London Views
By LEN WILKINS
London Correspondent
Enthusiastic reports from Lloyd’s suggest plans for the market are moving ahead, and the future is rosy. This may seem an odd conclusion when the most recently published annual report shows a $1.2 billion loss with a combined ratio of 110.3 percent. True, Covid-19 distorted these figures, and Lloyds showed a $2.93 billion profit for 2019, but is Lloyd’s claim of a profitable future true or is it too optimistic?
An April 6 report by S&P Global helps to put things into perspective.
The main conclusion of S&P is that Lloyd’s turnaround is still a work in progress. S&P said that Lloyd’s began rebuilding in 2020, following recognition that the worst performing syndicates were losing the same amount as the best performing were making. Back in 2018, Lloyd’s launched Decimal 10 which required that syndicates with three consecutive years of underwriting losses come up with a remediation plan to get into profit and that all syndicates submit plans to ditch the worst-performing 10 percent of their business. S&P said that some managing agents pared back their books, and others exited the market altogether. S&P’s data shows some steep reductions in gross written premiums in 2020.
Since Lloyd’s was cleaning up its act and looking to become more profitable, the market is able to welcome some new business. Several managing agents are now growing strongly amid much improved pricing.
Lloyd’s figures show its gross written premium fell by 19.8 percent between 2018 and 2020 in this push for improved profitability. S&P believes that prices are increasing, especially in some lines, which it sees as ideal conditions for growth. With this year’s renewal season showing price increases in double digits and Lloyd’s annual report showing the market put through price increases of 10.8 percent in 2020, Lime Street is optimistic for the future.
For years Lloyd’s Achilles’ heel has been the high cost of placing business in the market. S&P notes progress has been made but said more needs to be done. The market’s collective expense ratio fell by 1.5 percentage points to 37.2 percent in 2020, according to S&P, but Lloyd’s top management wants more. S&P points out that some managing agencies’ expense ratios are far above the market average.
The problem Lloyd’s has is that, with many cost cutting actions taken, it will be difficult to continue reducing expenses. Rating agency Fitch noted recently that, while progress has been made, it was mainly on administrative expenses, not acquisition costs that are largely out of syndicates’ control.
There are more efficiency savings to come as promised by the Future at Lloyd’s, but these will take time to materialize. Robert Greensted, associate director of insurance ratings at S&P Global Ratings, said that it’s likely to be a “couple of years” before the improvements start to show results. He added that support for modernization efforts, despite previous market reluctance to embrace technology, changed with the coronavirus pandemic which boosted digital trading. Indeed, Lloyd’s has a “few following winds to help them along,” said Greensted.
Lloyd’s approves rating agency
One would think that with S&P, Moody’s and Fitch, Lloyd’s had enough rating agencies, but no, it wants a fourth. Lime Street announced that it has appointed Kroll Bond Rating Agency to provide an additional independent opinion of Lloyd’s financial strength. The move is aimed at further demonstrating the Lloyd’s market’s exceptionally strong financial position to investors and customers.
KBRA assigned an AA- insurance financial strength rating to Lloyd’s with a stable outlook. KBRA said the rating reflects Lloyd’s sound risk-adjusted capitalization, unique capital structure, conservative underwriting leverage, sound technical reserves, strong liquidity profile, diversified earnings sources, broad distribution channels and comprehensive risk management program.
The new rating takes into account Lloyd’s capital growth at a compound annual growth rate of 6.5 percent since year-end 2014, despite elevated catastrophe and attritional losses since 2016. Lloyd’s maintains strong capital and solvency positions, with net resources increasing to $44.07 billion in 2020 and central and market-wide solvency ratios of 209 percent and 147 percent respectively.
Burkhard Keese, Lloyd’s chief financial officer, said, “We are delighted to appoint Kroll Bond Rating Agency and add an AA- stable outlook rating to sit alongside our financial strength ratings from our existing agencies. At Lloyd’s we highly value our ratings as they are vital indicators to our customers, our market, and our investors of our exceptional financial position…. We believe it is important to have a diversity of views in the ratings market and welcome KBRA as a new entrant that will provide a fresh perspective on Lloyd’s.”
So, if you want to know Lloyd’s financial strength ratings, you now have a choice of (Strong) stable outlook with Standard & Poor’s, A (Excellent) stable outlook with AM Best, AA- (Very Strong) with Fitch Ratings, AA- (strong) stable outlook with Kroll Bond Rating Agency (KBRA).
