Drop in investment returns will lead to a capacity crunch, FM Global VP predicts

The drop in insurers’ investment returns and assets values will lead to a capacity crunch that will inhibit insurers from underwriting higher levels of business in a market where rates are becoming more profitable, said David M. Thompson, vice president and operations manager of FM Global’s Toronto operations.
Thompson spoke to delegates of the CIP Society’s 2009 Symposium in Toronto.
“What we think we’re going to see is that [the drop in investment returns and asset values] is going to inhibit insurers’ ability to participate in the market when it does harden up,” Thompson suggested.
“Anybody who has bought any business in London today all knows that the pound sterling in terms of U.S. dollars or the Canadian dollar isn’t doing so well. So Lloyd’s capacity, when put out on a global level, is a lot less than it was a year ago.”
Since July 2008, the pound sterling has dropped roughly 20% against the U.S. dollar.
“So when I go into Lloyd’s to look for reinsurance, the guy who gave me a $50-million line last year can now only give me a $30-million line this year. It is all causing a bit of a crunch.”
By the end of the mid-year treaty renewals, “the party will be over,” particularly for the commercial property market, Thompson predicted. This is because “a lot of the capacity got sucked up in the Jan.1 renewals,” he said.
“By the end of the July 1 renewals, anyone who has big capacity to play with would rather put it on treaty or facultative business right now, and I think that’s going to drive the market change.”