Re/insurance "Business as usual is not sustainable, says Lloyd’s Chairman"
From Artemis, March 21:
If you thought that the Lloyd’s of London insurance and reinsurance
market had changed in the last decade, it’s likely nothing compared to
the change we will see over the coming years, as the world’s oldest
re/insurance market accepts the fact its model has become unsustainable.
This morning the Chairman of Lloyd’s, Bruce Carnegie-Brown, admitted
as much as in the annual results pack, which revealed the market fell to
an aggregated pre-tax loss of £2 billion in 2017.
The underwriting loss was significant, at £3.4 billion for the year,
as the results were driven down by the impact of the major losses from
hurricanes and catastrophes in the second-half of the year which
delivered a major loss bill of £4.5 billion to the Lloyd’s market and
its underwriters.
While the impact of the catastrophes was significant last year, the
fact remains that Lloyd’s remains an expensive place to do business and
as a result losses can tip it into unprofitability relatively easily.
Which led Carnegie-Brown to explain, “The market’s 2017 results are
proof, if any were needed, that business as usual is not sustainable.”
Lloyd’s operates on an expense ratio of around 30%, with 2017’s
results showing acquisition expenses contributing 27% to the combined
ratio and administration expenses 12.5%. The combined ratio in 2017 rose
to 114%, but the goal going forwards will be to bring that down,
through greater efficiency.
“The market is embracing new ways of working, and I am confident the
combination of our strategic focus and the market’s proven ability to
respond to challenging conditions will ensure Lloyd’s continues to offer
innovative and competitive solutions across all lines of business,”
Carnegie-Brown said.
The fact is that for years now Lloyd’s has been urged to open up,
modernise, accept more efficient capital and risk transfer models, but
it is only in the last few years that this has truly been heard and
steps are now being taken to leverage the state of the market, the
advancement of technology and of course the entry of efficient capital,
to attempt to drive change.
Lloyd’s, like all other traditional insurance and reinsurance
players, has to find a way to be able to sustainably operate in an
environment where risk pricing is lower and competitors are bringing
increasingly efficient capital to market through increasingly
streamlined business models.
Here Lloyd’s should actually have an advantage, being a marketplace
into which risks are placed and then syndicated among the capital and
capacity providers.
Think of a market-based model for the future of reinsurance.
Risks are placed into the marketplace through technology based
distribution channels, here we mean open channels developed specifically
for their efficiency, not owned by bits and pieces of the market
itself.
Capital providers (syndicates) get to see all of the data on the
risks, analyse them, then place bids to underwrite them (a bit like an
auction), with the risks eventually being placed through algorithms that
know the preferred markets, the most efficient capital and the most
sustainable way to syndicate the risk around that marketplace.
Sitting atop this efficient risk transfer structure is Lloyd’s
itself, providing the oversight for the market but also perhaps
facilitating following markets, with their efficient capital, to take
the lead from the best underwriters in a class of business, augmenting
the leads capacity and benefiting from their expertise. Perhaps the lead
even gets a commission fee, for ‘introducing’ their underwriting of a
risk to the followers.
As we’ve said before, and no doubt will again, every market player in
insurance and reinsurance needs to identify the models that allow them
to monetise their expertise, while increasing efficiency and leveraging
the lowest-cost capital.
The above is but one way Lloyd’s could do this, although questions
over the necessary size of Lloyd’s and whether it needs an enormous
building (or even such a physical presence as it has today) to achieve
this will remain.
Efficiency is just one of the levers that Lloyd’s has at its disposal
and its likely we’ll see the market drive down the digitalisation route
towards modernity, but hopefully not at the expense of getting locked
into systems developed only for a segment of the broader global risk
market and avoiding vendor lock-in as well....MUCH MORE
