By LEN WILKINS
Lloyd’s has announced losses of $0.52 billion for the half year to date. The market can live with that but will be worried about Lloyd’s management’s expectation that the market stands to pay out up to $6.5 billion for COVID-19 customer claims on a gross basis. After reinsurance recoveries of $2.6 billion, the net cost to the market will be $3.9 billion.
Lloyd’s COVID-19 claims for the half year after reinsurance recoveries added an extra 18.7 percent to the market’s combined ratio of 110.4 percent. These figures do not reflect the additional cost of the business interruption claims currently being fought over in the U.K. courts. Even though a decision has been made favoring policyholders, it surely will be appealed.
What’s annoying the market is that, taking COVID claims out of the equation, the market has done well. Excluding COVID-19 losses, the market delivered an underwriting profit of $1.3 billion. The market’s combined ratio showed a significant improvement from 98.8 percent for the first half of last year to 91.7 percent sans pandemic for the first half of 2020. What helped the figures was a 7.1 percent drop in Lloyd’s attritional loss ratio, which fell to 52.6 percent. What a difference a year makes; in September 2019 Lloyd’s reported a profit of $3.8 billion for the first half despite underwriting concerns.
Premium income rose 1.7 percent to $26.0 billion from $25.6 billion a year earlier. Once foreign exchange movements are removed, overall premium increased by 0.1 percent.
At the same time, investment income suffered from the COVID-19 effect and fell heavily to $1.17 billion from $2.99 billion. The improvements that Lloyd’s has made to reduce its operating expenses continue, but the expense ratio for the first half dropped only marginally from 38.1 percent to 37.7 percent. Everyone hopes that this figure will continue downward as the Future at Lloyd’s program continues.
The good news is that the premium rate increase momentum shown earlier last year has continued. This impetus quickened in the first half of this year, with underwriters achieving average risk adjusted rate increases on renewal business of 8.7 percent. There have been 11 consecutive quarters of positive rate movement according to Lloyd’s broker Marsh, with rate increases exceeding Lloyd’s plan each month, affecting the vast majority of classes of business and all geographies.
The bad news is these increases were offset by an 8.6 percent decrease in business volume across the market. Some commentators believe this is not a bad thing as it shows the market is focusing on higher quality business that it renews or writes for the first time. Marine and aviation were among the higher loss-making lines of business, and Lloyd’s expects more syndicates to leave the market. However, this does not worry anyone at 1 Lime Street because Lloyd’s has a strong pipeline of new applicants.
The market’s strong capital and solvency position means it can easily withstand the impact of COVID-19. Figures show the market’s net resources increased by 7.2 percent to $42.64 billion which strengthened Lloyd’s balance sheet further, and the central solvency ratio reached 250 percent from 238 percent a year earlier, although this is expected to fall to 200 percent for the second half of the year as COVID-19 losses begin to bite.
John Neal, Lloyd’s CEO said, “The first half of 2020 has been an exceptionally challenging period for our people, our customers, and for economies around the world. The pandemic has inflicted catastrophic societal and economic damage, calling for unparalleled measures to stifle the spread of the virus, and to get businesses and economies back on their feet.
“Our half year results demonstrate that our robust approach to performance management and remediation has begun to take effect, evidenced by a significant turnaround in the underlying performance metrics, which give the truest indication of our market’s profitability.”
On these figures no one popped a champagne cork. The results aren’t good, but they are encouraging. With underwriters worldwide beginning to factor the costs of COVID-19 into their rates, premiums are only going to rise, and that can only be good for Lloyd’s.
Marsh reports hardening market
Lloyd’s broker Marsh’s second quarter report on worldwide insurance rates makes happy reading for insurers and strengthens the case for the hard market. The increase in the second quarter was the largest since the index was launched in 2012 and follows year-over-year average increases of 14 percent in the first quarter of 2020 and 11 percent in the fourth quarter of 2019.
For the second quarter of 2020, the rate increases in global composite insurance pricing and commercial property insurance pricing were both a record 19 percent, driven by the COVID-19 crisis. Global casualty pricing increased by seven percent, and global financial and professional liability rose by 37 percent.
