Lloyd’s optimistic outlook for 2021 is catching, despite COVID-19 threat

“It’s not just about making money in 2021 and 2022, it’s about a return to sustainable long-term profitability for the marketplace.” John Neal, Lloyd’s CEO.

· Split in market performance spurs “real differentiation” in processes for the first time
· Changes to capital reviews as process become stricter for all, and faster for some
· Market indicates ambition for growth with request for £11 billion of new business
· Future at Lloyd’s sponsor sets out expectations for the second half of 2020

COVID-19 has not derailed Lloyd's efforts to reform and modernise the market, if anything it has helped strengthen its determination to get the job done.

Lloyd’s of London offers a point of optimism for re/insurance in 2021 and beyond as the story of the impact of the COVID-19 pandemic continues to unfold.

Giving a briefing on the market’s plans for 2021 for business and capital, Lloyd’s chief executive officer John Neal highlighted the positive progress of the market performance management review following the £2.1 billion loss reported in 2017.

“We’ve made really good progress over the last three years and it’s important that we finish the job,” he said.

Neal said that the market turnaround had increased in 2019 to become “an attempt to return to world class underwriting”, adding that executing on this plan must continue through 2021 to set the market up for a sustainable profit across the long term.

“It’s not just about making money in 2021 and 2022, it’s about a return to sustainable long-term profitability for the marketplace,” he said.

The market seemingly echoes this optimistic outlook, with a request for £11 billion of new business in 2021.
But, Neal emphasised, there is more to do to maintain this positive momentum.

A tale of two halves

The market’s catastrophe exposure is a big part of its future performance management, and the well-documented losses in 2017 were due, in part, to huge catastrophe losses from monster hurricanes: Harvey, Irma, and Maria.

This is important because Lloyd’s “differentiated approach” to business planning for 2021 relates to the past performance of syndicates.

Neal said Lloyd’s has looked at its long-term average cost for catastrophe claims and then at whether syndicates are making money, and whether they are executing their plans.

“The good news is that broadly speaking half of the market are pretty much where we want them to be.

“The market is outstanding, frankly, and producing superb results and executing well to plan. Overall half of the marketplace are doing what we’d ask of them.

“However, the more challenging news is that half of the market are not where we want them to be. That is telling us that we must differentiate between those components of the market as we look at plans for 2021,” he continued.

For the half that’s in good shape, the syndicates that present good quality plans to Lloyd’s will go through a “very straightforward” or light-touch planning process. The rest of the market will go through Lloyd’s normal capital planning group process, which is subject to more scrutiny.

“Real differentiation is happening for the first time in 2021, respecting those that perform well. Those that haven’t will continue to go through a stringent plan review process,” Neal added.

Capital review changes

The way capital is set in 2021 will also change, says Burkhard Keese, Lloyd’s chief financial officer. Before outlining the new system for next year, he emphasised that “performance and capital are two sides of the same token”.

“If you have a strong performance, in our system you need to have less capital. If you have a weak performance, you need to have more capital,” he explained.

Pointing to the Lloyd’s syndicates which have missed their planned targets, he reiterated that if they adhere to and meet their plan, they will need less capital. If they always miss their target, they will need more capital.

With this in mind, he said, Lloyd’s priorities for 2021 capital would include changes to the review process. First, a “very stringent and rigid change management process” will be established for 2021 which will require all changes to the interim models to be submitted for a policy process.

Second, a large number of syndicates will be allowed to participate in a fast-track process, where most of the questions will be asked outside the process. Keese said this will enable them to run through the process very quickly.

COVID-19 and a changing risk profile

“It is important to note that in 2021, we are expecting to see a changing risk profile as a result of the pandemic,” Keese said.

“COVID-19 was unprecedented—we have never had a pandemic of that size combined with a global lockdown, with losses which were to some extent outside our sector process. There is more uncertainty in the world, and uncertainty needs to be capitalised.”

He added that there would be a much bigger loss due to COVID-19, because the interest rate is almost zero.

“The US Treasury rate is at 35 basis points even on a future rate; 35 basis points is roughly 200 basis points or 2 percent less than we have here.

“If you compute this on £70 billion of investments, which we have, this is a loss of £1.5 billion,” he said.

“This is relevant because the profitability from the business declines, and if you have less future profitability, you need to have more capital to place to support your business because capital is computed on future losses minus future profits if you capital-charge,” he explained.

Neal said that in preparation for September and the January renewals, the Lloyd’s team had been working hard so that everyone in the marketplace knows where they stand in terms of their categorisation, whether they will be light-touch, standard or high-touch as they propose their plans.

“We’ve already begun the strategic business discussions with the syndicates around the plan and our expectations. That is all designed to set us up for a very efficient process in September,” he said.

