Lloyd’s faces challenges despite return to profitability, says Gallagher Re report

Lloyd’s may have delivered a marked return to profitability in 2021, but it still faces a number of internal and external challenges, not least inflation, the Ukraine war and nat cat losses, as well as digitalisation and the formulation and implementation of its ESG strategies. This is according to the first annual Lloyd’s of London Market Report from Gallagher Re, which adds, on a more positive note, that efforts to improve the sustainability and credibility of the Lloyd’s market are bearing fruit, including recent market reform measures. The report notes that against a backdrop of four challenging years with a 100%-plus combined ratio, Lloyd’s delivered a marked return to profitability in 2021, with gross written premiums increasing by 11% and the combined ratio reducing to 93.5%, representing pre-tax profits of £2.3bn and a 6.6% return on net average assets. It adds: “Attritional loss and expense ratios continued a five-year declining trend, falling to 49% and 35% respectively, and the Lloyd’s market delivered a 16th consecutive quarter of positive rate movement, painting a positive picture of market performance and trajectory.” Tom Wakefield, UK CEO of Gallagher Re, said: “Lloyd’s made great progress in 2021, particularly in view of the natural catastrophe burden that hit the market. A relentless effort to improve syndicates’ performance has led to satisfactory results, which bolster the market’s sustainability and its credibility. Lloyd’s’ steadily decreasing attritional loss ratio points to the positive performance impact of portfolio remediation and rate increases.” Shireen Gammoh, Gallagher Re’s head of strategic and financial analytics, added: “We’ve put together this report to dig deeper into Lloyd’s’ published figures and notable trends, to provide additional insights for clients. For example, we found a moderate correlation between the mean and standard deviation of each syndicate’s combined ratio over the period 2012 to 2021. While that suggests more volatile syndicates have tended to outperform, it demonstrated that consistent profitability was also achieved with lower volatility. Our analysis further shows that the general spread of performance across the market has significantly narrowed, and shifted the market towards a profitable result in 2021 versus previous years.” According to the report: “Examination of various multi-year metrics demonstrates that efforts to improve the sustainability and credibility of the Lloyd’s market are bearing fruit. For example, analysis of the distribution of individual syndicate underwriting performance found not only that the majority achieved a sub-100% combined ratio in 2021, but also that the general spread of performance across the market – viewed over ten years – has narrowed and shifted toward a profitable result versus previous years.” But Wakefield warned that challenges remain, and said that maintaining or even stabilising the positive trajectory in 2022 will be frustrated, especially by intensifying inflationary pressures and their impacts. The report highlights some of the challenges, noting that the ongoing Russian invasion of Ukraine will impact Lloyd’s in several ways in the short and long term. “Lloyd’s’ direct premium from Russia and Ukraine is significantly less than 1% but indirect underwriting exposures arise across the aviation, marine, trade credit and political risk lines of business,” it states, adding: “There is no direct exposure to Russia and Ukraine within the Letters of Credit held at Lloyd’s.” But it goes on: “On a more granular level, it is unclear which markets will be hit hardest by any potential losses – in the interim this may lead to rate rises in various lines of business across the market… Market participants will continue to keep a close eye on developments; with Lloyd’s markets writing a majority share of the war and aviation war market, material adverse loss deterioration in this space could have direct consequences for insurers and reinsurers.” On inflation, the report says this is “likely to impact all lines of business at Lloyd’s in different ways, with the potential to erode the remedial work and rating increases that have seen a return to profitability”, adding: “To manage this, Lloyd’s will be checking that inflation has been specifically considered as part of plans, reserving and capital processes. For longer-tailed lines, such as in the casualty market, there will be a particular focus given the additional exposure to trends in social inflation.” Wakefield said that despite the challenges, “we see a level of momentum not just in underwriting performance, but also in market reform measures, which have taken a big step forward through the agreement this year of a data standard for electronic trading”, adding: “Lloyd’s remains a market which we will promote to our clients as resilient, innovative and strong.”

Lloyd’s faces challenges despite return to profitability, says Gallagher Re report

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