Lloyd’s Market Outlook for 2022

Posted 10/12/2021 – Insights

Patrick Tiernan (Chief of Markets at Lloyd’s) and two of his senior colleagues from the Performance Management Directive (Peter Montanaro, Head of Market Oversight & Tony Chaudhry, Head of Performance Management) gave some outline information following the conclusion of the business planning process for 2022. He was keen to stress that the process had been much more constructive (and therefore quicker) than the process in 2021 (aided by face-to-face meetings). His desire was to see an improved robustness of business plans that included better modelling, more realistic loss expectations, increased planning transparency regarding sources of growth. The main areas of focus for 2022 include underwriting performance (which remains the number one priority) and expenses (in particular the cost of delegated authority business). Tiernan pointed out that Lloyd’s is allowing net exposure growth across the market for the first time in four years.

Tiernan explained that the outcomes of the planning processes had to balance the market conditions with the long-term aims of the Lloyd’s market. The goals for 2022 include a Net Combined Ratio (NCR) of less than 95% (in-line with the 2021 target), Gross Written Premium (GWP) of £43.7bn (+c15% vs. c£38.1bn for 2021) and an expense ratio of 35.9% (vs. c36.3% in 2021).

The growth in the Risk Adjusted Rate Change (RARC) for the market is expected to be lower than in 2021, but still positive. A slowing rate of increase , though, means that the cumulative impact of nearly 5 years of positive rate momentum can still be very significant as the increase earn through. Tiernan was quick to emphasise that the RARC expectations in business plans, however, were a floor not a target – not least because of the potentially challenging impact of inflation (particularly for liability lines). Tiernan was also optimistic of faster RARC growth for cat lines, given the recent US Hurricane and European flood losses and the lower availability of reinsurance capacity. This is also true of some non-cat lines, such as Financial & Professional Liability lines. Lloyd’s will also remain flexible with regards to mid-year pre-emptions if rate growth proves to be significantly higher than expected.

Importantly, Lloyd’s will continue to differentiate with regards to growth across the three syndicate classifications. This means that Light Touch syndicates will largely be granted exposure-driven growth, whilst High Touch syndicates will largely be granted rate-driven growth:

Lloyd’s will also continue to support innovative areas of underwriting, such as Cyber, where premium growth will be driven by individual syndicate track-records and expertise. This means that those syndicates judged to be the ‘best’ in this space have been granted c70% premium growth vs. an overall average of c30%, which is mainly made-up of rate:

Peter Montanaro then went on to explain the Lloyd’s transition from a rules based to principle based oversight in 2022. Given that Lloyd’s has approximately 750 rules for the managing agents and syndicates, he acknowledged that a more streamlined approach was needed that did not create more work for market participants. As such, Lloyd’s will assess outcomes rather than dictating processes, with the level of supervision determined by the categorisation of each syndicate. The new processes will start to be introduced towards the end of 2021, with full attestation to the principles in March 2023.

Tony Chaudhry then gave more detail on the attitude of Lloyd’s towards delegated authority business. Chaudhry explained that Lloyd’s would ask if the book is well underwritten, if it is priced sufficiently and if there is sufficient management information to allow for a full assessment of the book through time. Lloyd’s believes that there is significant scope for improvement of delegated authority, c30-40% of Lloyd’s GWP, in both performance and cost.

Alpha comment

We did not learn anything particularly new  or ground-breaking during the session, but the meeting did continue to stress those aspects that Alpha believes to be absolutely vital with regards to the future success of Lloyds, namely: (i) continued improvement in underwriting standards; (ii) further progress in risk adjusted rate increases; (iii) greater differentiation in the supervision of syndicates; and (iv) a continuing focus upon the market’s expense ratio. As such, we found the meeting reassuring and look forward to the 2022 year of account with a sense of optimism.

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