General Insurance Article - Lloyd's of London EM Expansion Positive, but Brings Risk

 The Lloyd's insurance market's planned expansion into emerging markets is a net positive, even though writing insurance outside of established markets carries additional risks, Fitch Ratings says.

 Fitch expects the economic development of emerging market economies to boost demand for insurance and reinsurance. Lloyd's already writes 25% of its business outside of Europe and North America, with the growth of insurance premiums outpacing that of developed markets.

 The syndicated nature of Lloyd's should work to its advantage in tapping new markets. The structure of the Lloyd's market assists it in sourcing new capital and underwriting large complex risks, compared with an individual company. Adding to this flexibility is the presence of special purpose syndicates, which allow individuals to invest capital to support underwriting on a limited time basis.

 Nevertheless, last year's Asia-Pacific catastrophes - including locations traditionally viewed as non-peak - highlights the risks of writing insurance in less well-understood markets. 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 US 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 catastrophes losses jumping to 24.8 percentage points of the sector's 2011 calendar-year combined ratio from 11.7pp in 2010. Yet the region remains a relatively small proportion of reinsurance companies' business.