Insurance markets are “behaving differently” to historical norms, according to comments by John Nelson, chairman of Lloyd’s, quoted in The Financial Times yesterday.
Premium prices could stay low, even if a big property catastrophe event hits the sector, he said – suggesting an end to traditional re/insurance pricing cycles.
“Is the market going to behave in the same way in future in response to catastrophes? Because there’s so much capital, you’re not necessarily seeing the volatility in premium rates,” said Nelson. “You’re not seeing those cycles.”
Property casualty rates have fallen year on year, for several years now, while the only rises took place in Asia in the wake of 2011 catastrophes, particularly Tohoku Japanese earthquake and tsunami – but even the pricing rise associated with that event was regional and short-lived.
The last major US hurricane was Sandy in 2012, but the insured cost of that large “Superstorm” was mostly borne by the US primary market – and US Federal Emergency Management Agency (FEMA) fund – with only a small proportion of the insured loss reaching reinsurance layers.
Since then, the continued rise of “alternative” capital into reinsurance – collateralised, fund business plus the insurance linked securities (ILS, cat bonds) – has focused on the most profitable property catastrophe-exposed 10% of the market, has kept the capacity supply in excess, combined with low cat losses, keeping prices low.
Low cat losses allowed Lloyd’s a 2014 pre-tax profits of £3.2bn, announced yesterday.
Lloyd’s paid out £670m in major claims in 2014, down from £873m in 2013, both of which years are regarded as benign cat years by the sector.
In the event of a future interest rate raise or a major cat claims event, Nelson said he expected the alternative capital supply to “tighten” but “it will still be there”.
“You’re seeing the beginnings of an insurance asset class being created,” said Nelson. “We see that growing. What we need to see is how that capital behaves when there are bigger claims. My suspicion is that a lot of that capital will stay in the market.”
Nelson said that Lloyd’s was in a “strong position” relative to its rivals globally to weather the storm when it happens.