Lloyd’s shows losses for 2018 and 2019
Every quarter Lloyd’s publishes an update on how its underwriting years are developing. At the moment, things do not look good; the worst case scenarios for the 2018 underwriting year show a 9.08 percent market loss and a 6.07 percent market loss for the 2019 year of account.
On the worst case figures for the 2018 underwriting year, only one syndicate, Chaucer 1176, shows profit, while one other syndicate expects to break even. The largest losses are with Hiscox Syndicate 6104, which predicts a 55 percent underwriting loss, and Premia 1844, which predicts a 52.51 percent loss.
The mid-case figures suggest a market loss of 6.07 percent, and again, Chaucer predicts a healthy 35.00 percent profit, but five other syndicates hope to be in the black, and one hopes to break even.
The best case figures predict a market loss, but down to 3.07 percent, with Chaucer expecting a 40.00 percent profit. Fourteen other syndicates hope to declare underwriting profits, but only one of these is in double digits. At least the loss making syndicates can comfort themselves by reading Marsh’s forecasts of increased rates.
Things are better for the 2019 underwriting year. On the worst case scenario six syndicates expect to be in the black, and four predict a breakeven. Chaucer’s 1176 leads the pack with an expected 10.00 percent profit. The 22 loss making syndicates are led by Hiscox 6104 with a projected 40.50 percent underwriting loss.
The mid-case figure for the market is a 2.74 percent underwriting loss, with 17 syndicates in the black and one at breakeven. There is a new profit leader with MAP’s Syndicate 6103 expecting a 25.00 percent return. Thirteen syndicates predict losses; with Hiscox’s 6104 at 35.50 percent, the largest.
With the best case figure, the market at last has a profit, a modest 0.59 percent. Twenty-two syndicates forecast profits ranging from 0.14 percent to MAP’s Syndicate 6103, which expects an underwrit- ing profit of 33.50 percent. Seven syndicates predict underwriting losses, and Hiscox expects a loss of 30.50 percent.
Reinsurance conferences canceled
Usually at this time of year, the reinsurance world meets at Monte Carlo Rendez- Vous de Septembre to discuss renewal terms for the following season, and then comes the Baden Baden conference, where the deals are made. Unfortunately, the 64th annual Rendez-Vous and Baden Baden were among the many victims of the pandemic. Both conferences are difficult to duplicate digitally and were canceled. The conference sessions can be replaced by web conferences, but there is no replicating the quiet drinks or dinners with clients or with fellow reinsurers.
With the renewal season still coming up, reinsurers and brokers are forced to use other ways, such as Zoom and Microsoft Teams, to communicate with each other and their clients. There is a lot to discuss – reinsurers have seen large rate increases in the primary market and will now want some of that action for themselves. With the last major renewal season being midyear, so far, reinsurance rate increases have been modest, but this may be about to change.
With digital communications, it’s going to be more difficult for brokers to get a feel for how bullish reinsurers are, but brokers are confident they can stay on top of things via the internet, telephone and emails. One thing is certain: The insurance and reinsurance press will be more carefully scrutinized than ever as the information flow dries up.
If the brokers were talking to reinsurers at Monte Carlo, they would learn that reinsurers believe rate increases are insufficient. Thierry Léger, group chief underwriting officer at Swiss Re AG, recently told journalists that this year’s rate increases hardly cover companies’ lost interest rates. Reinsurers have seen premiums fall, while catastrophe exposure increases. On top of that, reinsurers have to pay their share of COVID-19 losses. Swiss Re believes its share of COVID-19 losses will be at least $20 billion, and for reinsurers generally, the final bill could hit $80 billion.
Those who work digitally while COVID runs riot across the world say they have benefitted from working from home with less commuting and more time to think. There is talk about how the London market will operate in the future, with the possibility of some staff going into the office only once or twice a week. While that might work for a digital market, it won’t for conferences, so the world’s reinsurers hope and expect to be back in Monte Carlo and Baden Baden next year.
Lloyd’s reopens at 45 percent capacity
For the first time since March, Lloyd’s reopened the underwriting room. Admittedly, only hundreds, instead of the thousands who normally work at 1 Lime Street, crowded into the building on Sept. 1, but it was a start.
