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Size isn’t everything, but shrink too fast and you may weaken your specialist credentials

On announcing full-year results last week, the carrier said it had shrunk its struggling London market business by about half – more than the one-third cut that was flagged in November.

The retreat from certain lines – including construction, ports and terminals, freight, MGA business and various marine segments – will cut about £150mn ($198mn) of net written premiums from the London business, which wrote £300mn in 2017.

And more cuts will most likely follow as new UK and Ireland CEO Scott Egan continues the portfolio review in the first quarter of 2019.

However, when asked during a call last week at what point the London market business could become “subscale”, Hester countered that, in this sector, a company’s size is “totally irrelevant”.

Some small Lloyd’s syndicates flourish despite their diminutive statures, he noted.

Instead, it’s a question of “what are your specialties and can you sustain the expertise”, Hester maintained.

That sounds sensible to a point – premium chasing was part of what got the wider London market into the low-profitability morass it is in at the moment.

This is particularly so at Lloyd’s, where performance management director Jon Hancock has effectively had to force syndicates to stop underwriting at a loss.

Similarly to Hancock, Egan has pledged a thorough “look under the bonnet” to evaluate what risk remains worth writing as he conducts a forensic review of the London operation.

Hester himself has of course spent the greater part of a decade wielding the axe. The executive did a creditable job dismantling the too-big-to-fail Royal Bank of Scotland before his abrupt ouster, and went on to free RSA from businesses in the Middle East, Russia, the Baltics, Latin America and elsewhere.

But there comes a point where a line of business becomes so tiny that brokers and insureds alike will no longer consider that carrier a specialist.

And there also comes a time when top specialty talent will gravitate towards companies with heft in their chosen lines.

And with £150mn of London markets premiums after the cuts and falling, RSA really is a minnow. Consider that even Swiss Re Corporate Solutions – with $4.7bn of gross written premiums last year – is regularly cited as a commercial specialty carrier which has failed to make its mark.

And among Lloyd’s syndicates, despite Hester’s suggestion that pocket-sized players can thrive, Skuld 1897 demonstrated last week that small isn’t always beautiful with news it would go into run-off after it failed to achieve critical mass.

Meanwhile, RSA has also acknowledged an issue with the cost optics. These would have been fine within the commercial lines unit – but for the fact the top line is coming down, Hester said last week.

The executive warned of a “lag” over the next two or three years as RSA works to “figure out how to catch costs up with the top line”.

RSA is aiming to get the cost ratio below 20 percent in every business unit. In 2018 the UK and Irish ratio at 21.4 percent was already higher than the Canadian and Scandinavian divisions – and the company will now have to work harder to meet its target.

None of this makes for comforting reading for RSA’s London market employees, and it’s safe to assume that many will be looking over their shoulder as Egan completes his review.

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