Insights

Lloyd’s market message

Posted 22/09/2022 – Quick takes

Lloyd’s held its quarterly market message this morning led by Patrick Tiernan, Chief of Markets.

Tiernan advised that in the face of a darkening economic outlook, the market needs to embrace uncertainty intelligently.  He is happy to support growth plans through flexibility and innovation and expects the market to continue to grow in size and relevance whilst sustainable performance remains the number one priority.

He talked through the elements of the recently reported 91.4% Lloyd’s half year net combined ratio and the areas of focus for the market.

  • The attritional loss ratio was reported at 48.9% at the half year point. He asked the market not to give up on improving this. Syndicates need to focus on inflationary impacts to their business, attachment points and clarity of cover going forwards. He continued that whilst Lloyd’s has not issued a directive on how to approach building in inflation to plans for 2023, there is an increasing homogeneity of inflation assumptions.  Where syndicates are outliers, Lloyd’s will challenge assumptions used. Pricing must reflect any changes in strategy eg increasing attachment points.
  • The large and cat loss ratio  was 7.1% at the six months stage. This is in line with the 10 year average and was heavily impacted by the war in Ukraine but less so on the H1 natural catastrophes where Lloyd’s has a smaller market share. He stressed no complacency please. Syndicates need to focus on the volatility of this part of the combined ratio and seek to reduce volatility where possible going forward.
  • The expense ratio was 35.4% at the half year point. The focus needs to be on alignment of interests, particularly with the distribution network (ie push harder to reduce broker fees and commissions)

He reported that aggregate business plans for 2023 showed 5% exposure growth for the market and Lloyd’s had a greater confidence in the Risk Adjusted Rate Change (RARC) assumptions used by syndicates in their plans. He reported that current market conditions support measured growth where valued appropriately. There is an increased propensity for underwriters to attach higher at this stage of the cycle and management must be aware of this and build it in to their modelled outcomes. They intend to challenge plans which include low RARC assumptions, with price adequacy an area of particular attention. Loss ratios and combined ratios in plans need to be realistic and backed up by past performance and will be challenged if they look over optimistic. There was a reminder to managing agents that syndicate are empowered to write a further 2% of their total premium in a class called “innovation” with minimum oversight, and this does not necessarily need to be from insurtech but any new product for customers. At present, only 0.02% of market income sits in this class. There will be a presentation in December on the future use of Lloyd’s Lab.

An area that Tiernan and his team are particularly focussing on is reinsurance, both outwards and inwards. The market spends around a quarter of its gross premium on outwards reinsurance protection and just under a quarter of that is ceded GWP. He said “It is an inherent expectation that managing agents consider the feasibility of their planned reinsurance strategy, with a reassessment of risk appetites, underwriting strategy and capital if placements differ from the plan”. They will be evaluating how realistic reinsurance programme purchase assumptions are in the 2023 plans and asking management to have contingency arrangements in place if these assumptions do not translate to reality. There is obviously some concern that there may be a gap in what protection syndicates believe they can buy and what might be available, particularly looking at property and stressed specialty classes both in price and structure due to the widely reported capital exiting from the global reinsurance space. Conversely, he noted this also presents an opportunity for the market and market conditions should enable some syndicates to grow in this area where they show demonstrable experience. Tiernan advised that his team will take an agile and accelerated approach to mid-year changes to business plans, if assumptions for 2023 prove to be significantly different from reality and capital could be released if opportunities do not appear.

The market is considering the ongoing impact of the war in Ukraine on developing risks, the span across territories, supply chain issues and potential for further geopolitical challenges. Lloyd’s is developing 3 new Realistic Disaster Scenarios with the LMA which will cover potential tensions between China and Taiwan and the impact on US relations. These are to be in place for Q1 2023.

Tiernan’s concluded that we are in a challenging and difficult market but not a universally hard market so there needs to be continued upwards pressure on prices. The Corporation of Lloyd’s is evolving as a strategic partner with managing agents and whilst conservatism is the preferred approach they will support mid year changes with growth ambition. He welcomes challenges and encouraged the market to bring them to him. Logical, realistic and achievable plans will be approved expeditiously and they will be taking a prudent and supportive approach to reinsurance challenges. The market is learning lessons from Ukraine and is preparing for other emerging risks.

If you would like to the watch the full presentation please click here.

Alpha comment

Lloyd’s oversight will continue to focus on Logical, Realistic and Achievable plans for 2023 with a particular focus on inflation and reinsurance programmes for 2023. This is a pragmatic approach given the potential reduced availability of aggregate cover and increased pricing for all reinsurance protection. The remainder of the presentation was simply a reminder of the continued need for sensible consideration in rate assumptions going into an improving market and with an eye on developing risks.

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