By LEN WILKINS
Plans for Lloyd’s members to attend the market’s 2022 Annual General Meeting in person were changed at the last moment because climate activists threatened to disrupt the meeting. Thanks to Zoom, the meeting went ahead led by Chairman Bruce Carnegie-Brown and CEO John Neal. This is the third year in a row the meeting has been virtual.
Lloyd’s must have been disappointed not to have a live audience to report a track record of successful management over four years, as well as the market’s sustainable profit. Between 2018 and 2021, Lloyd’s income rose by 10.4 percent to $50.96 billion, while the market’s combined ratio fell from a loss making 104.5 percent to 93.5 percent, and its solvency ratio increased from 249 percent to 388 percent.
The big success has been the change to performance-led underwriting. The introduction of the Decile 10 approach delivered sustainable 2021 underwriting profit of £1.7 billion ($2.3 billion).
Until 2018, the freedom given to the market allowed mistakes to be made. Following a $2.6 billion market loss in 2017, it was obvious things had to change. Lloyd’s managing agents were told to produce underwriting plans for 2018 that showed how they were going to return to sustainable profitability and reduce expenses. The syndicates were told to focus on eight classes of business on which the market had lost money and on the worst-performing 10 percent of their business – the Decile 10. Syndicates that failed to do so were threatened with closure, and a small number decided to leave the market rather than follow Lloyd’s directive. Since then the way has been up.
Lloyd’s says it is ideally placed for growth this year. Its sustainable performance positions the market for expansion in 2022, but Lloyd’s reminds underwriters of the need to focus on pricing, risk selection, improving catastrophe loss estimates and expenses.
The change for this year is implementing Lloyd’s principles-based approach to oversight, which replaces the old rules system. In the future, market participants will self-assess against 13 principles, including underwriting and pricing, customers, claims, conduct and culture.
During the meeting, the only concern raised was the expectation that the market will have to navigate a period of heightened uncertainty and volatility due to rising inflation and the conflict in Ukraine.
Lloyd’s said performance and growth should not be casualties of uncertainty and volatility and that the conflict in Ukraine is a major, but financially manageable, situation. There are no concerns about market solvency or the solvency of any individual syndicate, and Lloyd’s has taken a proactive approach in reserving.
Syndicates forecast narrow profit
This is the time of the year that Lloyd’s updates syndicates’ forecasts for open underwriting years. What’s unusual about this year’s forecasts is that there are two sets of figures, not three. This year there are worst and best figures. Using the worst figures, a market underwriting loss of around 2.53 percent is expected for the 2020 underwriting year. Using the best-case figures Lloyd’s predicts a 3.39 percent profit. A major loss seems out of the question, and the market hopes for a breakeven or a small profit.
Syndicates performing well for the 2020 underwriting year using the best-case figures include Chaucer’s Syndicate 1176 which predicts a 35 percent profit and Capita’s Syndicate 1492 which predicts a 28 percent profit. Of the rest of the nonaligned syndicates, 17 expect to produce profits with five expecting double digit figures. Unfortunately, 10 syndicates forecast losses, with Astra’s Syndicate 2288 predicting a 65 percent underwriting loss and its Syndicate 4242 predicting a 31.79 percent loss. Four other syndicates predict losses of double digits.
Take the worst-case figures, and 25 syndicates are in the red with 11 reporting double digit losses. Astra’s syndicates lead the way with 2288 predicting a 75 percent loss and 4242, a 41.79 percent loss. On the plus side, Chaucer and Capita swap places with Capita predicting an 18 percent profit for Syndicate 1492 and Chaucer, a 15 percent profit for Syndicate 1176.
The non-third-party syndicates do not produce individual figures, but the aggregate of their figures shows a 3.79 percent profit on the best case figures and 1.21 percent loss on the worst.
The 2021 underwriting year results are expected to be better. The best-case picture is a 7.48 percent profit for the market and the worst case a 0.92 percent loss. Profits are predicted for 28 syndicates with 15 expecting double digit results. Chaucer and Capita lead the field with a 30 percent underwriting profit for Syndicate 1176 and a 22.5 percent profit for Syndicate 1492. Six syndicates expect to be in the red with only Astra’s Syndicate 2288 forecasting a double-digit loss of 20.0 percent.
Using the worst-case figures, seven syndicates are in the black, although two predict a breakeven. Capita’s Syndicate 1492 leads the field with a 12.5 percent profit, and Chaucer is just pipped for second place by Covery’s Syndicate 1991 with a 10.62 percent profit against Syndicate 1176’s 10.00 percent. In the red are 24 syndicates, with Astra’s 2288 forecasting a 35 percent underwriting loss and Hiscox’s 6104 expecting a 19.54 percent loss.
The non-third-party syndicates’ aggregate shows a 7.63 percent profit on the best case figures and 1.21 percent loss on the worst.
Figures for 2022 are expected to be even better.
The U.K. has grown accustomed to Russia threatening to destroy the country by using its nuclear missiles. Every time the U.K. offers more support or more sophisticated weapons to Ukraine, a Russian spokesperson appears on its national television news threatening the U.K.’s extinction. The latest threat followed the U.K. and Europe banning the insurance and financing of seaborne deliveries of Russian oil to third-world countries. Russia uses its income from the sale of oil, $430 billion annually, to support its army in Ukraine, and rumors are that without the income Russia will go bust and not be able to pay its army or buy weapons.
