Lloyd's is feeling competition from markets in Bermuda and Asia where insurers have less regulation and pay less taxes, according to a study released by a leading reinsurance broker.
That conclusion was reached in the Lloyd's market financial and operational report for 2006 produced by Guy Carpenter & Company Inc., a reinsurance broker and subsidiary of professional services provider Marsh & McLennan Companies.
Guy Carpenter said Lloyd's suffered substantial losses from Hurricanes Katrina, Rita and Wilma in 2005 resulting in a combined ratio of 111.8 percent. Net losses amounted to ?3.3 billion (U.S. $6.01 billion at current exchange rate). The market suffered an overall financial loss of ?103 million ($187.52 million).
The three storms accounted for 28.1 points of Lloyd's combined ratio loss. All other noncatastrophe losses remained profitable, the report said.
Capital providers added ?1.2 billion ($2.18 billion) in new money to the market in the wake of the catastrophe losses in 2005, boosting funds at Lloyd's by 6 percent to ?10.2 billion ($18.6 million) and market capacity by 8 percent to ?14.8 billion ($26.9 billion).
Treaty reinsurance accounted for 35 percent of the whole book of Lloyd's business in 2005, compared with 29 percent in 2004. Reinsurance suffered a combined ratio of 135 in 2005, compared with 95 in 2004.
Energy business suffered the most with a combined ratio in 2005 of 147. The report noted that a significant portion of the energy business is located in the Gulf of Mexico.
The report went on to say that Lloyd's is facing growing competition from Bermuda and Asia. The bulk of the competitive new capital is going to Bermuda, which enjoys "tax advantages and a less onerous regulatory regime." The total amount of new capital raised in Bermuda in 2005, by new and existing companies, amounted to $17 billion.
Lloyd's advantage is in infrastructure and concentration of expertise, the report noted, and the ability to accommodate business involving extensive claims activity.
To create a more level playing field, the Financial Services Authority (the United Kingdom's regulator) is looking to create a more favorable tax system, which could also lead to special purpose insurance vehicles, known as sidecars, which are popular among Bermuda carriers.
The report also reviewed the activities of Equitas, which was developed to run off Lloyd's non-life liabilities, specifically asbestos and pollution.
Since its inception in 1996, Equitas has settled ?17 billion ($30.9 billion) in claims, generated investment returns of ?908 million ($1.65 billion), and reduced cost of running the business from ?243 million ($442 million) to ?72 million ($131 million).
However, it has increased reserves by ?1.6 billion ($2.9 billion), primarily because of U.S. asbestos liabilities. Asbestos accounts for 53 percent of reserves, the single largest threat to Equitas financial existence.
While the company has been successful in resolving the number of claims, adverse developments are expected to last for many years to come, Guy Carpenter noted.
Copies of the report are available for download at www.guycarp.com. Printed copies can be obtained by contacting the broker at marketing@guycarp.com.
Lloyd's did not return a request for comment.
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