Lloyd’s Market Message

Posted 27/11/2020 – News

Yesterday, the Lloyd’s executive delivered its post-business planning ‘Market Message’ to the underwriting, broking and investment community.

Although the tone was decidedly upbeat on the back of the improved rating environment for the 2021 year-of-account, all members of the presenting team were at pains to stress how much of the hard work for 2021 still lies ahead.

During his comments, John Neal (the Lloyd’s CEO) praised the underwriting teams and managing agents for a smoother process than for the 2020 year-of-account, despite the obvious disruptions created by COVID-19. He said that Lloyd’s had asked for, and agreed upon, realistic plans for 2021 – but now the market needed to execute upon them. Neal reminded his audience that the normalised combined ratio at Lloyd’s had been unsustainably poor for a number of years and that fast and decisive action had been required. He went on to say, though, that better underwriting practices have started to deliver improvement, clearly demonstrated with the Interim 1H20 results (back in May). After strong rate improvements in 2020, rate increases are expected to continue through 2021.However, Neal stressed that in order to future-proof the Lloyd’s market, sustainable long-term profitability had to be achieved. As such, the task is not yet complete and the focus is still upon profits rather than growth.

Tony Chaudhry, Head of Performance, stressed that underperformers had been asked to show plans that prioritise a return to sustainable profitability. He said that 2021 plans had been considered upon the basis of 2Q20 performance. Given that growth in new business since then had been slower than anticipated (albeit retention has been higher), due to COVID-19, 2021 income forecasts now looked ambitious. All plans will therefore undergo a further review in 1Q21. Chaudhry also criticised the c£1.3bn forecast rise in operating expenses, which will have a negative impact of 4.4% on the combined ratio. He said that it placed Lloyd’s at a c12% disadvantage vs. its global peers, which is clearly not sustainable.

Kirsten Mitchell-Wallace, Head of Portfolio Risk Management, stressed that a targeted approach to portfolio management continues. She explained that in 2021, Light Touch syndicates (c25% of the market) were given c18% GWP growth (with increased exposure accounting for about half of this). Standard syndicates (c39% of the market) were given c12% GWP growth (of which only about one quarter is due to increased exposure). However, High Touch syndicates (c27% of the market) were only given 6% GWP growth (which represents a 23% decrease in exposure in real terms).
Burkhard Keese, the Lloyd’s CFO, said that capital for 2021 has increased by 11% vs. 2020, primarily due to the exposure growth and the impact of COVID-19, partially offset by expected profitability for 2021.

Alpha comment: Alpha welcomes the continuing focus upon profitability rather than growth. Given the expectations for continuing rate improvement in 2021, the fifth consecutive calendar year of rate growth, it would have been very easy for the Lloyd’s executive to have declared victory over the poor underwriting practices of the past and allowed unsustainable income growth. Instead, Lloyd’s continues to demand higher standards of underwriting, better cost control and an emphasis on rate rather than exposure. This is exactly what the market continues to need and it helps to increase our confidence in a positive outlook for the 2021 year-of-account for capital providers.

A copy of the Lloyd’s slides can be found here

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