Lloyd’s supports market growth but warns on expenses

Lloyd’s has told managing agents that their business plans allow for aggregate growth of 15% next year. In accordance with Covid-19 safety restrictions, Lloyd’s presented its review of this year’s business and capital planning for 2022 via a Zoom-based webinar.

Engagement with managing agents on their business plans started in early June. Every managing agent met with Lloyd’s representatives, led by Lloyd’s account managers, with support from technical teams.

Patrick Tiernan, Lloyd’s chief of markets, told managing agents there is more to do to ensure that the market hits its target of a sub-95% combined ratio. “The market has made great strides to get its attritional loss ratio under control but there is more to do to ensure our cat and large loss picks are equally robust.”

Nothwithstanding an active couple of quarters in the second half of 2021, remediation work done in previous years improved underwriting profit, allowing for projected top-line growth of 15%, Tiernan said. He noted that Lloyd’s is supporting net exposure growth for the first time in four years, driven by the market’s stronger performers.

But he reminded managing agents that rate assumptions in the plan are net of inflation, which has hovered around 2% in recent years: “The current picture is much more challenging and the consequences of getting it wrong are severe for future reserving adequacy… it calls for rate increases that are equal to, if not above, prior years.”

The business planning envisages targeted GWP growth from £38.1bn in 2021 to £43.7bn in 2022.

Tiernan said the market’s overall planned expenses ratio has decreased (to 35.9%) in 2022, “but while it is directionally OK, it is not enough”, he added.

Tiernan said the Lloyd’s market needs to pay more attention to expenses if it is to close the gap on costs between Lloyd’s and the company market.

Three of the most immediate pressure points in scope for Lloyd’s managing agents are: the pricing impact of second half cat losses in the US and Europe; the availability and pricing of expiring reinsurance programmes; and capacity expectations in casualty finpro lines. “It won’t take much for certain classes to behave outside planning assumptions; if that turns out to be the case we would expect upward pressure on rates required to hit plan,” Tiernan said.

Addressing what he described as the notion that Lloyd’s is closed to new cyber risk business, Tiernan said it is not the case. But he said Lloyd’s had taken a strongly differentiated approach to supporting growth in the class: “It meant pushing back on some growth requests, exposure reduction and ‘rate’. The net effect is that the class is expected to grow by about 30% next year – the majority of which will be rate. Capacity for new entrants has been granted to followers of established and profitable incumbents.”

Previewing a thematic review of cyber risk out this week, Tiernan said Lloyd’s’ focus will be on aggregated exposure, a syndicate’s ability to effectively manage risk, and the consistency of wordings on the perimeter of cyber cover.

Referencing the growth of managing general agents (MGAs) as a source of distribution, delegated authority business will come under scrutiny for underwriting quality and cost, including alignment of interest over commissions. “We see delegated underwriting, coverholders and MGA underwriting as critical to the success of Lloyd’s,” Tiernan said.