The Lloyd’s first quarter Market Message

Patrick Tiernan, Lloyd’s Chief of Markets, and Kirsten Mitchell-Wallace, Director of Portfolio Risk Management, delivered the Market Message for 1Q23 on 9th March 2023.

The Lloyd’s market message is a semi-annual event that provides the corporation’s management an opportunity to outline its prevailing strategic imperatives for the market.

Firstly, Tiernan referred to the preliminary FY22 market results (see Alpha’s commentary here) that had been released by Lloyd’s the day before. He drew attention, in particular, to the combined ratio (CoR) of 91.9% – the market’s best underwriting result since 2015 – despite the negative impact on the CoR of 12.7% from major losses. In 2015, the CoR was 90.0%, but major losses had a negative impact of only 3.5%. Despite this underwriting performance, Tiernan believes that there is still much to do. There will be an on-going focus upon major claims, given the fresh challenges that face the market, with the overall level of catastrophe losses expected to increase over time. Tiernan, therefore, emphasised the need for managing agents to manage underwriting appetites actively through the cycle, whilst maintaining a high level of discipline. Mitchell-Wallace said “rather than the adage of it ‘being better to be lucky than good’, we simply want you to be good”.

Tiernan said that managing agents had built in a level of prudence to business plans for 2023, particularly regarding potential reinsurance market dislocation around the key renewal date of 1/1. In the event, the worst fears of reinsurance market dysfunction did not materialise but there have still been a number of business plan resubmissions. The overall impact on aggregates from these resubmissions is likely to be minimal, but shape of portfolios will change to take account of:

• Relative attractiveness of well-defined higher layers vs. difficult to protect lower layers;
• Conservatism in cyber and rate & terms softening in D&O;
• Coverage alignment issues in war-impacted specialty risks;
• Clearer understanding of risk appetites – including the unbundling of composite programmes.

Areas of particular focus include D&O, cyber and delegated property business (or binders).

D&O has seen a softening of rate since early-2022 and cyber has seen rates start to plateau. Tiernan wants the market to concentrate on rate adequacy in these areas and not write to plan by simply increasing the volume of business written.

Cyber will also see war exclusions included in all wordings from 1st April 2023. Tiernan explained that Lloyd’s (which has a c20% market share of the global cyber insurance market) is not “running away” from cyber risk, but instead is trying to ensure that customers know exactly what cover they are buying and that underwriters are appropriately rewarded for the risk they are assuming.

Tiernan is concerned that much of the property binder business written by Lloyd’s is unprofitable and in need of further remediation.

The Lloyd’s markets team has also sent out a questionnaire to all managing agents with regards to geopolitical risk, attempting to learn lessons from the war in Ukraine. The questionnaire is part of a process designed to build resilience around potential future external shocks and focused specifically upon the Straits of Taiwan, with three different scenario analyses that escalate in terms of severity and supply chain impact.