Ever Given claim figure reduced
Underwriters concerned about Lloyd’s Chairman Bruce Carnegie-Brown warning that Lloyd’s is on the hook for between five percent and 10 percent of the claim from the blocking of the Suez Canal by the Ever Given will feel somewhat easier now that the Suez Canal Authority offered to reduce its claim for compensation to $600 million from the $916 million originally claimed, a figure which liability insurers said was “largely unsupported.”
The Lloyd’s market is still on the hook for any damage to the ship plus the salvage costs, which will be one of the costliest elements of the claim. Meanwhile the vessel and its cargo lie under arrest in the Great Bitter Lake.
Ever Given’s liability insurer, the UK P&I Club, which is reinsured by Lloyd’s, will also be relieved at the news.
There is a feeling in the market that costs of this nature should not be borne by the insurers and the ship’s P&I insurer. Whatever the outcome the market will consider that the losses could have been much worse. If it had been necessary to unload the cargo to free the ship, the cost would have been horrific and shared among hull and cargo insurers.
German insurer Allianz published a safety review in 2018 that warned of the potential threat from ever-larger containerships. It modeled a potential $1 billion loss for the total loss of a vessel, its cargo, and the cost of removing the wreck. This was written just three years ago, and ships are even bigger now.
Prior to the Ever Given loss, the market had been hurt by major losses from containers being washed overboard and removal-of-wreck claims from car carriers. These and losses from other incidents have hurt insurers, and double-digit rate increases will be demanded for some time.
Staff poaching claims go to court
Guy Carpenter has filed a U.K. High Court action over alleged poaching of its staff by rival Lloyd’s broker Howden. It’s a familiar story of a merger between brokers leaving senior staff unhappy with their new positions and deciding to move to a rival. The difference this time is that Guy Carpenter alleges that those leaving took the crown jewels of thousands of pages of confidential information.
The problem for Guy Carpenter started when its parent Marsh and McLennan purchased Lloyd’s broker Jardine Lloyd Thompson. The deal included JLT Re, some divisions of which became part of Guy Carpenter. Not everyone was happy with this, and a team of 31 staff led by a former executive, Bradley Maltese, left Guy Carpenter for Howden. Maltese became chief executive of Howden’s reinsurance division.
Guy Carpenter and Marsh launched a legal action in the U.K. High Court against Howden, Maltese and four other former JLT employees. They allege that four of the group accessed confidential information. Ironically, Guy Carpenter is on the other end of a U.S. dispute with Willis Towers Watson, where WTW alleges the poaching of 20 staff from its Latin American team.
What will happen to Guy Carpenter should the proposed merger between Aon and WTW go ahead is unclear. With the EU blocking the merger due to perceived control of the EU reinsurance market by Aon, EU regulators are requiring bits of the Aon/Willis empire to be sold off. Aon/Willis will have to sell Willis Re and various assets of WTW’s corporate risk and broking business and possibly bits of Carpenter. CRB units in France, Germany, Spain and Netherlands are also to be sold as well as parts of CRB’s cyber operation and aerospace manufacturing. Many brokers are interested in buying this, especially as it could be a way into European business.
Prospective buyers will be too late to buy Willis Re and other minor interests. Gallagher and Co. announced May 12 that it will acquire Willis’s reinsurance, specialty and retail brokerage operations for $3.57 billion.
Other bits remain available, but interested buyers must clear regulatory hurdles to be allowed to purchase. Word on the street is that Gallagher is expected to buy most of the available pickings.
New Lloyd’s syndicates emerge
When Lloyd’s announces new syndicates are joining the market, it’s a sure sign that things are looking good at 1 Lime Street. Four new syndicates will write business in 2021 and others are expected to follow. Usually, these syndicates follow the traditional Lloyd’s pattern, but Brit’s Ki Syndicate is very different and brings significant high technology into the Lloyd’s fold.
Brit’s Ki syndicate is a stand-alone business and the first fully digital and algorithmically-driven Lloyd’s of London syndicate. The syndicate will be accessible anywhere, at any time by using Google Cloud. It aims to redefine the commercial market as a “follow-only” syndicate that will significantly reduce the amount of time and effort for brokers to place their follow capacity once the risk leader has negotiated terms for the risk.
With traditional business, once the broker sees the first few leaders (and usually the first lead), he is unwilling to negotiate the risk again. As a follower, the broker has the choice of writing the risk at the leader’s terms or not writing it at all.
