London market expected to retain capacity despite market turn

Despite a downturn in the insurance pricing environment, the London market is expected to maintain its record-setting profits and capacity through 2004 and 2005, according to the annual London Insurance Market survey by PricewaterhouseCoopers.
However, insurers will be tested to maintain underwriting standards and make sound capital allocation decisions or risk the wrath of rating agencies and capital holders, notes Philip Calnan, partner with PWC. “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 (i.e. lines of business) and focus on these in order to maximize returns, while remaining within their set risk tolerance.”
Insurers also appear to be placing more focus on claims and expense management as margins are squeezed by the downturn in the pricing cycle. “”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,” notes Paul Delbridge, partner with PWC. Sources for cost containment include direct trading, establishing proprietary distribution channels and rationalizing the use of overseas managing general agents this, given commissions, brokerage and staff costs account for 80% of all operating costs.
Insurers are also looking to further reduce reinsurance costs, citing expectations of a 7% reduction in 2005 on top of an average 8% reduction since 2003. The importance of long-term relationships seems to be waning in the face of reinsurer credit ratings downgrades and issues over recoverability. The result could be an even greater emphasis on technical pricing of reinsurance, adds Delbridge.