Inflation to hit Lloyd’s market growth plans for 2022

Lloyd’s market’s growth ambitions of 15 percent for 2022 are expected to move as a result of fast rises in inflation since the plans were agreed, Patrick Tiernan (pictured), chief of markets at  Lloyd’s, said yesterday (18 May 2022).

His comments came on the same day inflation in the UK hit a 40-year high of 9 percent as energy bills soared.

Speaking at a quarterly market update event in Lime Street, he reiterated that the plan for 2022 is to grow market gross written premium by 14.8 percent.

But he added: “Given the movement in inflation since the 2022 plans were agreed and the fact that we were explicit that risk adjusted rate change was a floor and not a target, I expect this number to move in line with price increases and capital withdrawals as underwriters continually assess the current conditions.”

Tony Chaudhry,  Lloyd’s underwriting director, and Emma Stewart,  Lloyd’s chief actuary, also flagged inflation as a major factor, with Stewart saying inflation was “the biggest issue” the market faces and it needs to be considered in allowances for reserves and capital.

Chaudhry said current conditions mean he expects to see business plans for 2023 from syndicates “that showed explicit and relevant inflation assumptions at a class and whole account level, as well as the overall impact on plans”.

These assumptions need to consider inflation driven by exposure changes in the view of risk, economic inflation and claims inflation, he said.  Lloyd’s will be changing their planning form so syndicates can capture these assumptions separately.

In spite of the challenging external conditions, which also include the conflict in Ukraine, the effects of COVID-19, a food and energy crisis and a global climate emergency, Tiernan emphasised that  Lloyd’s are in a “strong position to grow sustainably”. But he warned “there’s no room for complacency”.

Conditions ‘require careful management’

“We’re currently facing a once in a generation period of uncertainty and volatility, these conditions require careful management.”

Tiernan said that  Lloyd’s was well positioned for a sustainable future with underwriting results for 2021 showing a “healthy” combined ratio of 93.5 percent and an attritional loss ratio “in decent shape” at 48.9 percent. This demonstrated that in last year’s conditions  Lloyd’s pricing was about where it needed to be from a frequency perspective, he explained.

He said the “strong” central solvency ratio of 388 percent reflected  Lloyd’s deliberate strategy of strengthening the balance sheet in anticipation of growth, while ensuring the market has the capital to respond and be resilient in difficult times. The cost of capital in 2021 was 6.5 percent, which Tiernan described as “as good as anywhere else in the world”.

“That balance sheet strength gives us confidence that we can take opportunities, while managing the short and longer term volatility.”

However, he admitted that there were still areas that needed to improve to ensure  Lloyd’s was being paid an appropriate premium for volatility and to ensure the industry delivers value for customers. “This means getting our cat picks in better shape,” he said. “The average miss over the last five years was 4.7 percent, excluding COVID-19 and this just isn’t sustainable. This will be a key focus for us particularly in the delegated authority space.”

The expense ratio for 2021 was 35.5 percent, which Tiernan said still needs to be reduced to be competitive against  Lloyd’s peers. He said this goes beyond delivering the benefits of Blueprint 2, the market needs to be best in class when it comes to the management of allocated loss adjustment expenses. From a distribution perspective  Lloyd’s will look to ensure that interests are aligned throughout the value chain.

Ukraine aviation impacts ‘almost unprecedented’

Commenting on the Ukraine conflict, Tiernan said: “Considering the financial impacts on our market, while  Lloyd’s has minimal direct impact from the invasion, due to the market retrenchment following the annexation of Crimea in 2014, the knock on consequences in certain classes are nevertheless significant.

“To ensure confidence in our exposures we’ve taken a targeted approach gathering data from managing agents in the classes most affected by the conflict and the ensuing sanctions.”

But he added: “Our analysis to date reinforces our view that all scenarios fall within manageable tolerances and we do not expect this to be a solvency or a capital event for the corporation or individual syndicates.”

He said losses were concentrated in aviation, marine, political risk, political violence and trade credit classes.

He said there would be a fuller picture of these complex major losses in the Q2 results “but we do not believe there is any need for an early estimate”. However, he said that it was already clear that the complexity of the aviation loss was “almost without precedent”.

“We will continue to work with the market on appetite, pricing and availability of capacity in affected business lines.”

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