London Market turns to portfolio management to drive profits and remain competitive

Strong portfolio management is becoming an increasingly important tool in the London Market to deliver underwriting profit as insurers adopt new business models to drive market modernisation, according to a new study.

Specialist re/insurance market Lloyd’s of London and broker Willis Towers Watson together conducted a research on senior executives and underwriters in the London Market with the aim to better understand the impact of portfolio management on business performance.

The benchmarking study found that that top quartile performers had on average a loss ratio of 56 percent and a combined operating ratio of 98 percent, compared to an average of 103 percent across all Lloyd’s participants. While the bottom quartile performers, by contrast, had a loss ratio of 65 percent and a combined operating ratio of 106 percent.

According to the research, the top performers reported that strong portfolio management led to a 5 percent uplift in their combined operating ratio.

In the study, 72 attributes of portfolio management were identified and used to create an overall performance index. They were further grouped into 12 categories, under three key dimensions - Granularity, Agility and Coherence.

For participating Lloyd’s syndicates, this performance was compared to their 2018 profitability, in order to establish a clear link between good portfolio management and the likelihood to deliver sustained underwriting profit.

Caroline Dunn, head of underwriting at Lloyd’s, said: “First-class underwriting performance is a critical foundation upon which Lloyd’s strategy to build the world’s most advanced insurance marketplace is based. The highest underwriting standards are essential to protect customers, the market’s reputation, the central fund and our credit rating, as well as ensuring the long-term sustainability of the Lloyd’s market.

“Despite this, relatively few companies have looked in depth at what constitutes best-in-class portfolio management and what advantages there are to adopting best practice. This is particularly relevant for underwriting, where the roles are evolving to become more rounded, managing portfolios rather than being just single-class specialists.”

Richard Clarkson, head of London Market Consulting at Willis Towers Watson, added: “We identified three strategic drivers impacting the London Market today - performance remediation, market modernisation and culture, including skills needed in the future. Portfolio management is a critical capability that operates across all these drivers and will become even more important as insurers move to adopt new business models as the market modernises.

“The report findings should benefit Lloyd’s market participants by describing what constitutes a strong portfolio management capability, which may allow them to systematically fully understand and improve the performance and financial sustainability of the different parts of their business.”

Clarkson concluded: “Portfolio management supported by more accurate data makes a huge difference to today’s market. Until recently, this latest set of renewals would have seen blanket market pricing across various business lines versus what we have today, which is very specific pricing to each client depending on loss record, portfolio composition, strength of management team and broader corporate relationships.”