On Lloyd’s and the US Surplus Lines Market

The Kiln Event at the Georgia Aquarium, 2012 NAPSLO Conference in Atlanta

To understand and appreciate Lloyd’s at its very best then you would look no further then the US Surplus Lines market. With a premium volume approaching $6 billion, Lloyd’s is the largest player, bigger than AIG, enjoying a strong reputation and an enviable network of long standing profitable relationships. This high profile business attracts some of the best brokers and underwriters, all rolling in to Atlanta earlier this month for the annual NAPSLO convention, the principal meeting place for insurers, intermediaries and agents. 

The surplus lines market absorbs the risks unacceptable to the standard insurance industry be they distressed, novel or high capacity. Over the past two decades the market has expanded enormously in real terms and as a percentage of the total commercial insurance premium base in US. What is more, as AM Best indicate in their excellent annual review, the dedicated surplus lines carriers including Lloyd’s have consistently out-performed standard insurers in terms of underwriting profitability. Yet in Atlanta views were mixed about the current state of the market and what its likely direction might be. 

In substantially raising insurer’s capital requirements, the introduction of the RMS v.11 windstorm model in 2011, did more than the string of tornado, hail, flood and wildfire losses last year, to reverse the four year decline in property premium rates since they peaked post-Katrina in 2006. After eighteen months of rate improvements there are signs that the rally is fizzling out in certain areas despite some recent bullish comments from AIG’s trading arm Lexington. However in cutting 2013 earnings forecasts last week for a clutch of listed Lloyd’s insurers on the back of US pricing concerns, Analysts KBW may be too pessimistic. Lloyd’s underwriters are generally good at segmenting accounts, calibrating their portfolio towards niches offering higher rate. 

Since a one-off model change rather than an erosion of capacity precipitated the up-lift in rates, it is hardly a surprise that the hardening has been short-lived. Certainly by the standards of most other international markets, US surplus lines has been a quite disciplined sector of the industry so any pricing shifts are likely to be gradual. Absent so far in 2012 any major natural disaster (with fingers firmly crossed), surplus lines insurers are on course to record significant profits. Carrying prices that are still at the very higher end of historical levels; benefiting from ever-improving data feeds and working with more robust models, Lloyd’s is well positioned in US. Providing its underwriters continue to be agile and entrepreneurial then Lloyd’s should remain a leader and deliver strong returns from this critically important segment of its global business.










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