Moody’s praises Lloyd’s plan but sees ‘high degree of execution risk’

Moody’s rating agency views the Lloyd's of London’s modernisation plan as “credit positive” for its proposals to cut costs and increase its digital services. But it warned that delivery of the plan was subject to a “high degree of execution risk” as it required a major overhaul of the culture and huge investment.

Lloyd’s launched its strategic transformation plan on 1 May to much fanfare. Helena Kingsley-Tomkins, an AVP-Analyst at Moody’s, said: “Lloyd's proposed reforms include plans to radically reduce the cost of doing business and creating new digital platforms for placing insurance risk and streaming claims services, a credit positive. If the plan is successfully implemented, meaningful cost reductions will support profitability, which has declined since 2016. “However,” she added, “we believe the plan is subject to a high degree of execution risk because it will likely require substantial investment and significant cultural change.”

In an analysis from Moody’s she said that Lloyd’s target to cut costs for less complex risks down from the current 30 percent to 40 percent of premiums to 10 percent to 20 percent was “ambitious”.

“Although there is considerable scope to improve Lloyd’s expense ratio, reduction on the scale it proposes will likely require considerable long- term investment in its IT systems and a concerted effort to recruit staff with technological expertise.

“The experience of peers that have similarly upgraded shows that such initiatives can be costly and shave only a few percentage points from the expense ratio.”

Highlighting the cultural shift required, a culture that has been built up over 300 years, she said: “A successful rollout of the plan will also require a cultural shift to overcome built-in resistance to reform. “Lloyd’s reform blueprint highlighted the need to ‘embed a culture of innovation and inclusion’ in its everyday activity. However, the market lacks a proven track record of pushing through large-scale modernization programs, and take-up rates of previous initiatives, such as the electronic trading system, were initially slow.”