Russia is the third largest exporter of oil. Its oil is trading at a 33 percent discount to North Sea oil, roughly $122 for Brent Oil and $85 for its Russian equivalent. To impoverished nations, saving a third of the cost on oil imports is a great temptation, and many, like India, decided to trade.
Russia expects to get around the U.K. and EU insurance ban on oil to third-world countries by using state guarantees to pay for any marine losses. The insurance of individual tankers and their cargoes should not be a problem. The value of the oil carried is around $150 million, and the tanker itself could vary from $75 million to $250 million depending on size and age.
Where Russia may have a problem is on liability issues. International treaties hold tanker owners liable for any oil pollution. At present, the limit is the equivalent of $950 million. Tanker owners usually buy protection and indemnity insurance, which covers this and other liability exposures. Without this cover, some ports are expected to refuse permission for Russian vessels, or vessels carrying Russian oil, to dock.
In terms of premium income the decision is not a major loss to London. Despite Europe banning the insurances, most of the risk was placed in Lloyd’s and the London market.
More concerning is the news that the WRB Lloyd’s syndicates, part of WR Berkley Corporation, became the first London based insurers to pull out of the political violence and political risk market since the Ukraine conflict started.
Political risk is insuring against a government seizing property, while political violence is insuring against damage to an asset from a politically motivated act.
Part of the problem for Berkley is the reduction in the specialist reinsurance market to lay off potential accumulations. So far, Berkley is the only syndicate to pull out of the business, but without reinsurance the market is worried others will follow.
Terrorism definition changes
When it comes to terrorism insurance, the U.K. has a head start due to the problems some years ago between Irish Nationalists and U.K. authorities. Following a major bomb explosion in 1982, U.K. insurers pulled out of terrorism cover leading the U.K. government to set up Pool Re, which is a mutual reinsurer with members consisting of most of the U.K. insurers and Lloyd’s syndicates. Pool Re reinsures these insurers when a terrorist event exceeds a certain limit.
If a terrorism loss occurs, each member retains that loss up to an agreed threshold, determined individually. Pool Re is funded by premiums paid by insurers, and the government guarantees the fund if losses exceed a certain figure. So far over $780 million has been paid by insurers on 13 separate claims without government support.
Cover is on an all risks basis for property and business interruption insurance. Chemical, biological, radiological and nuclear risks are covered, as are cyber terrorism to protect commercial property and BI, but there is no cover for intangible assets which should be insured in the cyber market.
Pool Re is the center of concern in the London market at the moment due to proposed changes in its cover which will extend the insurance risk to London and Lloyd’s underwriters. The move follows a series of terror attacks in public spaces in the U.K., including the bombing of a concert at the Manchester Arena. The new cover is known as the protect duty and follows legislation being introduced by the U.K. government.
For insurers, this involves extending terrorist cover for around 650,000 U.K. businesses operating across multiple sectors including sports arenas, shopping malls and bars. The new cover is expected to be introduced by 2023, with insurers being asked to provide higher terrorism limits. The new exposure falls on insurers’ casualty programs, specifically public liability and employer’s liability, and exposes insurers to terrorist risks.
The new legislation will introduce a statutory duty for the owners and operators of publicly accessible locations to take appropriate and proportionate measures to protect the public from terrorist attack. At the same time, Pool Re will review its current definition of the terrorism risk it covers as part of a new five-year plan.
Lloyd’s launches ESG report
A short while ago the term ESG would not have meant a lot to insurers; today it is a major talking point and an area for new business. ESG stands for Environmental, Social and Governance, three disciplines each with its own set of standards and practices. Investors, customers, employees, action groups and other stakeholders are turning up the pressure on companies to reduce the environmental impact of their business and be more transparent about ESG. As ever, organizations are turning to insurers to dig them out of a hole.
The London Market has responded in two ways. Lloyd’s released a 55-page ESG report in May which looks at how the Lloyd’s market is responding itself to ESG pressures and how it is supporting its customers as they shift their business models and products to low carbon. Lloyd’s has committed itself to making all its operations, investments and underwriting net zero by 2050 or sooner.
Lloyd’s has been at the center of protests by eco-activists who managed to close the market recently. Also, Lloyd’s received threats of future action. Unlike the company market, with offices scattered around the Lime Street area, the single Lloyd’s building is an easier target.
The London company market responded to pressure by forming an ESG committee under the auspices of the International Underwriting Association. The committee is made up of representatives from 20 of the association’s member companies, with a primary interest in helping promote sustainability initiatives across the insurance industry and in exploring the “soft power” of insurers to influence the behavior of their clients.
The IUA already operates a Climate Risk Committee which helps companies consider the industry’s environmental impact and adapt to new regulations aimed at combating climate change. Its new ESG Committee will expand on this work and consider the London company market’s contribution to sustainability more generally.
U.K. regulator staff strike
There is news of another strike at the Financial Services Authority, the U.K. regulator for insurers and brokers. The FSA employs around 4,000 staff, and one of the U.K.’s major trade unions, UNITE, is trying to obtain union recognition from the FSA. According to UNITE, 600 staff members of the FSA are union members. How dedicated they are is questionable. During the last action, 240 staff members out of the 600 took part in strike.