Lloyd’s calls out worst practices in nat cat; vows tough talks with underperforming MGAs in review

Lloyd’s is fed up with managing agents that can’t price natural catastrophe risks and the impact of climate change.

“It’s unsustainable to be adverse to plan every year,” Lloyd’s chief of markets Patrick Tierman (pictured) bemoaned for an online March 2022 Market Message conference. “It’s imperative we demonstrate strong pricing discipline including realistic cat loss picks.”

Comments come ahead of Lloyd’s first-ever round of ‘principle-based’ oversight reviews. Lloyd’s needs to hammer away at performance targets from recent remediation efforts from new angles to both catch lingering underperformers and secure sustainability from best performers, officials suggested.

“We must not make the mistake that remediation is a one and done,” Tierman said. From inflation through climate change, risks and paradigm shifts are at hand to wipe out hard fought declines in loss ratios. His ongoing mantra: “risk adjusted rate change is a floor, not a target.”

In the pending oversight action vis-à-vis managing agents, Lloyd’s hopes to pin agents down on the gaps between model, plan and experience, increase oversight of volatility measures and start to judge performance against up-front declarations on “willingness to lose,” portfolio risk management director Kirsten Mitchell-Wallace said.

Officials vow “support for best performers,” and “some challenging conversations for those that underperformed in 2021.”

And support for best performers could mean a relative all-clear to write nat cat to their hearts’ content. “Increased focus on cat does not mean our appetite has changed; it has not,” Tierman said. “Our appetite for cat has in no way decreased – this is about taking the right steps so we as a market are excellent writers of this class of business going forward.”

The record has been poor. Five-year aggregate results would have generated £25 billion in gross profits by modelled loss plans, but instead hit a normalized £11 billion and scraped by at break-even when including natural catastrophe and Covid, Mitchell-Wallace reminded.

Climate change is being priced in more as a ready excuse for performance than as a price-driving risk factor, Mitchell-Wallace even suggested.

“You cannot calculate climate change impact by comparing experience to your model,” she said in her rebuke to underperformers among managing agents. “More work is required to understand this risk properly.” Start with some science, she counseled.

Cat losses can be expected to increase on demographics alone, Mitchell-Wallace said, with suggestions that managing agents aren’t prepared to separate average from outlier from real climate-driven trend change.

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