“We think we have a streamlined and more efficient process to go through for the 2021 approvals.”

Lloyd’s will review the plans again in the first quarter of 2021, because “quite a proportion” (17 to 18 percent) of the market’s business is committed at January 1.

“We want to get a real reflection on what has happened in the marketplace through the January renewals, to make sure that the plans and the assumptions remain valid,” said Neal.

Marketplace growth ambitions

Neal said that initial plans seen by his team have revealed that there is some ambition in the marketplace to grow as a result of better market conditions.

“The number we’re seeing is a request for £11 billion of new business. To give you a feel, that number is 60 percent higher than in 2020.

“Our view is that if you’re one of those businesses that has performed well, provided we can get under the skin of the plan, and fully understand the assumptions you’re making, then we should support that ambition if we can, provided those plans are logical, realistic and achievable.”

He reiterated that where businesses have not performed to plan, “they have to concentrate on getting back to profitability”. For those syndicates, it will be all about profitability and setting themselves up for long-term success—it will not be about growth.

“We are absolutely differentiating between the good and the poor performers.

“As Burkhard said on capital, we’re saying let’s try to be as efficient as we can with capital and help businesses to get some clarity around capital expectations for 2021 as early as they can,” he said.

As to how much of the £11 billion was likely to be approved, Neal said: “I think growth will be single-digit.”

This is due to the simple reality of the maths of business retention, as Lloyd’s retains approximately 70 percent of what it writes.
“We don’t start at 100 percent, we start at 70,” he said. He added that the COVID-19 pandemic will be a factor as businesses in 2021 will be suffering with lower turnovers.

“Our assumption is that that bar will be lower again. Even to get back to where we were will require the market to write more new business than it’s written for four or five years.

“The new business number will be greater than it’s been in 2018/19/20, greater than the £7 or £8 billion we’ve been talking about.
“How close it’ll be to the £11 billion we’ll have to see when we’ve had the chance to go through all of the individual plans,” he explained.
Like the marketplace’s buoyant attitude to growth, COVID-19 has failed to derail Lloyd’s Future of Lloyd’s plans, which are full steam ahead (see below for more updates).

“The pandemic determined in the second quarter that we would have to be razor-sharp in our focus around execution and delivery,” Neal said.

Lloyd’s is now a shareholder (with a 40 percent stake) in the electronic placing platform PPL. To help get its front-facing platforms right, Lloyd’s has started its programme to improve the quality of delegated authority underwriting, and is working to approve the line claims platform use. “Sitting behind that was our work on data technology in the back office. That is the core of the Future of Lloyd’s, and that work has gone well in Q2 and Q3,” Neal explained.

“We have stepped up again around those activities, with increased spend and activity.

“We’re happy with the progress we’re making on Future at Lloyd’s, and don’t feel unnecessarily held back by the COVID-19 pandemic.

“If anything, it has reinforced the value proposition of digital thinking and our ability to trade digitally. We feel galvanised to ensure that we execute tightly through 2021 and 2022, and meet our Future at Lloyd’s ambitions.”

Future at Lloyd’s 2020: update

On July 17, 2020, Jennifer Rigby, chief operations officer at Lloyd’s and executive sponsor of Future at Lloyd’s, outlined the latest progress and expectations for the second half of 2020.

Rigby said that the big three priorities for the Future at Lloyd’s in 2020 are placement, delegated authority, and claims.

Placement

To aid the evolution of placement, Lloyd’s is continuing to develop the next generation of PPL, as part of the document-plus-data complex risk platform. More application programming interfaces (APIs) are being built to increase the electronic flow of data. Work on the first phase of the virtual underwriting room is under way, to complement the famous real-world underwriting room at the heart of the Lloyd’s building.

Delegated authorities

The market is improving the technology and processes for managing delegated authorities. This includes introducing a new service for binder registration and a faster, simpler coverholder approval, onboarding and compliance process to attract and retain delegated authority business.

Claims

In claims, work to improve the service for customers is being accelerated, with changes to the Lloyd’s Claims Scheme and a review of the success of its Small Claims Auto Settlement pilot. Other changes include finding ways to support catastrophe management, loss funds and ensuring faster payment of claims, as well as continuing to scope requirements for a longer-term solution.

Essential infrastructure

On top of this, Lloyd’s is prioritising three foundation initiatives to provide essential infrastructure for the new Future at Lloyd’s ecosystem: data and technology architecture; lead/follow; and middle and back office.

Commenting on the impact of the pandemic on the plans, Rigby said COVID-19 had “reinforced the need for Lloyd’s to become more resilient” with initiatives to make the market more robust, dynamic and digital.