Canadian Underwriter

Only about 4% of Lloyd’s total business considered at risk from Brexit: Aon Benfield

August 18, 2016   by Canadian Underwriter

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Only about 4% of Lloyd’s total business is considered to be at risk from the potential loss of membership of the single European market, following the United Kingdom’s decision to leave the European Union (EU) in June, according to Aon Benfield.

Brexit Direction Sign“‘Brexit’ is not expected to have a significant impact on the Lloyd’s franchise,” Aon Benfield said in its Lloyd’s Update report, released earlier this week.

The report noted that the 30 countries in the European Economic Area (EEA) generated 11% of Lloyd’s gross premiums written (GPW) in 2015, or 2.9 billion pounds. This includes 1.1 billion pounds of reinsurance business and 0.6 billion pounds of marine, aviation and transport business (MAT), which is “unlikely to be materially affected by a potential loss of existing trading rights,” the report said. “The biggest cause for concern is 0.8 billion pounds of non-MAT business written on a cross-border basis (4% of GPW).”

Lloyd’s specialist market access team is engaging with the U.K. government “at all levels” and has also commenced discussions with regulators across the continent, with the aim of preserving its passporting arrangements, the report said. “If these efforts do not succeed, Lloyd’s has the option of establishing a separate subsidiary in an EU member state to achieve passporting rights throughout the EEA and facilitate the writing of non-MAT business,” the report noted.

The immediate financial impact on Lloyd’s primarily arises from the material weakening in sterling and the decline in bond yields since the referendum, Aon Benfield reported. However, expense ratios will potentially benefit, given the significant amount of U.S. dollar denominated business being set against a largely sterling cost base. “The market’s capital position is protected,” the report stated.

Other highlights of the report include:

  • Lloyd’s operating performance has been strong over the past decade. The combined ratio and return on capital average 90.6% and 16.2% over this period, supported by relatively benign loss experience;
  • Capital resources are currently at peak levels. Members’ assets supporting underwriting now exceed 22 billion and pounds calls on the Central Fund have been limited to 11 million pound over the last five years;
  • At constant exchange rates, gross premiums written rose by 1.1% to 26.7 billion pounds in 2015, despite an average renewal rate reduction of 4.6%;
  • Underwriting and investment results both weakened in 2015. Pre-tax profit fell by 30% to 2.1 billion pounds and the return on capital dipped to 9.1%;
  • Lloyd’s net expense ratio breached the 40% threshold for the first time in 2015. Efforts to streamline operations across the London market have gathered pace over the past year, as leading industry bodies cooperate to drive a five-year modernization plan;
  • Interest in setting-up at Lloyd’s remains strong. “For (re)insurers looking to develop an international or specialty franchise, the market offers an unrivalled combination of access to diversified business and capital flexibility”; and
  • Recent industry consolidation has had a significant impact on Lloyd’s. Eight corporate transactions involving a Lloyd’s business were announced during 2015, affecting some 20% of market capacity.

On June 23, 52% of U.K. voters supported relinquishing membership in the EU. At the time, the International Underwriting Association of London said that the London insurance market is “resilient” and “well-positioned” to respond the results of the referendum.