With rates set to depreciate across virtually all lines of business, Lloyd's insurers are preparing for the year ahead

Predictions of further capacity cuts are turning out to be correct as Lloyd’s insurers gather themselves for worsening market conditions in 2008.

Chaucer has become the latest managing agent to take the approach of reducing its limits following the likes of Hiscox and Kiln, who have made similar announcements in recent weeks.

Widespread reductions are expected between now and November across all lines of business as rates gradually fall in virtually all areas.

“Syndicates that have less catastrophe exposure are more likely to reduce capacity because rates are most robust in areas that have the most exposure to catastrophes,” explains insurance analyst, Richard Gradidge.

That is certainly true for Chaucer, which has a diversified portfolio of business. What makes Chaucer different from Kiln and Hiscox, which expect capacity to fall by 14% and 20%, respectively, is that it only expects to reduce Syndicate 1084’s capacity by 8.3% to £445m for 2008 and intends to leave capacity unchanged at £27.5m for Nuclear Syndicate 1176.

Analysts say the reduced capacity in non-motor, due to softening rates, is partly offset by a planned increase in motor insurance.

“Syndicates that have less catastrophe exposure are more likely to reduce capacity because rates are most robust in areas that have the most exposure to catastrophes

Insurance analyst, Richard Gradidge

“This highlights the cycle management benefits of Chaucer’s motor portfolio, and explains why the proposed reduction in capacity is less than those recently announced by Hiscox (-20%) and Kiln (-14%),” adds Gradidge.

Chaucer expects an upturn from UK motor premium rates during 2008 and hopes the group’s motor division will benefit from this.

Ewen Gilmour, chief executive of Chaucer, explains: “While prudently renewing as much of our current portfolio as possible, we will also switch capital to those areas where returns are more attractive, notably UK motor where we are seeing first signs of a market upturn.

“This philosophy, combined with the unique structure of our Lloyd’s business, with its significant UK motor presence, leaves us well placed to manage the market cycle challenges ahead.”

In the coming months capacity forecasts for 2008 are expected to cascade through the market as companies abide by the sacred Lloyd’s rule of “disciplined underwriting” and mould their business model around market conditions.

The cuts, however, are likely to be diverse in range, which only goes to emphasise the mix of business and exposures borne by the 319-year-old market.