Lloyd’s northern exposure

Stephen Merrick, Class Underwriter, International Casualty Facilities — AEGIS London.

Canadian delegated authority business is a mainstay of Lloyd’s North American presence. AEGIS London’s Stephen Merrick considers how the market can optimise this trading relationship.

I’ve always been fascinated by the differences between Canada and the UK. Consider the sheer scale of the country – a landmass in which you can fly for five hours, cross numerous time zones and still touch down in the same country. A six-hour drive in Canada is routinely undertaken by many yet hardly moves more than a few inches on the map.

Thankfully, when it comes to insurance, the UK and Canada are much more aligned. Canada has traditionally been a success story for Lloyd’s underwriters. The reasons for this are manifold: the shared language and cultural alignment, which have laid the foundation for close trading ties. Lloyd’s direct licensing allows for easy access to market, permitting syndicates to offer products alongside domestic writers, while also being able to flex their underwriting capabilities in the non-standard risk arena. The absence of severe Cat events or Wild West jury awards creates a relatively stable underwriting landscape.

Partnering Lloyd’s underwriters with Canadian coverholders has been a successful formula for many syndicates for decades but, in recent years, has shown itself to be a major threat to the ongoing prosperity of Anglo-Canadian trading. As a top five commercial insurer in Canada, Lloyd’s has felt the same pressure experienced by the local market to push for growth. The backdrop has been one of a prolonged soft market cycle, in which abundant cheap capital has depressed rates, margins and ultimate underwriting profitability beyond sustainability. More and more coverholders were being appointed to expand distribution. But the result was increased competition for Canadian business within the Lloyd’s market. 

The last 18 months have witnessed significant turmoil among both domestic writers and Lloyd’s. On both sides of the Atlantic, underwriting results as a whole have been poor. This has prompted the local market to restrict its appetite, jettisoning poor performing classes and pushing rates across remaining business. At the same time, Lloyd’s syndicates have been non-renewing poor performing binders, exiting loss making business, reducing coverholder count and restricting income. Symptomatic of this prolonged soft market was the broadening of delegated authority agreements to absorb business not well suited to this approach; volatile and distressed classes, larger scale operations and, increasingly, more US exposures. Insufficient scrutiny was being applied to the makeup of the portfolio. The result is that many coverholders had their wings clipped as syndicates look to remediate. 

The good news for Lloyd’s underwriters is that the drive to get our house in order has coincided with changes in the Canadian market. However, it’s important we ask ourselves how we can ensure that the future of delegated underwriting in Canada can be preserved successfully.

At AEGIS London, we’ve been writing Canadian delegated authority (DA) business since the early 2000s. Many of the coverholder relationships we established then continue to this day. This focus on long-term relationships is critical. Investing the time up front in due diligence, and then putting a framework in place to manage coverholder clash should protect a syndicate’s coverholder network in the long run. As and when new opportunities arise, we ensure they fit within our current book. The key is not to sacrifice the principle of profitable underwriting in search of growth.

It’s important to set high standards for ourselves and coverholders. The soft market has put the emphasis on the underwriting performance of binding authorities and it is crucial that syndicates, Lloyd’s brokers and coverholders work in partnership to push quality standards up. As an underwriter, it is a significant responsibility to be entrusted to write business with a syndicate’s capital and, arguably, this is even more significant when delegating this privilege to a third party. There should be a mutual understanding in the distribution chain that profit breeds success.

Having people on the ground is a great differentiator and demonstrates underwriters’ commitment to the territory. However, most Lloyd’s syndicates write Canadian DA business without a physical presence in the country. That’s achievable but is slightly surprising and we believe there’s more that can be offered. Having staff based in Canada provides the ability to work in the same time zone. It also means local knowledge, local experience and a faster response time. Nowhere is this more relevant than on the claims side. An Ontario-based loss adjuster can hop on a plane to a remote part of the country and be there in a few hours; a London-based loss adjuster might take a day or more, while excessive transatlantic travel renders this an expensive way to provide onsite claims expertise.

Challenges remain for the Lloyd’s market going forward though. We are still a long way behind the curve in terms of data collection and data analytics. We need to make quantum leaps in these areas to ensure we can make more data driven decisions around the business we write, identifying key profit and loss drivers effectively and then knowing what calls to make based on the findings. We also have a higher acquisition cost base than our domestic competition and we need to do more to bring products to market in a more cost-effective manner. Online distribution will play a key part in helping us to achieve this. OPAL, our own AEGIS online platform already successfully established in the USA, will play a key role in improving our coverholder distribution.

Above all, Lloyd’s needs to play to its strengths. Agility, innovation and entrepreneurship, aligned with the ability to think critically about risk in order to build profitable, stable books of business over the long term should continue to be our focus. 

First published in Insurance Day 13 March 2020.