The designers of Ki powered its algorithm to evaluate Lloyd’s policies and automatically quote business through a digital platform that brokers can access directly. The selection process is performed using a proprietary algorithm developed with support from University College London and its computer science department. Ki will follow several nominated lead syndicates across the Lloyd’s market, including Brit. If one of these several recognized leads has written the risk and the algorithms work out okay, Ki automatically will offer brokers a line on every risk in the selected classes led by these market leaders. This could save a small fortune on salaries.
John Neal, Lloyd’s of London CEO, said, “Ki truly embraces all that is represented in The Future at Lloyd’s by bringing data, technology, innovation and artificial intelligence to the fore in the complex world of corporate and specialty underwriting. It is an exciting first for Lloyd’s and paves the way for others to follow.”
Another high tech arrival is CFC’s Syndicate 1988 which will be managed by Asta Managing Agency Ltd. CFC and Asta are currently working to secure final approval with Lloyd’s to allow underwriting business incepting July 1, 2021.
Syndicate 1988 will write a cross-section of CFC’s established portfolio of specialist, emerging and digital economy risks with planned gross premium of over $130 million for its first year of trading. Capital will be provided by CFC and third-parties.
Also opening for business is Inigo Limited. Inigo purchased Enstar’s Syndicate 1301, which was put into runoff at the end of last year, together with the StarStone managing agency which Inigo used as a platform to begin underwriting at the start of 2021. Under its new owner, underwriting capacity for this year is $350 million. Inigo aims to write a specialty lines and reinsurance account balancing underwriting with science. Inigo has a team of experienced underwriters to back its business.
Another new Lloyd’s entrant for 2021 is Mosaic Syndicate 1609, also managed by Asta. Mosaic will underwrite on behalf of its own Syndicate 1609, as well as on behalf of other third-party market participants. Mosaic will use a unique InsurTech operating model which it believes will enable it to grow and achieve scale while leveraging digital automation and a significantly reduced expense ratio. Initially Mosaic will write speciality risk, including M&A, political risk, terrorism, environmental, professional indemnity, financial institutions, and cyber. Business will be accretive to the Lloyd’s market, and sourced through service companies in London, the U.S., Bermuda and Asia.
It seems the days of the traditional Lloyd’s syndicate are doomed.
Lloyd’s pays twice for protection
Lloyd’s managing agents have been gnashing their teeth recently. They all received an annual letter from Lloyd’s asking for details of premium and liabilities, which determine the amount of fees they will pay to the Financial Services Compensation Scheme.
The scheme is intended to protect policyholders if their insurer goes bust. What raises managing agents’ blood pressure is that, effectively, they are paying twice for the same protection: once to the scheme and second to Lloyd’s for the Central Fund.
Repeated attempts failed to persuade successive governments that the scheme is unfair, so now the managing agents and the Lloyd’s investors who provide the money just grin and bear it.
Beazley wins Lloyd’s Oscars
Lloyd’s managing agent Beazley announced that it has been ranked top in terms of underwriting strength among London market underwriters. The result comes from Gracechurch’s 2021 survey and is based on 1,400 individual nominations by brokers and underwriters across the London market.
The report ranks the leading underwriters according to line of business, as well as best performing underwriting teams.
In addition to ranking top for overall team strength, Beazley triumphed in the Top 10 list for underwriting teams across multiple lines of business, including accident and health, casualty/nonmarine liability, marine, professional indemnity, property, reinsurance, and war and political risk.
Individual underwriter Tim Garrett, Beazley’s head of cargo, shined in the Gracechurch rankings. Garrett was featured in the Top 10 list for overall leading underwriters and marine underwriters, coming in at eighth and third respectively.
Beazley wins Lloyd’s Oscars
Lloyd’s managing agent Beazley announced that it has been ranked top in terms of underwriting strength among London market underwriters. The result comes from Gracechurch’s 2021 survey and is based on 1,400 individual nominations by brokers and underwriters across the London market.
The report ranks the leading underwriters according to line of business, as well as best performing underwriting teams.
In addition to ranking top for overall team strength, Beazley triumphed in the Top 10 list for underwriting teams across multiple lines of business, including accident and health, casualty/nonmarine liability, marine, professional indemnity, property, reinsurance, and war and political risk.
Individual underwriter Tim Garrett, Beazley’s head of cargo, shined in the Gracechurch rankings. Garrett was featured in the Top 10 list for overall leading underwriters and marine underwriters, coming in at eighth and third respectively.
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