The London insurance market has enjoyed another strong...
The London insurance market has enjoyed another year of record profits generated on the back of unprecedented levels of capacity, according to research by PricewaterhouseCoopers (PWC).
PWC said this trend was set to continue through 2004 and 2005, despite the softening of rates in many key sectors.
PWC partner Philip Calnan said: “Capacity within the London insurance market has soared to record levels over the past three years as insurers and their investors have sought to capitalise on the environment of hard premium rates.
"However, the softening market, increasing competition for capital and pressure from regulators, rating agencies and capital providers will leave little margin for error in underwriting and capital allocation decisions.
“We believe that those insurers at the forefront of developments in the capital, risk and performance management arena will be more strongly placed to identify the best performing areas and focus on these in order to maximise returns, while remaining within their set risk tolerance.”
Cost control appeared to have moved up the corporate agenda as margins started to become squeezed in the cycle downturn, said PWC.
Possibilities identified by interviewees for savings included direct trading, rationalising the use of managing general agents overseas and even establishing their own distribution channels, said PWC.
PWC partner Paul Delbridge said: “Some London market insurers have admitted to becoming complacent about their level of operating costs during the hard market.
"But the cycle downturn and forthcoming pressure on margins have led respondents in our latest study to evaluate more critically their expense ratios.
"The view that every pound saved is a pound more profit could prove ever more crucial as margins tighten in a softening market.”
According to survey respondents, reinsurance expenditure represents more than 20% of their gross written premium, though spending in 2004 has fallen by an average of 8% since 2003. Respondents expect their reinsurance expenditure to come down by a further 7% in 2005.
Many question whether they are receiving adequate value for money from their existing reinsurance arrangements.
Concerns appear to have been exacerbated by what some respondents see as growing problems with recovery and the withdrawal of cover to longstanding clients.
Delbridge said: “The sense that reinsurance is a long-term quasi-credit scheme appears to be receding in the property catastrophe reinsurance market.
"It also appears from our survey that many reinsurance buyers are themselves adopting a tough approach, including dropping longstanding partners from their security list if their reputation or credit rating is called into question.
“Our survey suggests that as long-term relationships become less important and both buyers and sellers become more hard-nosed in certain market sectors, reinsurance is likely to become a more technical price-driven market than ever before.”
