Inflation uncertainty threatens Lloyd’s growth despite progress

Rising inflation and its implications can frustrate the positive trajectory of  Lloyd’s of London despite momentum of market reform and marked return to profitability in 2021.

That’s the key finding of the annual  Lloyd’s of London Market Report from  Gallagher Re, a global reinsurance broker, which tracks the market’s capital and profitability.

The report highlighted that internal and external challenges facing  Lloyd’s remain critical concerns for the world’s largest insurance market, despite its positive trajectory in performance.

Uncertainties caused by the broader inflationary environment, natural catastrophe losses, and Russia’s invasion of Ukraine as well as their potential impact, on the external side – combined with the formulation and implementation of ESG strategies, and other  Lloyd’s initiatives including digitisation and modernisation on the internal side – are all key priorities and factors that could frustrate the positive trajectory of the market.

However, examination of various multi-year metrics demonstrates that efforts to improve the sustainability and credibility of the  Lloyd’s market are bearing fruit,  Gallagher Re noted. For example, analysis of the distribution of individual syndicate underwriting performance found not only that the majority achieved a sub 100% combined ratio in 2021 but also that the general spread of performance across the market – viewed over 10 years – has narrowed and shifted toward a profitable result versus previous years.

Similarly, by viewing the breakdown of  Lloyd’s profit and loss since 2011, analysis highlighted a period of recent volatility and increased risk, but most notably the marked turnaround in underwriting performance in spite of reduced investment returns.

The report found that positive trajectories in attritional loss ratios are also evident. These continued on a five-year decline reflecting continuing rate momentum across  Lloyd’s following 16 consecutive quarters of positive movement as well as the impact of remedial work undertaken.

Tom Wakefield (pictured), UK CEO of  Gallagher Re, said: “ Lloyd’s made great progress in 2021, particularly in view of the natural catastrophe burden that hit the market. A relentless effort to improve syndicates’ performance has led to satisfactory results, which bolster the market’s sustainability and its credibility.  Lloyd’s steadily decreasing attritional loss ratio points to the positive performance impact of portfolio remediation and rate increases. Challenges remain, though. Maintaining or even stabilising the positive trajectory in 2022 will be frustrated especially by intensifying inflationary pressures and their impacts.

“That said, we see a level of momentum not just in underwriting performance, but also in market reform measures, which have taken a big step forward through the agreement this year of a data standard for electronic trading.  Lloyd’s remains a market which we will promote to our clients as resilient, innovative, and strong.”

Shireen Gammoh,  Gallagher Re's head of strategic and financial analytics, added: “We’ve put together this report to dig deeper into  Lloyd’s published figures and notable trends, to provide additional insights for clients. For example, we found a moderate correlation between the mean and standard deviation of each syndicate’s combined ratio over the period 2012 to 2021. While that suggests more volatile syndicates have tended to outperform, it demonstrated that consistent profitability was also achieved with lower volatility. Our analysis further shows that the general spread of performance across the market has significantly narrowed, and shifted the market towards a profitable result in 2021 versus previous years.”

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