Lloyd’s bosses vow to cleanse market of unprofitable classes and laddish culture

More unprofitable business will be forced from Lloyd’s as part of this year’s performance review, although it will also take a more nuanced approach and implement what it called a risk-based approach to regulatory oversight, according to its senior management team.

Chairman Bruce Carnegie-Brown, chief executive officer John Neal and performance management director Jon Hancock held a roundtable press briefing in Monte Carlo yesterday at which they elaborated on some of their plans for the market in terms of performance and changing its culture.

They said that, as they move into the 2020 planning cycle, they will continue to focus on the poorly performing bottom segment of the market, which is dragging the whole down, while encouraging syndicates performing well to do more of what they are good at.

“We lost £4 billion of business last year; this year’s planning process will be more nuanced but there remains plenty of work to do,” Carnegie-Brown said.

“We will allow the top performing end of the market less oversight and focus on the bottom end.”

He admitted that last year’s planning process had been tough and a shock to some in the market.

“There was support from the market, but it was also a case of people saying ‘it’s the other guy, not me’. We encouraged people to look in the mirror. We lost £4 billion of business, but that was to create the opportunity for £7 billion.”

He added that it was not the market’s intention to drive rates up through that process.
“That was an output rather than an aim, but it coincided with other big players doing the same thing and that has been helpful.”

Hancock said that losing £4 billion of business was never a target, rather it was the natural outcome of the business planning process, and that removing poor business will remain a continued focus for the market.

He said that while the market’s overall combined ratio for 2018 was 104.5 percent, this disguised a very wide range in performance: the top 20 syndicates posted a combined ratio in the low 90s; the worst 20 performers posted a combined ratio of more than 130 percent.

“It is a question of getting syndicates to do more of what they are good at and less of what they are not good at,” he said.

“More business will be removed, that is a continuous process of improvement. We are not focused on portfolios that have had one bad year but those that drag the market down year in, year out.

“If they do not improve, we will remove themwhile encouraging the top end as well. The bottom decile is destroying value in the market and having a disproportionally negative effect on the whole market.”

Hancock also confirmed that its regulatory approach will reflect performance. “We will be taking a risk-based approach to oversight. Where syndicates are performing well, if they deliver on what they promise, we will look at what appropriate regulation should look like.”

Drive to diversify
Some market observers have suggested that one of the causes of Lloyd’s problems has been a drive to diversification in syndicates, driven by Solvency II capital efficiency rules that reward diversification. Neal was quick to dismiss this notion.

“That is utter rubbish,” he said. “People have a responsibility to write for profit. I get the intellectual point but to me it is a weak excuse. At the end of day, you need to be writing profitable lines of business.

“If we are going to be best in class globally, we need to be rigorous in seeking bad performing businesses and promoting good performing business while also demonstrating innovation and performance.

“Underwriting is a complex business and price is only one factor. We want to get under the skin of what makes good underwriting and how to manage the cycle.”

Carnegie-Brown, however, added: “Solvency II probably has pushed people to diversify and we are aware that the market’s strength has always lain in its specialised underwriting. We are thinking thoughtfully about that.”

The executives also discussed the challenge of changing the market’s male-dominated culture, which has been subject to much criticism this year. At its annual Dive-In Festival, which focuses on diversity, later in September, the market will reveal the results of a survey it commissioned in May designed to understand the working cultures that exist in the market. It will also unveil plans to change the market’s culture for the better.

“The results will not be surprising, but they are sobering,” said Carnegie-Brown. “We want to call out and address these issues. I suspect, as we do that, we will experience a few bumps and certainly more negative sentiment.

“It may appear we will go backwards before we go forward, but that will also be part of the healing process.”

He added that he believes the process of change would be helped by dealing with some cases very publicly to warn the rest of the market certain behaviour will not be tolerated.

“It would be good to find a few to hang that would change the mood,” he said. “We want a proper process and it needs to be fair, but we also want to send a powerful signal to the market.”

Neal backed him up. “If we do not take tangible action, I am not sure we will make the difference we want to achieve,” he said.

“When the scandal first broke, there was regret but there was a sense of denial—we really want to set the right tone now. That is essential because we also want to attract the right talent; if we do not do that, we will not succeed.”