Lloyd’s LCM5 seen as ‘restrictive’ by managing agents targeting growth amid ‘easy’ capital

Easy access to capital has allowed the focus of managing agents in  Lloyd’s to remain firmly on growth, though some are beginning to take a more holistic approach to how they manage capital, a survey of managing agents’ CFOs has shown.

"A few CFOs, who have a broader group-wide role, are beginning to take a more holistic approach to capital, integrating risk appetite, rating agency factors and local regulatory capital requirements into capital optimization," authors wrote in the report called ‘How CFOs Connect Capital and Business Strategy’.

Some 87 percent of managing agents at Lloyd's would like to see their stamp capacity increase and most manage capital with an eye for enabling such new business, the report by Aon and Lloyd's Market Association indicates.

Alternative goals in capital management are few. No other would-be goal took a majority vote from participants. Balance sheet repair is a nearly unheard-of goal.

With capital aplenty, few constraints for growth are palpable beyond Lloyd’s initiatives for ensuring profitable business.

To wit, the LCM5 initiative, used to measure and manage overall cat exposure, is considered "restrictive" for some 61 percent of survey participants and 89 percent have cut net exposure by ceding business, report authors claimed. Reinsurance adds a further buffer.

In turn, the Decile 10 initiative, a requirement that underperforming portions of syndicates implement improvement plans, takes high marks for forcing quality.

Cost of capital is not the apparent concern and only 54 percent of respondents bother to measure the metric at the Lloyd's level. Some 91 percent of members hail from larger capital groups where they can draw funding.

With caveat for varied methodologies, the average cost of capital was put at 7 percent, from a range of 3 to 10 percent, all in line with Lloyd’s H1 2021 reported cost of capital of 6.3 percent.

Estimates of return on capital range from 10 to 15 percent, above Lloyd's H1 2021 reported RoE of 10.3 percent, again showing a wide range of applied measures from participants.

The primary capital optimization technique is intragroup reinsurance, utilized by some 78 percent of survey participants and considered a top strategy by 61 percent.

In leveraging reinsurance, many managing agents are "looking to optimize the structure continually," with 33 percent said to review arrangements annually, and a further 50 percent making significant changes, authors added.

The online questionnaire was completed by CFOs of 28 managing agents representing 75 percent of the market’s capacity for 2021.

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