, 2001, terrorist attacks, devastating US and Gulf of Mexico hurricanes and other natural catastrophes that occurred across the globe. The softening casualty insurance market and the global financial crisis also caused difficulties during this time. The current Lloyd’s ratings assigned by each rating agency are at their original levels - a significant achievement given that most of Lloyd’s peers have failed to recover their pre-2001 ratings.
Lloyd’s capacity is an estimated GBP24.0 billion at the start of 2012, showing continued growth. Lloyd’s capacity grew from GBP15.7 billion to GBP23.3 billion between 2007 and 2011, an increase of 48 percent. GWP in that time increased 43 percent to GBP23.5 billion.
Lloyd’s has a well-developed risk management framework. A number of committees provide oversight for the Market and detail what is required of members in terms of their own risk management. Lloyd’s is required to conduct an ICA for the Market as a whole, using the normal FSA risk categories to examine risks that are not captured within syndicate ICAs. This process aims to determine the level of capital required to be held centrally that can withstand a 1-in-200 year event over a one-year time frame. The Lloyd’s ICA is an important driver for the Council in determining the optimum level of central assets. Another key driver is the expectation that the costs of mutuality will be less than 1 percent of members’ GWP across the insurance cycle. The central assets target and the level of contributions are regularly reviewed in light of the Market’s current financial position and forecasted needs.
Although the 2011 investment return of 1.9 percent was weak relative to previous years, Lloyd’s conservative investment strategy has partially insulated it from some of the more damaging volatility seen across a number of markets since the onset of the financial crisis in 2008 and continuing through 2011.
After experiencing its single biggest catastrophe year ever in 2011, Lloyd’s expects market conditions to remain tough in 2012. Fears of a double-dip recession have made investors very cautious, particularly in Europe, and the Eurozone crisis has slowed insurance growth in the region. Looking forward, Lloyd’s has warned that the difficult global economic conditions may mean that the insurance cycle will be slower to turn than in the past.
Lloyd’s approach to risk management is integral to assessing its capital needs and measuring the return on risk. Each managing agent at Lloyd’s is responsible for managing its own risks and those of the syndicates it oversees, while the corporation manages the risks facing the Market as a whole. Strong risk management disciplines are viewed as essential to enhancing business performance and safeguarding overall franchise value. To address the risks faced by individual businesses and the risks that each syndicate poses to the franchise, extensive reviews are undertaken upon registration along with ongoing performance management reviews.