Lloyd’s said its number one priority is allowing the market and the Lloyd’s community to connect and collaborate safely and productively. There are new rules and regulations to make sure everyone stays safe. The underwriting room looks a little different from when it was closed.
U.K. government social distancing rules require people to stay two meters apart where possible. This is difficult when workers sit next to each other, so things have to change, which means people in the market cannot return all together. To solve this problem, Lloyd’s organized a business class rota. Monday is reserved for financial and professional lines and third-party casualty placements, both direct business and facultative reinsurance. Tuesday is reserved for property, terrorism, construction, again both direct and facultative reinsurance. Wednesday is mariners’ day, when marine, aviation and transit business can be transacted. Treaty reinsurers have to wait until Thursday to access the underwriting room, where they will be joined by the underwriters and brokers who place kidnap and ransom, accident and health, political risk, bloodstock, and energy insurance and reinsurance.
The rest of the time brokers and underwriters will have to go back to communicating digitally, apart from Friday, when the room will be open for all classes of business.
Over 12,000 transactions were completed and bound in June, so the simpler risks will be placed digitally, and the more complex risks will be traded traditionally face-to-face in the underwriting room. The emergency trading protocols Lloyd’s set in place to supplement face-to-face and electronic trading continue. They will stay in force for a period of time as yet undefined, while Lloyd’s gets a better understanding of the market’s requirements and how to support non-face-to-face trading throughout the continuing disruption.
With only 45 percent of the market operating, Lloyd’s suggests that all brokers book appointments for face-to-face trading. Not all underwriters will want to trade in the room, especially if they are in the atrisk- group of older people or anyone with an underlying medical condition, such as asthma.
When brokers arrive at a box, they will find plastic screens have been installed. The screens are at each of the boxes and also across the box to stop COVID-19 spreading. All the seats on each underwriting box have been allocated into three categories. Brokers can sit on underwriting chairs alongside the underwriter, and this practice will continue while government social distancing guidelines remain in place.
Other measures Lloyd’s has taken to make the market practical and safe to operate in include the new digital booths created for brokers and underwriters to use for negotiations. With access to the room limited, brokers and underwriters will be able to connect to those outside of the room via these booths. They have enhanced network connectivity, greater privacy and screens, and effectively offer a virtual meeting room for clients and colleagues who are outside of the underwriting room.
Lloyd’s is creating a virtual underwriting room that will enable brokers and underwriters to connect online wherever they are, as well as when they are alongside the physical trading environment in Lime Street.
To make this work Lloyd’s has had to upgrade its Wi-Fi system throughout the underwriting floors. The systems for the virtual room are being tested and should go live soon.
So, it’s all systems go for the brave new world of Lloyd’s, but with one missing ingredient. Lloyd’s, synonymous with coffee, no longer has an operating coffee shop. The shop is being used for the digital booths, and brokers and underwriters can only get a takeout. Costa and Starbucks must be rubbing their hands with glee.
Lloyd’s appoints new head of U.S. claims
With U.S. business becoming more and more important, Lloyd’s has strengthened its U.S. claims team by appointing Carey Bond as U.S. head of claims. Bond assumes this newly created role as part of the Future at Lloyd’s strategy. He will collaborate with London brokers and underwriters on the design and delivery of claim solutions for policyholders in Lloyd’s largest market to improve the U.S./Lloyd’s relationships.
Bond joins Lloyd’s from Canal Insurance Company. He has more than two decades of claims management experience with a strong background in improving operational efficiencies at several insurance companies. Prior to that, he was the director of claims at Access Corporate Services and served as corporate auto property damage manager at American Independent Companies.
A graduate of the University of Tennessee, Bond served in the U.S. Army as a senior military advisor in Iraq during Operation Iraqi Freedom and in Afghanistan during Operation Enduring Freedom, leaving the reserves with the rank of lieutenant colonel in 2011.
In his new role, Bond will report to Hank Watkins, regional director and president of Lloyd’s, Americas, and Phil Godwin, Lloyd’s head of claims in London. Based in Greenville, South Carolina, Bond will be responsible for overseeing U.S. claims processing across the Lloyd’s market, with a goal of improving outcomes and customer experience. Bond’s immediate priorities will be to provide support for Lloyd’s customers through the U.S. hurricane Season.