Nigel Roberts, Head of Distribution — AEGIS London
It is possible we could look back on 2019 as a turning point for Lloyd’s. Market conditions are on the turn. Governance and profitability are improving. Cultural reform is under way and there is a clear vision for how to shape the future. But be in no doubt, we still have a mountain to climb.
Market performance this year could best be described as lacklustre, especially given the improving rating environment, a comparatively benign US wind season and the absence of significant hurricane activity. Q3 results were a mixed bag and Q4 is unlikely to be much better, which would suggest that Lloyd’s will come in with a combined ratio in the region of 100 – a marked improvement on recent years, but not yet time to hang out the bunting.
After several years of reserve releases to prop up poor underwriting results, many are now taking the opportunity of rising rates to bolster reserves on both short- and long-term books. As reserve strengthening gathers pace, so we can expect the market to strive for better performance next year when the impact of year-on-year rate rises should deliver a good uptick in underwriting profit across the market.
In many ways, 2019 has been the year when the Corporation’s ‘improve or remove’ profitability drive has started to come good. Although overall the market is smaller than in 2018, and some classes – marine hull, cargo, property direct and facultative and professional indemnity – have shrunk, the focus on profitable underwriting has been beneficial. Some syndicates, particularly those like AEGIS in the light-touch cohort, are now well positioned to take advantage of improving market conditions, all of which points to a positive year ahead.
But as experienced climbers know, there’s many a false horizon before the true summit is reached.
Focus on cost is key
As we look ahead to 2020, the priorities for the Lloyd’s market should be anything that removes unnecessary cost. There is no doubt that London is under threat and we need to be ruthless about removing business acquisition cost that does not come with associated value-add. Europe, Dubai, Singapore – all have become established as centres of excellence that can write some of the business at lower cost that has traditionally come to London. It won’t happen overnight, but the business will migrate to those lower-cost centres as those markets become ever more mature.
Under Blueprint One, Lloyd’s has sown the seeds this year for a potential market transformation. The driver behind both the complex risk platform and the risk exchange is the desire to remove frictional costs from the market. In our view, electronic placing platforms such as these are the way forward. This new generation of platforms is reducing the cost of acquiring business while lowering the level of human intervention we’ve seen traditionally.
Aspirationally, Lloyd’s is undoubtedly moving in the right direction. We know we all need to work smarter and more cheaply if the market is to remain competitive. The trouble is, setting the vision is the easy part. Delivering the vision is much harder, as the experience of working with PPL shows.
Devil in the detail
Looking ahead to 2020 we see scope for change on two fronts.
First, the Corporation need to put flesh on the bones of how the new exchanges are going to work – both from a process and technology perspective. The lack of detail is a concern and the market will need to get a much more granular view of what is being done to support the vision. This will be challenging, not least because of the many competing agendas within the market.
Second, although underwriting businesses were first to come under scrutiny as part of market reform, increasingly, it will be the turn of brokers to adapt fast to changing market conditions. 2020 will be a tough year with capacity eroding and margins coming under pressure. Brokers that cannot demonstrate how they add value will struggle and the squeeze will come in the small and especially mid-market.
By contrast, one area where scrutiny is undoubtedly bearing fruit already is the D&I agenda. Improvement was sorely needed, the cultural survey results did not make easy reading and we continue to see examples of bad behaviour. However, the mood music has changed and there can be no doubt that Lloyd’s and the rest of the London market mean business. This market depends on attracting and retaining good people from all backgrounds and the reforms now under way will give us a better shot at doing that. If we are to remain relevant into the 2020s, we need to be a much more diverse marketplace otherwise talent will not come to us and customers will simply walk away.
Long climb ahead
As we look ahead to 2020, there’s not much Lloyd’s underwriters can do about the cat world, but because of actions taken at a market and syndicate level, the attritional book should perform better. The challenge will be to capitalise on those gains, sustain the D&I shift and most importantly, to work together to drive unnecessary cost and hassle out of doing business in London.
The seeds of reform have been sown, but it maybe many years before we know whether they will bear fruit. In the meantime, we still have a long climb ahead.
First published in Insurance Day 16 December 2019.