Lloyd’s goes digital, but that’s not all

Management plans include a rebalancing of the market’s underwriting strategy, speeding up the adoption of the modernisation programme and reducing expense ratios further in order make the market more competitive and profitable.

The modernisation work under the banner of the London Market Target Operating Model (TOM) aims to create a market that is highly accessible, efficiently run and relevant to the needs of customers.

PPL, the electronic placement platform, was launched in 2017 providing a system transporting data through quoting to binding, and beyond. PPL provides benefits to both brokers and underwriters as it limits rekeying and therefore reducing costs. By the middle of 2018 all lines of business will be live, according to Lloyd’s.

Creating a digital Lloyd’s

To speed up adoption, the Corporation of Lloyd’s has, in March 2018 introduced a mandate for electronic placement. From the end of the second quarter, each syndicate will be required to have written no less than 10 percent of its risks electronically. This target will rise by 10 percent each quarter until the fourth quarter of 2018 to reach 30 percent. Further targets will be confirmed prior to the end of the period.

The mandate is designed to accelerate the market’s transformation from paper to digital and ensure the market realises the benefits of electronic placement. It is critical for Lloyd’s that the initiative is successful, according to CEO Inga Beale.

“Without higher levels of adoption throughout the market we put our investment to date at risk and we are in danger of seeing administration costs rise even higher,” Lloyd’s CEO Inga Beale explained in the market’s 2017 annual report.

The corporation must speed up the adoption of the market’s modernisation programme which will digitise processes, reduce unsustainable expense ratios, and make Lloyd’s more attractive to do business with, Beale explained.

For 2017, Lloyd’s reported an aggregated  pre-tax loss of £2 billion following a pre-tax profit of £2.1 billion in 2016. Major claims for 2017 more than doubled to £4.5 billion from £2.1 billion over the period, driving the combined ratio to 114.0 percent from 97.9 percent in 2016.

From the companies included in a direct comparison, only Swiss Re and AIG had higher combined ratios in 2017 than Lloyd’s while competitors like Hannover Re, XL Catlin, Arch or Munich Re reported healthier ratios.

“The exposure to US catastrophe that Lloyd’s has means that in any one year when there is big claims activity we may well underperform,” said chief financial officer John Parry, during a March 21 results press conference.

The combined ratio differential between Lloyd’s and its competitor group was 6.6 percentage points in 2017. This compares to minus 0.7 percentage points in 2016 and minus 5.4 percentage points in 2015, according to the results presentation.

Lloyd’s needs to cut costs

While Lloyd’s combined ratio may benefit from a better risk selection in some years, expenses weigh on the market’s performance.
“At the moment our expense ratio is worse than our competitors’,” Parry said. “On a loss ratio basis, we are outperforming, but that risk selection is not able to beat that expense challenge in the current market conditions,” he explained.

Expenses at Lloyd’s are higher than at competitors partially because of the market’s business mix and the way it accesses business, Parry suggested. “Where we write a lot of business via delegated authorities you have quite a chain to get the business into the Lloyd’s market,” Parry explained.

In order to address the issue, Lloyd’s wants to drive the attention of market participants to all aspects of the combined ratio, not only the loss ratio, Parry said.

The market is taking its own action. Lloyd’s intends to make the distribution process via delegated authorities as seamless as possible, avoiding the re-keying of data.

“We want to make it easier for delegated authorities to deal with us and have a one-time data entry,” Parry said. “We want to make our systems compatible,” he added.

The market modernisation is also expected to help reducing operating costs and commission rates or acquisition cost rates to levels similar to competitors, Parry suggested.

“We are looking to speed up adoption of our modernisation programmes. The technology is there, they are being used by many market participants. That needs to be rolled out across the board,” Parry said.

The first phase of the London Market TOM programme is set to reduce the Lloyd’s market expenses by £145 million cumulatively by 2020.

“It is universally accepted that the market needs to digitalise and improve how it processes business. That’s now beyond doubt and everybody is bought in,” Parry said.

All classes of business at Lloyd’s registered combined ratios above 100 percent for the accident year 2017, led by property with 131.5 percent, followed by marine with 121.8 percent and reinsurance with 121.7 percent.

For Parry this is reason enough to pressure market participants to improve underwriting results and reduce own expenses, acquisition costs and attritional claims levels.

Adapting the Lloyd’s risk profile

As part of the process, Lloyd’s wants to become more risk-based in its market oversight approach, Parry noted. “With the level of competition and the level of pricing, we need to continue to work very hard with the market on remediation of the weaker performing portfolios,” he noted.

“The underlying performance clearly needs to improve,” he said. “If you normalise the cat experience, remedial action needs to be taken,” he said.

As part of the plan to improve the market’s performance in 2018, Lloyd’s has decided to grow only the syndicates that have outperformed the market and have more profitable and better-performing books. Average performers will not grow this year and the underperformers will reduce premium volume in 2018.

Regarding the classes of business, Lloyd’s has set up criteria based on absolute performance as well as relative performance against peers operating in the same classes. As part of the plan, £450 million of premium was “taken off the table in 2017” and these measures will continue in 2018 with a number of lines actually closed rather than just having capacity reduced, Parry said.

“We are open for business if you are performing well and you’ve got a profitable business, particularly if pricing is going to pick up, but the focus on that weaker part of the syndicate market and classes of business continues,” Parry said.

Is Lloyd’s doing enough?

But while Lloyd’s is expanding the reach of PPL, some believe the work Lloyd’s is doing is not ambitious enough. “To date, much of the activity around PPL and TOM has focused on internal efficiencies in the effort to make it cheaper and easier to do business with the London Market,” said Ian Summers, previous chairman of PPL and current CEO of insurance software company Sequel.

“However, the market needs to go further than that. We shouldn’t just be using electronic placement to create efficiencies; we should be using it to help London reach out to the international markets.

“We need to improve delivery of our market-leading products and services in order to get them all the way to the client, whether that’s a regional broker or the assured, more directly and efficiently. The value provided by the various players in the insurance cycle needs to be redefined, as the pure transactional efficiencies of the wholesalers will not be able to sustain the London Market’s current position.

“Electronic placement is an inevitability, so it’s vital that London leads the charge by re-establishing its dominance as the world’s insurance hub. It will only be able to do this, however, if its innovative products and services are left unhampered by the current inefficient transactional model,” Summers said.

Meanwhile, Parry pointed out that Lloyd’s is not only working on making the market easier to deal with. “Some of the TOM work is going into that, but we also want to develop our reputation for innovation.

Lloyd’s is creating an innovation lab that aims at enabling new concepts and ideas to be tested in a fast-track, fast-fail environment with the support and active involvement of the Lloyd’s market, according to the annual report.

“We are going to launch an innovation lab here in the building to try and embrace some of these new ideas, new products that can help the Lloyd’s market continue to thrive,” Parry said.