Lloyd’s sees light, but it’s a long tunnel ahead

Lloyd’s of London has accelerated the profitability review started in 2017, which aims to reduce the market’s exposure to unprofitable lines and the size of the worst-performing syndicates. Its senior executives have admitted there is no quick fix and management is preparing the market for a long journey as it will take time for any progress to be reflected in the top line, and even more so in the bottom line.

“We are looking at improving and taking some positive action to address areas of the market that are underperforming,” outgoing Lloyd’s CEO Inga Beale said during a September analyst presentation.

“While much of the Lloyd’s market is profitable, there are some syndicates and certain lines of business that have a disproportionately negative impact on the market’s profitability.”

Syndicates have been asked to conduct in-depth reviews of the worst-performing 10 percent of their portfolios along with all loss-making lines and have been submitting their relevant remediation plan for approval as part of the 2019 business planning process.

The profitability review commenced in 2017 but Lloyd’s has accelerated activities this year to work on closing the performance gap.

Lloyd’s pre-tax profit halved in the first six months of 2018 due to a lower investment return. This came despite an improvement in the combined ratio over the period.

Its pre-tax profit fell to £588 million ($763 million) in the first half of 2018 compared to £1.22 billion ($1.58 billion) in the same period a year ago. Pre-tax profits were impacted by a reduced investment return of £204 million compared to £1.04 billion ($265 million from $1.35 billion) in the first half of 2017.

At the same time, the combined ratio improved to 95.5 percent in the first half of 2018 from 96.9 percent. The underwriting result was £0.5 billion ($0.65 billion) in the first half, slightly up from £0.4 billion ($0.5 billion) in the same period of 2017.

This partly reflects Lloyd’s ongoing work reviewing the worst performing portfolios, and the subsequent action by the market to reduce loss-making lines, Lloyd’s noted. Gross written premiums increased to £19.34 billion from £18.88 billion ($25.11 billion from $24.5 billion) over the period.

“We are in the middle of the planning process and we are making really good progress,” said Jon Hancock, performance management director of Lloyd’s. As part of the 2019 business plan approval process, a number of loss-making syndicates were requested to set out how they’ll return to a sustainable profit. Lloyd’s has also identified eight classes of business which are having a really big impact in driving negative performance in the market.

The naughty step

The classes under scrutiny include a large part of the marine and property books, as well as the international professional indemnity (PI) covers, Hancock said.

“We asked syndicates to provide remediation plans that show how they would deliver sustainable profit in each of those classes,” Hancock explained.

In addition, Lloyd’s has asked all syndicates to identify their worst-performing portfolios and requested them to produce realistic and achievable plans that deliver sustainable profits if those portfolios are to continue at Lloyd’s, he added.

Lloyd’s had previously told Intelligent Insurer that the lines of business that are in the centre of the review are cargo, marine hull, overseas motor, power generation professional indemnity (non-US), property D&F (non-US binder), property D&F (non-US open market) and yacht.

In the first half of 2018, property insurance produced an underwriting loss of £43 million ($55.8 million) after a loss of £50 million ($65 million) in the same period a year ago, according to the 2018 interim report. Marine posted an underwriting loss of £55 million ($71.4 million) after a loss of £31 million ($40.2 million) in the first half of 2017. Reinsurance, on the other hand, grew the underwriting profit to £352 million from £258 million ($457 million from $335 million) over the period.

“Many syndicates are already taking strong action on their underlying and poorer performing portfolios,” Hancock said.

Lloyd’s has given feedback to syndicates about their business plans at the beginning of August based on initial remediation plans as well as on the regular 2019 high-level plans. The corporation has also started to receive updated second round plan submissions.

“By the end of November, all decisions would have been made and the 2019 plans agreed,” Hancock noted.

Lloyd’s does not have targets or predictions for the number of syndicates or the number of classes that will close or that will materially change, Hancock said. “What we do have is targets that plan for a credible route to a sustainable, profitable performance.”

For 2017 Lloyd’s posted its first aggregate pre-tax loss in six years as major claims more than doubled, causing an underwriting loss of £3.4 billion ($4.4 billion). Major claims for 2017 more than doubled to £4.5 billion from £2.1 billion ($5.8 billion from $2.7 billion) over the period.

According to Hancock, Lloyd’s has received “very strong support for the actions that we are taking from across the Lloyd’s market and wider from commentators, analysts, capital providers”.

“We are being clear that we won’t chase market share at the expense of profit. We will be very disciplined in our underwriting and it’s right that in this tough market conditions our focus is on maintaining a sustainable profitable Lloyd’s, and it will continue to be so,” he added.

“This is all about ensuring the market is fit for the future to continue to be the leading specialty player.”

A long road ahead

There is no quick fix, outgoing chief financial officer John Parry suggested during the call. The attritional loss ratio, for example, edged up to 59.4 percent in the first half of 2018 from 57.4 percent in the same period of 2017.

“The corrective action being taken by the market as overseen by Lloyd’s will take time to come through. The majority of the amount of premium at risk in the first part of 2018 was written during 2017,” Parry explained.

“Remedial action will take time to come through on the top line, and particularly on the bottom line.”

However, the actions being taken on the underwriting side may not suffice to ensure the market’s competitiveness, as acquisition cost and administration expenses represent nearly 40 percentage points of the combined ratio.

“One commitment that is being required of managing agents as we go into 2019 is to give action plans to address that expense cost,” said Parry.

At the same time, Lloyd’s is looking for alternative solutions to make the market more efficient.

“We are exploring ways that customers can more easily and cheaply access the market,” Beale said.

In March 2018, Lloyd’s introduced a mandate for electronic placement which required that from the end of the second quarter of the year, each syndicate would need to have written no less than 10 percent of its risks electronically. This target is set to 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.

Lloyd’s is also looking at a new solution for gathering delegated authority data from its thousands of partners across the world and its customers in order to streamline the claims processes, Beale noted.

“Part of the work we are looking at in the claims area is going to include blockchain, looking at whether distributed ledger technology can be helpful for straight-through claims processing,” Beale explained.

Furthermore, in July, Lloyd’s launched a new digital distribution platform called Lloyd’s Bridge, an online platform that matches insurance businesses with underwriters from the Lloyd’s market, enabling these businesses to underwrite certain policies on behalf of Lloyd’s as Lloyd’s coverholders.

Lloyd’s has also created the Lloyd’s Coverholder Workbench, an underwriting system through which coverholders can input risks under a binder with improved controls and information for the managing agent. The pilot is being launched with three coverholders in the UK and Australia and, if successful, will be rolled out more widely in 2019.

“We’ll continue to look at options that enhance our accessibility around the world,” Beale said.

Some new options may come from the Lloyd’s Lab launched in September. Lloyd’s is planning for four cohorts over the next two years. Lloyd’s Lab aims to enable new ideas to be tested in a fast-track, fast-fail environment while giving selected startups the opportunity to work with market experts to shape the future of Lloyd’s.

“Later this year, the Lloyd’s Lab will be looking for applications for the second cohort and we will be seeing the developments coming out of the first cohort towards the end of this year,” Beale said.

Beale won’t, however, be able to reap the benefits of the innovative tools and platforms that are expected from the Lloyd’s Lab. John Neal, the former boss of Australia’s QBE, took over the top job at Lloyd’s in October 2018 and will be in charge of overseeing and driving the process of making the market more efficient and profitable.