This morning Lloyd’s warned insurance and reinsurance market participants to be aware of challenging conditions in the reinsurance market and insurance updates ahead, but also said the market would support those who could capitalize on this inside.

Speaking to market representatives, Patrick Tiernan, head of markets at Lloyd’s, explained that reinsurance market conditions are being closely monitored and urged all participants to notify Lloyd’s of any changes to their reinsurance programs as soon as possible.

“We wanted to take this opportunity to highlight reinsurance, an area that we believe has changed significantly since we were last here together and that needs a lot of attention,” Tiernan said.

He explained that Lloyd’s looks at reinsurance “from both a cedant and reinsurance perspective”, with just under a quarter of gross written premiums in the market being ceded to third-party capital reinsurers.

He went on to say that “we are closely monitoring the availability, structuring, pricing and terms of upcoming reinsurance placements, particularly in property and certain specialty classes.”

Adding that “we cannot walk with our heads in the sand” and ignore the changing and more complex conditions in the reinsurance market.

He warned the Lloyd’s market about the need to respond to any issues that arise or changes to their reinsurance arrangements.

“It is an inherent expectation that managing agents review the appropriateness of their planned reinsurance strategy with a reassessment of risk appetites, underwriting strategies and capital when placements differ from plan.

“Thus, as part of the process this year, all syndicates were asked to submit their assumptions regarding external reinsurance rates, limits, retentions and coverage availability to help evaluate underwriting plans,” Tiernan explained.

Adding: “We need you to be aware of current conditions and make sure your business plans for 2023 have smart assumptions and reasonable contingency plans in place.”

He noted that syndicates have already required Lloyd’s to report changes to reinsurance programs, urging the market to be realistic to avoid resubmitting plans in the first quarter.

Tiernan then moved on to discuss the opportunities that could arise as reinsurance markets strengthen and said Lloyd’s would support those that could grow.

“This could be an opportunity for those who take out reinsurance contracts at Lloyds,” he said.

Adding: “We will actively support those who are well placed to take advantage of any opportunities that you wish to pursue.

“Hopefully, this is evident in the flexibility in the catastrophe risk appetite requirements that we have placed on those syndicates that meet the qualifying criteria.

“This will allow for greater growth across the five LCM exposures while staying within our overall appetite.”

But, on the other hand, Tiernan warned: “We cannot show the same flexibility in capital or growth when plans are built more on optimism than on proven experience.”

The top-performing syndicates are going to get a little more capital flexibility when it comes to increasing catastrophe risks, it seems, while the ones that aren’t performing as well are unlikely to get any leverage to expand in terms of cat exposure.

He said Lloyd’s intended to be nimble to respond quickly to requests for change, seeking to allow the market to remain capital cautious even when pressures or opportunities arose.

“We will strive to find the right balance of prudence and practicality when it comes to reinsurance and capital building,” Tiernan said.

Interestingly, Tiernan did not mention Lloyd’s insurance-linked securities (ILS) initiatives, the recent launch of the ILS London Bridge 2 structureor how it might actually work to the benefit of market participants at this stage of the reinsurance cycle.

Syndicates and Lloyd’s members could raise investors’ risk appetite using the London Bridge 2 ILS structure, perhaps by accessing reinsurance capital that has a lower total cost associated with it, or in a way that reduces the associated brokerage costs.

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