Lloyd’s: a return to the nasty mid-90s?

5 key takeaways

• Brokers warn elements of ‘the nasty days of mid-90s’ are making a comeback
• Underwriters see return to a sustainable market, but discipline remains key
• Fruits of Lloyd’s remedial plans show signs of ripening
• Product value is essential as clients say certain cover is ‘too expensive’
• Disappearance of capacity glut gets brokers out broking after soft market years

“The Lloyd’s market is almost, not quite, back to where it was in the nasty days of the mid-1990s when people were going insolvent every two minutes. We’re not quite there, but some of those challenges are arriving.”

This was the view of James Livett, associate director at the London & International Insurance Brokers’ Association (LIIBA), as he discussed the challenges in today’s Lloyd’s market, following a tough 1/1 renewal and ongoing global uncertainty.

“We can’t necessarily guarantee the 100 percent placement that we once could, particularly in the reinsurance world,” he said. Brokers are “having to go out there and broke” because the glut of capacity is no longer there, which in turn has driven down prices over the last few years.

Livett was speaking on an Intelligent Insurer panel titled “Riders on the storm: ongoing challenges for Lloyd’s and the London Market”, with fellow panellist Patrick Davison, underwriting director at the Lloyd’s Market Association.

From an underwriters’ perspective more broadly, Davison said he was seeing a positive return to a sustainable market, which he called “excellent” given the number of unprofitable years on aggregate that came before.

“One swallow doesn’t make a summer so we need to maintain focus on that underwriting discipline,” Davison said.

He pointed to the impact of remedial work in the market so far, driven by Lloyd’s and outlined in its Market Oversight Plans for 2022 and 2023, saying the market has started to “see the fruits of that labour ripen”.

These remedial plans set out a number of mitigation efforts to tackle underperforming classes, fair value requirements and inappropriate behaviour, to name a few. The plans have enjoyed “a lot of buy-in from managing agents”, Davison added.

Not the only game

The market experiences of underwriters and brokers are different, however.

“One of the challenges we have is that we are getting to the point where Lloyd’s is sometimes a very expensive place to do business. It’s cheaper, easier and faster to do it elsewhere,” Livett said. “Lloyd’s is not the only game in town.”

With rates rising and capacity shrinking in some areas, the LIIBA associate director has heard clients saying that certain cover is “too expensive to buy”. This can leave brokers with a smaller pot even though it’s on a bigger price base, he said.

Davison agreed that customers and their experiences were crucial, saying “perspective needs to be maintained in terms of product value”.

“This is not a market in which people should simply be drawing money for the sake of it,” he commented. “We are aware of clients who are looking at products and saying: ‘this no longer represents value for money’. That needs to be maintained front and centre of people’s thinking.”

This is happening against the backdrop of a hard market that many in Lloyd’s have never experienced, both panellists said. And this hard market has brought its own challenges for Lloyd’s, according to Livett, as a lot of people are learning on the job how to deal with it. Brokers are also hearing underwriters saying “no”, and it’s been a while since that’s happened, he added.

Disruption and repricing

The current market is a challenging environment for buyers of outwards reinsurance, said Davison, adding that some of the dynamics in the market are being driven by the reinsurance sector. But, he said, this was just a classic part of the cycle.

“As James says, not many people have seen it. I’ve been in Lloyd’s for 10 years, and to be honest I don’t think I’ve seen a hard market. People are struggling with that. On the positive side though, there hasn’t been too much kneejerk reaction.”

Davison said that people were well prepared for 1/1. “We’re not seeing market failure here, we’re seeing a little disruption and repricing, but fundamentally the view from Lloyd’s is very much that the market remains open for business and is still seeking to write business. And that’s positive.”

For example, in spite of significant issues for certain areas of business, such as the specialty reinsurance sector, particularly on terrorism, political violence and marine war, the market could have cited significant reinsurance structure changes as a reason to stop writing these businesses, but it hasn’t, he said.

With the effects of the unprecedented years of 2021 and 2022 still marking the global economy, could Lloyd’s expect another such year in 2023?

Livett thinks that some of the large price increases that popped up over 1/1 will trickle down this year. “I would hope we get a certain level of stability coming up. We’ve had a couple of years of absolute turmoil and hopefully this year will stabilise. If Lloyd’s syndicates achieve 14 percent gross written premium growth that’s good for all of us.”

Davison said he would “quite like a ‘precedented’ year in 2023”. He felt the Lloyd’s market has responded to “the preponderance of completely unexpected events hitting the market” pragmatically as people “continue to try to provide products and coverage for some of these very, very complicated risks”.

“If we think about climate change, we were not seeing people wholesale walk away from that market in Lloyd’s. There remains capacity. Yes, pricing is challenging, but you can still buy cover for these risks, which I think is important,” he concluded.

Lloyd’s current market is positive for underwriters, according to an Intelligent Insurer panel.  Click hear to read.