Lloyd’s CFO proposes curtailing broker commission

Lloyd’s chief financial officer has mooted the idea that brokers should reduce the commission they make on business placed in the market as a way of reducing the overall cost of using Lloyd’s.

John Parry was speaking at a January 25 Fitch Ratings market briefing in London. “Each contract is a negotiation between a client, their advisor and the syndicate of how much commission is going to be taken,” said Parry.

Reducing broker commissions might not always be possible, he admitted. In emerging markets, for example, where Lloyd’s does not yet have the same brand image and reputation as in Europe or the US, this might be more difficult. Market share and costs need to be weighed up, Parry said.

Lloyd’s is also mulling over options to reduce distribution costs for managing general agencies (MGAs). But here, the opportunities might be limited. “To take ten points out of 30 would be an ask,” Parry said.

Lloyd’s is trying to reduce the cost of operating in the market to improve its competitive position. It is also introducing new technologies such as an electronic trading platform, which is set to make business processes more efficient, taking costs out for both carriers and brokers.

Lloyd’s is still working out how much cost can be taken out, but Parry said that adopting the new systems was key. It is clear is that costs need to come down, he said.

“A ratio of 40 percent of net premiums going out in acquisition cost and administration expenses makes it pretty difficult when market pricing is tight to generate a profitability that allows decent returns,” Parry said.

Lloyd’s higher acquisition costs are partially due to the way it accesses its business. While Lloyd’s writes a lot of big ticket reinsurance and large property risk, it also accesses about 30 percent of its business through MGAs and delegated authorities, Parry noted.

“That adds to the distribution chain. There are more mouths to feed in there and that does incur a cost,” he said.

Lloyd’s needs to make sure that the added distribution costs deliver the benefits through expertise and the business throughput, Parry noted.

Market facilities, brokers, line slips and other arrangements can be a great way to match capital to expertise, but these need to be managed to make sure that they are worth the cost, he explained.

“One of the challenges of the Lloyd’s and the London Market is the cost of acquiring business and managing business,” Parry said. But while the expense ratio at Lloyd’s is higher if compared to international competitors, there is an offset, Parry noted. The loss ratio at Lloyd’s is lower, he said. The risk selection is, therefore, moderating the expense ratio disadvantage.

“But there is clearly a lot of scope for us to tackle that expense gap,” Parry noted.

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