London Views
By LEN WILKINS
London Correspondent
As usual, at the end of the renewal season the major brokers produced detailed year-end reinsurance renewal reports, and underwriters will be purring as they read about the continuing improvements in the price and conditions for European and U.S. renewals.
According to reports published by Gallagher Re, Howden and Guy Carpenter, reinsurers held firm and were determined to obtain better pricing. This year’s renewals ran two weeks late because of concerns over the accuracy of loss results and the market’s changed attitude to risk.
Brokers tried to hold the line on property business by saying last year’s double digit rate increases were enough, but rising catastrophe losses destroyed their arguments, and despite all their efforts rate increases were greater than expected, with some property catastrophe rate increases greater than last year’s. Not surprising, considering 2021 was the market’s second worst loss, according to Munich Re, with insured losses topping $120 billion, partly thanks to Hurricane Ida’s $65 billion of losses. The loss figures almost topped the record breaking $146 billion of 2017.
Gallagher Re’s Catastrophe Rate on Line Index showed a double digit 10.8 percent increase, the biggest increase since 2006. Howden’s Catastrophe Risk-Adjusted Rate-on-Line Index rose slightly less at 9.0 percent.
The alternative for the brokers’ clients was for the reinsurers to refuse to renew loss-making areas rather than go for an across-the-board increase. The market separated primary market clients according to their underwriting approach. Reinsurers looked at their clients’ results, controls and management strength and, where necessary, made changes to their terms and conditions.
Reinsurers were cautious and priced in future unknowns, such as climate change and whether or not catastrophe models accurately show the possible frequency and cost of natural catastrophes. For the first time in a few years, the effect of inflation was considered, and reinsurers paid greater attention to secondary perils such as wildfire and flood.
Primary insurers, who were loss free, may have hoped for no increases but found price rises of between zero and seven percent, depending on how reinsurers saw their exposure to loss. If loss-free primary insurers feel aggrieved, they might consider the increases of those who had losses and saw their renewal premiums rise between 10 and 30-plus percent. However, it was the flood-hit European insurers who had to pay the most after making losses of up to $15 billion. Reinsurers’ response was to increase rates by an average of 50 percent on loss-impacted German, Austrian, Belgian and Swiss risks.
In its report, Guy Carpenter commented that the casualty renewals were also positive for reinsurers, benefiting from the continued improving terms and conditions charged by insurers.
Reinsurers paid attention to the primary market’s underwriting discipline, and changes to terms and conditions were made in an effort to reduce loss projections. Howden reported that casualty in the London market showed increases of up to five percent.
Covid made little impact on rates, largely because the primary and reinsurance market increased exclusions and limits; consequently, much of the exposure to future Covid losses has been reduced. Howden reported that, while courts in the U.K. have battered some insurers and reinsurers, U.S. litigation has been kinder to insurers, and while any long-tail claims may appear in the future, most reinsurers have setup cautious reserves with many losses considered to be incurred but not reported.
The stage is now set for act two of the 2022 renewal season, and attention moves to the Far East and U.S. reinsurance renewals. Everyone expects increases, but the question is how much. According to Howden, the concerns over Covid, climate and cyber losses are leading to the primary market transferring risk over to reinsurers.
Lloyd’s looks to grow premium
Patrick Tiernan, Lloyd’s chief of markets, recently addressed Lloyds and talked about the market’s capacity numbers for this year and gave an overview of how Lloyd’s polices the market.
Lloyd’s will look at its expense ratio and endeavor to remove poor values and high costs, while expecting syndicates to perform at a combined ratio of 95 percent or better.
Lloyd’s will focus on the market’s performance, and profit is the number one priority. Having approved every syndicate’s business plan for the year, Lloyd’s wants these syndicates to perform. In the past, there was often a gap between the planned and the actual results.
Tiernan warned that Lloyd’s will test the robustness of the business plans, and he said planning accuracy is key for 2022. If syndicates don’t sort themselves out, he warned, Lloyd’s will. Tiernan indicated a focus in 2022 on catastrophe and large loss picks and how accurate forecasts of these losses are, so the market can better respond to modeled and unmodeled risks. Attritional losses are still a problem for the market, and Lloyd’s will continue to remediate underperforming syndicates.
With rates having now risen nearly across the board for two renewal seasons, Lloyd’s is taking the brakes off on premium growth and allowing aggregate exposure growth across the market. Tiernan said Lloyd’s would be relentless in its push to be a top quartile performer globally. Gross written premium for the market will be allowed to grow by 15 percent to around $60 billion. This is double the seven percent growth Lloyd’s allowed for the market in 2021 and shows Lime Street’s confidence in the market’s future. Tiernan warned the market that when rating business it must take into account inflation.
Following the success of Decimal 10, Lloyd’s continues to employ a differentiated approach to syndicate management. Those who are performing well and can show good management techniques will be left alone – the so called “light touch” syndicates.
Next in line are the “standard” syndicates which aren’t doing anything to worry Lloyd’s but are not hitting the heights of the light touch syndicates. These will be allowed to generate most of their planned premium growth through exposure increases.
Despite all Lloyd’s efforts to encourage them, a number of poor performing syndicates still exist. Known as “high touch,” these syndicates will be allowed to grow their exposure bases, but the majority of the growth will have to be come from rate increases.
Tiernan gave an example of syndicates that write cyber where the worst performers were only permitted to grow by three percent, but the best performers were able to grow by 70 percent.
