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Market Conditions – Reinsurers: Lloyd’s
 2005 capacity will decrease 9% to £13.7Bn ($25.8Bn) from £15Bn and will not include any
qualifying quota share (QQS) capacity, demonstrating disciplined capacity management.
2004 Combined Ratio of 96.9%. Pre-Tax profit of £1.357Bn. Includes £1.3Bn in net cat losses.
Lloyd’s net resources (the equivalent of shareholders’ fund/stockholders’ equity)
strengthened in 2004 (£12.2Bn). Central fund assets rose to £1.1Bn including the addition of
commercial debt of over £500Mn.
Lloyd’s capital base remains strong and diverse:
 UK listed investors increased their share of the market’s capacity from 30% to 37%. Coupled with
Trade Investors, both segments account for 72% of capacity.
The leading 20 direct capital providers provide 64% of the market’s capacity - no one capital
provider provides more than 6.2% of the Market’s total capacity.
62 Syndicates operate in the Lloyd’s market in 2005, a decrease from 66 in 2004 (8 syndicates
ceased trading; 4 new ones were formed).
A.M. Best raised the financial strength rating of Lloyd’s in August, 2004 to “A” (Excellent) and
is rated “A” (Strong) by S&P. All ratings are “stable.” Lloyd’s is the only one of the largest 20
global reinsurance groups to have achieved an upgrade from A.M. Best since April, 2002.
Market Conditions – Reinsurance: Overview
Property Per Risk and Catastrophe: Little impact of the hurricanes on reinsurance rates for
companies operating outside of Florida and the Southeast at January 1. Most programs saw little
change in overall cost; rate increase for those with losses ranged from 5% - 20% depending on the
frequency/size of loss position.
Despite record capacity and increased competition in the Property Cat market, the
psychological impact of the hurricanes (and model inconsistency), lessened the impact this had
on catastrophe pricing at January 1.
Most of the Florida exposed business renews mid-year - there will be increased demand for
capacity resulting in higher prices.
Many companies explored horizontal/sideways cover (i.e. 2nd event) and/or some form of
Catastrophe aggregate protection. Little sold as buyers viewed coverage as too expensive.
With some adverse development and additional creep emerging from the 2004 hurricanes, we
expect the July 1, 2005 renewal season to be essentially flat.
Clash: Reinsurers are trying to hold the line on pricing as best they can, but were willing to give 5 –
10% reduction on those accounts where there was no loss or adverse development.
Workers’ Compensation: Some additional appetite for per claimant covers. Reinsurers were less
able to hold the line on pricing on catastrophe covers based on increased levels of available
capacity, although, the market is reaching minimum ROL levels in some areas. Terms and
conditions have expanded (e.g. Terror, sunset/commutation, MAOL’s) for a price.
Market Conditions – Reinsurance: 2004 Catastrophe Update
Hurricanes Charley, Frances, Ivan and Jeanne:
Following the wide range of initial loss estimates from the events (see table below) loss figures have stabilized.
Original estimate of approximately $18Bn has increased to $22Bn and, most recently, $28Bn.
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| |
RMS |
AIR |
EQE |
PCS/SIGMA(1) |
Holborn (2) |
|
| Charley |
$6Bn-$8Bn |
$6Bn-$10Bn |
$6Bn-$10Bn |
$6.8Bn/$8Bn |
$7Bn-$10Bn |
| Frances |
$3Bn-$6Bn |
$5Bn-$10Bn |
$2Bn-$5Bn |
$4.4Bn/$5Bn |
$4Bn-$6Bn |
| Ivan |
$3Bn-$6Bn |
$3Bn-$6Bn |
$4Bn-$10Bn |
$6Bn/$11Bn |
$5Bn-$8Bn |
| Jeanne |
$4Bn-$8Bn |
$5Bn-$9Bn |
$6Bn-$8Bn |
$3.2Bn/$4Bn |
$8Bn-$14Bn |
| Total |
$16Bn-$28Bn |
$19Bn-$35Bn |
$18Bn-$33Bn |
$20.4Bn/$28Bn |
$30Bn-$40Bn |
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Although aggregate losses from these events are the largest ever for the US, these events did not cause a major
loss to the reinsurance industry. A moderate amount of “creep” on loss estimates has begun to emerge in 2005,
primarily in Commercial Lines.
Modeling vendors are attempting to improve their models.
- It is unlikely that any model revisions will cause the estimated losses to go down.
- Increased loss estimates could influence reinsurance terms, primary rates, rating agency scrutiny, etc.
Losses put financial stress on FL companies (FHCF, Citizens, “take outs,” “pups”) & claims infrastructure.
FL market faces a number of challenges: State legislature is considering many options regarding rates,
deductible levels, Citizens, as well as the structure of the FHCF.
(1) Swiss Re Sigma Report No 1/2005. Insured loss includes non-US.
(2) Based on Holborn’s analysis and White paper, October, 2004. Considers Additional
$2.5Bn - $4.5Bn in Non US and Loss Adjustment Expense.
Midwest tornadoes in late-May were largest non-Hurricane event in the U.S. at $800Mn.
2004 was a record catastrophe year in the U.S. with 22 events causing $27.3Bn in insured loss.
5 hurricanes hitting Florida accounted for 80% of the overall insured loss.
2001 was the second worst year on record ($26Bn), dominated by one event (WTC).
1992, however, is the worst year when adjusted for inflation ($30Bn).
Worldwide Catastrophe losses hit a record in 2004 in terms of insured amounts ($49Bn).
Japan Wind: Japan was hit by 10 typhoons (previous record was 6). Largest (Songda)
amounted to $3.5Bn in insured loss.
December Earthquake & Tsunami:
280,000+ dead and missing, mostly in Indonesia, but also in 10 other countries;
Disease outbreak was managed;
Insurance utilization in region is much lower per capita than in U.S. ($19 vs. $3,700);
Current $4Bn estimate (RMS) is plausible; EQE’s estimate @ $5Bn.
14 Tsunamis of significant size and loss of life have occurred since 1970.
Market Conditions: Notable Recent Losses, Lessons Learned
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