Lloyd’s market message Q2 2023

Patrick Tiernan, Chief of Markets and Emma Stewart, Chief Actuary delivered the Lloyd’s quarterly market message of 8th June.

The overall message from Lloyd’s was positive with Lloyd’s having adapted well to both recent and more systemic market challenges. A large focus for Lloyd’s in the coming months will be the 2024 planning season and ‘strong growth’ is anticipated to continue.

Patrick Tiernan began by highlighting the improvements of the Lloyd’s market from 2021 to 2022 and the anticipated final results for 2023. The market had improved its combined ratio by 1.6 points, attritional loss ratio by 0.5% and growth was 8% up from 2021. The revised plan for 2023 is £56.7bn of GWP, the growth of 15% and 5.1% of risk-adjusted rate.

Lloyd’s from 2013 to 2022 has had significant portfolio changes where in 2013 the short tail to long tail ratio was 29:71, whereas in 2022 the ratio was 40:60. Tiernan also commented on Lloyd’s risk distribution changes where over the same period particularly in North America, the delegated underwriting had increased from 32% to 40%, whilst the Open Market underwriting had reduced from 48% to 45%. The issues are with business written under delegated authorities is set out below.

Tiernan felt that broadly speaking the property risks were now well rated whilst he had some concerns on the casualty and “FinPro” markets, where there were some reductions which were not necessarily justified.

He then explained the six key areas of underwriting focus going forward into planning season:

Geopolitical risk – Tiernan explained that there was a growing instability in the geopolitical landscape. The particular classes that are linked to the uncertainty are Political Violence, SRCC (Strikes, Riots and Civil Commotion) and Terror and for 2024, syndicates should not be chasing growth in these classes. Many of the primary rates were still too low, with terms and conditions not being tight enough. Lloyd’s will focus on syndicates’ exposure and experience in these areas.

Macroeconomic pressures – With D&O and FinPro classes being directly linked to the economic landscape and recent collapses of SVB, Signature Bank and First Republic, Lloyd’s will be focusing on market price adequacy for these classes.

Delegated underwriting – Tiernan detailed that open market distribution has remediated quicker than delegated underwriting, where the effect of the time lag is showing in the underwriting figures, and as a result delegated underwriting will be under additional scrutiny.

Catastrophe loss picks – Over the past six years syndicates have had planned catastrophe loss ratios far below actual catastrophe loss ratios and Lloyd’s will examining syndicates’ performance closely for 2024.

Reinsurance market volatility – Tiernan highlighted that reinsurance has continued to harden and as a result syndicates will be monitored to make sure that any gap in outward reinsurance coverage is managed effectively. Net exposures will be examined, and capital set based on those net exposures

Cyber – Lloyd’s remains determined to manage potential systemic risk better. The market recently required a cyber war exclusion to be added from 1st March 2023, although its introduction did lead to some confusion on the different versions thereof. Should syndicates want to continue to write cyber war, they will be required to put up additional capital as a result. Managing agents wanting to offer the broadest cover will be encouraged to write such business on non-Lloyd’s paper.

For 2024, Lloyd’s will continue and further enhance its approach to business planning with outperforming syndicates having ‘de-minimis plan reviews’ and underperforming syndicates having intensive meetings and plan reviews.

Emma Stewart then described the capital requirements for Lloyd’s. The message from Lloyd’s is that additional capital will be required for the growth anticipated, inflationary environment and unpredictable landscape. Syndicates will also need to take into account the various interest rates for the EU, UK and US.

Tiernan finished the meeting discussing claims at Lloyd’s. He explained that claims are a key aspect of the Lloyd’s brand and that faster settlement and experience can help to differentiate the Lloyd’s market and help future success.