Lloyd’s moves from standards
One major change this year will be the gradual move from Lloyd’s being managed by market standards to being managed by principles-based oversight. This move has been coming for some time and was first suggested in 2018 as a way to let individual syndicates run their businesses as they see fit within the framework Lloyd’s sets.
At present, Lloyd’s underwriters have to meet 750 standards on items such as underwriting and claims settlement. Some of these standards go back to 2004 and are not suitable for the modern market. The new approach sees the introduction of 13 principles for doing business at Lloyd’s. They are part of Lloyd’s oversight framework and set out the fundamental responsibilities expected of all managing agents. They provide a clear and consistent indication of the outcomes expected by all Lloyd’s syndicates and managing agents; they also recognize that different syndicates and managing agents have different underwriting accounts and will deliver against the principles in many different ways.
The 13 include principles on underwriting, claims, catastrophe exposure, reinsurance and solvency as well as customer management and culture. Syndicates will fall into one of five categories ranging from unacceptable to outperforming. The gradual changes will be introduced during the first half of this year, and the first test of compliance with the principles will be in March 2023.
Lutine Bell rings for architect
In the days before mass communication Lloyd’s used the Lutine Bell to inform the market of news – one ring for bad news and two for good. Currently, the bell is rung only on ceremonial occasions, and one occurred recently to mark the passing of Lord Richard Rogers, 88, whose immense vision and skill created the iconic Grade I listed Lloyd’s Building.
As a mark of Lloyd’s respect for his life and achievements, a remembrance service was held on the Underwriting Floor and the Lutine Bell rung once in his memory.
Lloyd’s building was one of his most cherished projects. Opened by Her Majesty Queen Elizabeth II in 1986, the structure took eight years to build. In 2011, it became the youngest building to earn Grade I listed heritage status.
In the years since its creation, the building has hosted royalty, presidents, prime ministers, mayors, visitors, passersby and the thousands of Lloyd’s underwriters, brokers, risk professionals and corporation staff who have called it home for 35 years.
Rogers spent time with the Lloyd’s market while working on the building’s design in order to create a space which could accommodate the demands of face-to-face trading. Ironically, his design for four trading floors is now irrelevant as the days of small Lloyd’s syndicates are long gone, and the market can now trade on two floors.
There is one apocryphal story of the day when Rogers displayed his plans to the then Lloyd’s Council. The old school traditionalists allegedly were stunned by its modern design and inside-out appearance. At one point when it looked like the design would be rejected, the Chairman saved the day by pointing out that, since they worked inside the building, they would not have to look at the outside.
Syndicate backed by London Bridge Risk
Lloyd’s continues to attract investors, and the latest example of the dash to invest in Lloyds comes with the announcement that leading investment manager Nephila has funded its newly launched Syndicate 2358 with capital provided through London Bridge Risk PCC (protected cell company). The new syndicate will focus on short to medium term business lines, a new area for Nephila, which started underwriting for the 2022 year of account.
London Bridge Risk PCC offers insurance linked securities (ILS) cover to the market. LBR provides reinsurance capital from a group of investors which include four pension funds.
Not new to Lloyd’s, Nephila has been active in the market for over nine years. It was the first syndicate to be wholly backed by capital from managed ILS portfolios raised from institutional investors. Its Syndicate 2357 wrote its first property catastrophe risks in 2013. Its current gross written premium is over $500 million. Nephila has been involved in the ILS market for over 20 years. By using LBR PCC to channel its new syndicate, it now brings part of its investment activity onshore in the U.K.
In addition to this transaction, Lloyd’s has confirmed that Ontario Teachers’ Pension Plan , which was announced as the first investor to use LBR PCC in November, recently provided a second tranche of capital via LBR PCC to cover further risks in 2022.
Lloyd’s and the IUA go paperless
The perennial moans about the cost of doing business in Lloyd’s and the London market could finally be coming to an end following the announcement of a deal to transform London’s backroom documentation from a largely paper-based, analog set of processes to one that is data-focused, automated and cost-efficient. For the first time in over 20 years, the technology infrastructure that underpins the London market will be completely transformed, according to Lloyd’s.
Parties to the joint venture are Lloyd’s, the International Underwriting Association (IUA) and DXC Technology. The deal will see DXC build a digitalized, streamlined and fully automated process for the Lloyd’s and London markets. At last, Lloyd’s and London will not only have digital underwriting, it will have digital processing. The move is a decisive step forward in fulfilling the ambition set out by Lloyd’s in its Blueprint Two document.
The deal is a key milestone in building the Future at Lloyd’s and IUA has jumped on the bandwagon. Without the move, brokers would face a dual market system and increased costs. The agreement received support from Lloyd’s Market Association (LMA), which represents all 51 Lloyd’s managing agencies and Lloyd’s members’ agents.
Continuous coverholders contacts
Some time ago, Lloyd’s decided that delegated underwriting through granting binders to coverholders is a good way to acquire quality business.
Since then, Lloyd’s has worked on improving its coverholder services. Recently, insurance company and managing agent Brit Ltd. got together with Lloyd’s to pilot the first continuous binder at Lloyd’s. The new system went live at the beginning of this year.
The aim is to replace the traditional annual renewals, which can be time consuming and labor intensive for coverholders. The continuous contracts will have regular, data driven, reviews throughout their life which will help the overall visibility of performance.
Joy Ferneyhough, chief experience officer at Brit, said, “Continuous contracts will help remove the disruption that can often occur with traditional policies, while empowering our underwriters with better data and more visibility over performance.
“We were pleased to work with Lloyd’s and two of our long standing broker partners, Amwins Global Risks and Bowood, on this and hope to extend this pilot in the future.”
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