Lloyd’s 2007 Capacity up 10% to $31.5 Billion; Franchise Director Comments

January 16, 2007

Lloyd’s capacity for the year 2007 has increased to approximately £16 billion ($31.42 billion at current conversion rates), compared to the 2006 figure of £14.8 billion ($29 billion) in terms of gross written premium.

Rolf Tolle, Lloyd’s Franchise Performance Director, in a Q&A session on the web site (www.lloyd’s.com), said this represents around a 10 percent increase year on year. He added, however that “capacity is just an indication of the business the market intends to write, what is more important is the utilization of that capacity as it should only be used if the underwriting can be done profitably.”

He noted that the current rating environment still shows “the effects of a sustained hard market,” which indicates Lloyd’s is taking a “very sober approach.” However, Tolle indicated that “outside of US catastrophe risks, rates in 2007 are expected to continue to soften. It speaks volumes for the strength of the Lloyd’s market and its attraction to brokers and policyholders that we are in a position to take on more business this year.”

“We are currently seeing a tale of two markets,” he continued. “Although rates have increased in wind-exposed business, particularly in the US, non-wind exposed business continues to soften. This makes good cycle management and underwriting discipline more important than ever.”

Tolle noted that the market is still experiencing some price increases from areas “that were hit by the hurricane losses of 2004 and 2005. As a result, property direct, facultative and treaty, along with energy, have seen the biggest pricing changes.

“The challenge on those lines not affected by the hurricanes of 2004 and 2005 is that they now show different degrees of weakening. We are seeing some lines reaching a level where they are lower then they were pre-9/11, throwing into question whether they are profitable.” The quiet 2006 hurricane season has give the market “more time to address any potential issues,” he noted.

“The market needs to ensure that it has a greater understanding of its potential losses,” Tolle continued. “The work of our exposure management team will help with this. Its job is to look at what could go wrong, and ensure that the market is ready for it. They take a step back and look at the whole market to ensure it is not over-exposed.

“Rates must be sustained, and the volatility in pricing caused by major catastrophes removed. Clients want consistency in pricing. We have seen rates spike in the past, after major incidents such as 9/11 and the 2005 hurricane season. This is not only caused by incorrect pricing of business, but also a lack of understanding of the exposure to such events.

He’s wary of the upcoming 2007 North Atlantic hurricane season, which experts have indicated could well produce an “abnormally higher then the average” number of storms that could “drive uncertainty for those lines which have catastrophe exposures.”
Tolle also noted that the “ongoing issue remains the availability and affordability of reinsurance cover. The result has been the emergence of new types of loss mitigation in the form of catastrophe bonds and sidecars.

“From Lloyd’s point of view, we have taken steps to address this issue by setting up Thunderbird Re, which is a framework to provide Lloyd’s syndicates with a cost effective way to use cat bond capacity if they wish to.

“But the biggest challenge remains managing the cycle. We have to remember that 2006 was a very benign year from the perspective of large losses. It has left some casualty lines under increasing pressure along with non-catastrophe exposed lines. Cycle management remains extremely important in order to enable the market as a whole to meet the needs of its clients if, or when, major claims arrive.”

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