Insights

Lloyd’s May 2022 Market Message

Posted 19.05.2022 – Quick takes

On Wednesday 18th May, Lloyd’s delivered its May Market Message, to coincide with the start of the business planning process for the 2023 year of account. In addition to the 2023 SBF process, other key areas discussed were the conflict in Ukraine, the impact of rising global inflation and an imperative for the preservation of capital given global uncertainties. The planning for 2023 will be the first under a principles-based oversight framework, rather than the previous rules-based oversight. This new oversight environment, called RIO (re-imagining oversight) is designed to allow the best run syndicates space to grow, whilst ensuring appropriate and proportionate oversight across businesses performing poorly against Lloyd’s financial and non-financial expectations.

Patrick Tiernan (Chief of Markets), Tony Chaudhry (Underwriting Director) and Emma Stewart (Chief Actuary) delivered the semi-annual message to market participants, stressing that performance and growth need not be casualties of the “once in a generation” levels of macro-economic and geo-political uncertainty that the world currently faces.

Although Tiernan did not give any more detail on the market’s exposure to Ukraine, saying that more information would be provided with the 1H22 results in September, he did reiterate that the war would not be a capital or solvency event for either the Lloyd’s market or for individual syndicates. He explained that the Ukraine reserves announced so far by syndicates were predominantly IBNR, concentrated across aviation, marine, political risk, political violence and trade credit. He went on to say that the uncertainty in the aviation market was understandable given that it was “as complex a situation” as he could recall, but that all parties were co-operating and entering into constructive dialogue in good faith. Tiernan clearly believes that a certain amount of litigation will be inevitable to resolve the complex contractual questions that arise from certain aspects of the war and the ensuing sanctions.

Tiernan touched on the various challenges facing the insurance sector in general, including rising inflation, slowing economic growth, interest rate and currency volatility and supply chain interruptions. In doing so, he urged Lloyd’s market participants to consider affordability of products and the removal of any unnecessary costs and fees in order to do so.

Tiernan said that Lloyd’s will continue to support the market’s growth ambitions for 2022, with scope for plan adjustments to accommodate inflation and currency fluctuations, but that the Risk Adjusted Rate Change (RARC) targets continued to be a floor not an aspiration. Tiernan stressed that the Lloyd’s executive would not be accepting of those that were not “building this uncertainty and volatility into their plans.”

Tiernan also repeated his message that the market had to be better with its catastrophe loss picks (target loss ratios), with the 5-year average negative impact on combined ratios from catastrophes being 4.7 percentage points worse than target described as “not sustainable.” High expense ratios in the Lloyd’s market also came under renewed criticism.

Alpha comment

We did not learn a huge amount from this presentation given that there was no new detail on the market’s exposure to Ukraine and the main points of the presentation were reiterations of previous messages on the need for: higher RARC; lower catastrophe exposures; and lower expenses. These are all laudable aims, but they may prove hard for Lloyd’s to deliver as a market, given the cost pressures building in the system from inflation. These are, however, all aspects that we spend considerable time discussing with our supported syndicates.

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