Lloyd’s opens in India as results suggest tough renewals ahead for risk managers

Lloyd’s has officially opened its India branch and welcomed MS Amlin as its first underwriting syndicate. The ceremony, which took place on 1 April, was witnessed by UK Chancellor Phillip Hammond and Lloyd’s chairman John Nelson. The new branch, which will act as the domestic reinsurance branch for India, will “help Indian insurance firms increase the resilience of the Indian economy to catastrophic events and boost Britain’s ties with one of the world’s most exciting economies, underlining our status as a truly global trading nation”, said Mr Hammond. Mr Nelson added that the opening was a “true milestone in Lloyd’s’ 328-year history” and would “increase our support for the Indian market”. The branch opening comes shortly after Lloyds published its 2016 results, which, if taken as a decent yardstick for the state of the international commercial and specialty insurance and reinsurance market, suggest that risk and insurance managers worldwide need to brace themselves for tougher renewals in future. The market revealed numbers last week that showed a big jump in gross premiums written, up from £26.7bn in 2015 to £29.9bn in 2016. This came amid further news of expansion of the Lloyd’s franchise last year in core markets such as the US and emerging parts of the world such as India and China. “Lloyd’s has continued to enjoy progress across its major global markets: securing its position as the leading provider in excess and surplus lines in the United States; transferring over half its managing agents to the Shanghai and Beijing platforms; and being granted final approval to open an onshore office for reinsurance in Mumbai,” stated the market. But the underlying numbers were not so healthy and suggest that Lloyd’s is going to have to police the market more aggressively this year, and ensure that individual syndicates rein in their expansion plans and underwrite more conservatively. The level of pre-tax profit was sound at £2.1bn for last year, level with 2015. But the underwriting result was lower. The profits were boosted by significantly improved investment returns, driven by a downward yield shift in the bond markets, and foreign exchange gains, principally caused by sterling depreciation. Syndicate investment returns overall were 2% last year, compared with 0.8% in 2015, delivering a result of £810m against £2,373m. Major claims for 2016 were significantly higher at £2.1bn, against £700m in 2015. This was the fifth highest since the turn of the century and above the long-term average. Lloyd’s said this number was mainly driven by hurricane Matthew and the Fort McMurray wildfire in Canada. Return on capital reported by the market was 8.1% last year, compared with 9.1% in 2015. The market’s combined ratio figures are surely a big concern. Overall, the market combined ratio was 97.9% – up strongly from the 2015 figure of 90% on a calendar year basis. Of the eight main business lines, however, only reinsurance (92.3%), energy (92.6%) and aviation (84.7%) were below 100%. These numbers were all significantly helped by positive prior year development. The market reported a calendar year combined ratio of 103.4% in property, boosted by 3.2% for prior year development. Casualty came in at 102.7%, helped by 0.2% of prior year development, and the marine calendar year combined ratio was 106.2%, boosted by 2.2% of positive prior year development. On an accident year basis, not one of the eight main business lines managed to report less than 100% – surely a worrying sign for the central team at Lloyd’s. Marine and motor came in at 108.4% and 108.9% respectively. The Lloyd’s energy market reported an accident year combined ratio of 106.4%, aviation 106.9% and property 106.6%. Without the support of reserve releases, the market would have reported a combined ratio of 103% last year compared with 97.9% in 2015, hardly a sustainable level in this market. The fundamental problem for Lloyd’s, as with all its competitors in the global insurance and reinsurance market, is of course the high capacity on offer and resultant stubbornly soft market. “Conditions over the course of the year were extremely challenging, with continued downwards pressure on pricing while traditional and alternative capital remained attracted to the insurance industry,” commented the market, as it published the results. A further local challenge for Lloyd’s syndicates that write motor reinsurance and direct motor and UK liability business was the recent announcement to change the discount rate to negative 0.75% (the Ogden tables), applied to lump sum liability claims. The motor market’s calendar year combined ratio was a whopping 111.5% last year, higher than the accident year ratio of 108.9% because of the need to boost reserves by 2.6%. Thus, while Lloyd’s may be pleased to have further entrenched its position in the huge US excess and surplus lines market and made further progress in potentially valuable growth markets such as India, China, Dubai and Latin America, this does not offer much help with short-term profits. If anything, such growth initiatives based on the need to reach out closer to customers across the globe will add yet more pressure on profit numbers. In the absence of a serious market hardening or dramatic improvement in investment markets, the time has surely come for Lloyd’s to seriously ramp up its efforts to cut operating costs within the market itself and reduce the frictional cost of doing business with Lloyd’s. Not surprisingly, chief executive Inga Beale said the figures underlined the need for the Corporation, the body that oversees the market, to deliver real value for money; to focus on underwriting oversight and reduce its cost base. “This has been a year of challenge for the insurance sector, with premiums once more under continued downward pressure. It is vital that the Corporation does everything it can to support the market and make the platform attractive, while demonstrating value for money,” she said. “Our collective focus must be on providing customers with the products they want, embracing innovation and modernisation. The market has shown how well it reacts to the demands of its customers in a rapidly changing risk environment, with the considerable increase in cyber coverage throughout 2016 a perfect case in point. It is critical throughout 2017 we continue to demonstrate that Lloyd’s is the home for creativity and expertise,” added Ms Beale. But surely the cyber market is a good example of how chasing new business needs to be managed very carefully indeed in such a market. One wonders whether underpriced cyber business emanating from the US surplus lines and excess market, that is the business that domestic US insurers do not want to write, could wind up being the 21st century version of asbestosis for Lloyd’s. Lloyd’s chairman John Nelson suggested that the market’s leadership is aware of such potential and keeping a close eye on things. “The results confirm that we must have an unrelenting focus on underwriting discipline through 2017. The challenge for all of us is to reduce the cost of conducting business because within the market this is impacting on already thin underwriting margins,” he said. Mr Nelson is soon to leave the market for pastures new, to be replaced by Bruce Carnegie-Brown, chairman of Moneysupermarket.com Group and vice-chairman of Banco Santander, in June. This was Mr Nelson’s last message to the market and understandably, he wanted to focus on the positive elements of the Vision 2025 strategy he and Ms Beale have implemented. “This is my final set of annual results as Lloyd’s chairman, and in the years since we launched our long-term strategy Vision 2025, our global reputation and brand has significantly strengthened; we have substantially improved our global market access; our modernisation programme has real momentum; [and] our increased financial strength and overall financial performance is a tribute to the underwriting skills in the Lloyd’s market. All of this puts Lloyd’s in a strong position both to take advantage of the long-term opportunities available to us globally in the specialist insurance market, and to face the many challenges we have,” he said. This is all true and valid. Lloyd’s does appear to be in a stronger position than for some time and is reacting sensibly to the changing market dynamics, not least the need to move closer to its original customers – both brokers and risk managers across the world. But this fast-changing world – not least the distribution system, rise of broker facilities and growth in MGAs and potential conflicts of interests, coupled with largely ill-defined risks such as cyber – contains a big danger for a wholesale market such as Lloyd’s. It could once again find itself becoming the garbage collector of the world’s catastrophic risks if it fails to strictly manage its risk. A firmer stand on rates during coming renewals and a conservative review of reserving strategies in the coming months would be a good place to start.

Lloyd’s opens in India as results suggest tough renewals ahead for risk managers

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