Biba 2012: Lloyd's expansion into emerging markets carries additional risks

The Lloyd’s insurance market’s planned expansion into emerging markets is a net positive, despite the additional risks of operating outside established markets, according to Fitch Ratings.

The rating agency expects the economic development of emerging market economies to boost demand for (re)insurance. Lloyd’s already writes 25% of its business outside of Europe and North America, with the growth of insurance premiums outpacing developed markets.

Fitch said the syndicated nature of Lloyd’s should work to its advantage in tapping into new markets. The structure of Lloyd’s enables it to source new capital and underwrite large complex risks, compared with an individual company. Meanwhile, its special purpose syndicates allow individuals to invest capital to support underwriting on a limited time basis.

But last year’s Asia Pacific catastrophes – including locations traditionally viewed as non-peak – highlights the risks of writing insurance in less well-understood markets, said Fitch.

These incidents led to significantly higher underwriting losses than reinsurance companies had forecast, due partly to the limited historical loss and exposure data compared with the USA and western Europe. This shortcoming has been compounded by the insurance industry’s increasing reliance on catastrophe models to assess the risk contained within their portfolios.

Asia Pacific was a major contributor to catastrophe losses jumping 24.8 percentage points of the sector’s 2011 calendar-year combined ratio, from 11.7% in 2010. Yet the region remains a relatively small proportion of reinsurance companies’ business.