London Views
London Correspondent

Lloyd’s investors will look with disappointment at the result for the 2018 underwriting year announced recently. While the estimated result for the 2019 underwriting year has been updated, it is also disappointing. For these two years, it’s red ink for most syndicates. Natural catastrophes, uneconomic rates and increasing expenses all helped produce losses for insurers worldwide, and Lloyd’s has more than its share.

The 2018 year closed on Dec. 31, 2020, (Lloyd’s operates a three-year accounting period for underwriting). The last estimate from the market is that, at best, there will be an overall underwriting loss of 2.53 percent. Final figures are being calculated, but the result for the market will be near this figure.

Of the 33 nonaligned syndicates that reported their results, only 10 were in the black. Leading the field is Chaucer’s specialist Nuclear Syndicate 1176 with a 44.2 percent underwriting profit. The next nearest is Atrium Syndicate 609, with a 7.7 percent profit. Of the other eight syndicates in the black, two reported profits of less than one percent. The big losers were Hiscox Syndicate 6104, with a 48.8 percent underwriting loss, and Astra 6123, with a 43.6 percent loss.

Two syndicates, Coverys 1991 and Argenta 2121, will keep their underwriting years open. Even after three years, there will be outstanding losses, and to close an underwriting year, syndicates roll these losses to the next open underwriting year of the syndicate. The syndicate buys a reinsurance contract, known as reinsurance to close, to pay these losses. Where the outstanding losses cannot be quantified with certainty, an underwriting year is kept open until the figures become more certain, and reinsurance to close is purchased.

Unfortunately for Lloyd’s investors, 2019 isn’t looking much better. The overall figures for the market have not been updated from the third quarter last year when a market loss of 4.08 percent was forecast. The worst case figures for the unaligned syndicates at the end of 2020 show that only four syndicates will be in profit, while three expect to break even. Forecasting the highest profit is MAP Syndicate 6103, which expects a 20.0 percent profit. Chaucer Syndicate 1176 is in second place with an expected 12.5 percent profit. On the best case figures, 15 syndicates expect a profit, and one syndicate expects to break even. MAP and Chaucer switched places in 2019, with Chaucer forecasting a 32.5 percent underwriting profit and MAP a 30.0 percent profit. Of the remaining syndicates, seven expect to be in double figures, with a 15.0 percent profit being the highest forecast.

While these figures are poor, the 2020 underwriting year will begin to show the effect of COVID-19 on the market. It’s too early to say what the results will be, but the saving grace is the large premium increases at the beginning of the year. At least the 2021 underwriting year should produce profits.

Underwriting room to open

Since Jan. 4, Lloyd’s Underwriting Room has been closed, and the market has been working remotely. However, following the U.K.’s successful vaccination program, the U.K. government now feels it safe to partially open the U.K. again, and Lloyd’s will reopen its Underwriting Room and corporation offices on May 17.

At first, only 2,000 of the usual 7,000 or so people will be allowed back. A full reopening is some weeks further away. Meanwhile, Lloyd’s will use a business rota system during the week to ensure safe social distancing. All being well, Lloyd’s will further relax restrictions with an expected updated government guidance from June 21. The Perspex screens that were installed in Lloyd’s underwriting floors are expected to be removed.

The Lloyd’s computer driven Virtual Underwriting Room is still open to all classes of business.

There is no talk about closing Lime Street, but it must be on someone’s agenda.

Lloyd’s recently updated its requirements for electronic trading. Syndicates are expected to trade electronically on a minimum of 60 percent of their business quotes, declines or acceptances in Q2 and Q3 2021. Details of the Q4 2021 target will be issued in September.

With most underwriters working from home, reaching electronic trading expectations should be no problem.

Lloyd’s pursues investors

The days are long gone when rich individuals as members of Lloyd’s produced the capital for Lloyd’s underwriters. Today, most of the capital providers in the market are corporate, but private individuals still accept almost $4 billion of premium income. These days, Lloyd’s calls everyone investors. The existence of these third-party investors, and the capacity they provide, is important to Lloyd’s, which wants to attract new third-party investors to the market.

To join Lloyd’s one must meet the membership and underwriting conditions and requirements, but they are written by Lloyd’s and are not particularly investor friendly. Lloyd’s published some new conditions recently, and now the Third Party Capital Group (TPCG), which was set up under the Lloyd’s Market Association Members’ Agents Committee, has suggested some improvements.

Originally members’ agents provided the security to syndicates by recruiting individuals into Lloyd’s. With corporate capital, members’ agents became less important, and only four survive. The TPCG members include members’ agents and members of the Association of Lloyd’s Members and High Premium Group.

While the TPCG and Lloyd’s agree on a number of points, the TPCG wants further clarification, and a small working party is proposed to discuss and implement the proposed changes. However, that’s not the end of the road. The proposed changes will need to be approved by the Council of Lloyd’s and the Prudential Regulation Authority, which regulates financial institutions.

Fallout from FCA’s BI case

The Financial  Conduct Authority’s case against insurers over claims of nonpayment for business interruption losses due to COVID-19 continues to send ripples of concern throughout the Lloyd’s market. Despite the High Court judgment in favor of the FCA, relatively few claims will be paid.

Insurer Allianz’s CEO John Dye reported that, while Allianz received a surge of claims after the Supreme Court’s decision, only a few were covered by insurance. Dye estimates Allianz received around 3,000 additional claims following the publication of the decision. Of these, about 100 provided cover.

Lloyd’s managing agent Hiscox, in its recent annual report, admitted it had put small business owners through anguish by failing to cover their COVID-19 losses. Hiscox’s policies were designed to cover losses from a firm having to close due to an outbreak of a disease that was contained locally. Coverage was not intended for an international pandemic. Hiscox said of its 34,000 policies in the U.K., only a third are eligible for BI losses due to COVID-19. Hiscox expects these losses to reach $443 million and hopes to pay all the losses by the first half of this year.

This whole mess has damaged the London market’s brand. Policyholders suffered uncertainty over cover, and there is still anger over their treatment and the refusal of insurers to pay claims. Insurers have countered by saying that a pandemic is beyond the ability of an insurance market to cover, and some sort of government scheme, similar to the various terrorist schemes around the world, is needed.

First version of CDR published

Lloyd’s Blueprint Two is the second part of the modernization of the market. Its aim is to improve operations, reduce the cost of doing business and deliver better service. It focuses on the two most common ways business is placed at Lloyd’s: open market and delegated authority. These two systems make up 80 percent of the premium and 90 percent of contracts placed at Lloyd’s. Improvement will benefit the whole market.

If Lloyd’s Blueprint Two program works, it will shift the market to a digital ecosystem, powered by data and technology. As we all know, every computer manufacturer and app inventor uses different program language. If Blueprint Two is going to work, Lloyd’s needs one system. Therefore, the key to Blueprint Two is to use global standards, and Lloyd’s is collaborating with ACORD to adopt the global standards already used in the London market and internationally. This needs one system of Core Data Records (CDR), and the first version was published recently. Lloyd’s will continue to explore opportunities for collaboration to simplify access and provide better solutions in the placement, claims and settlement journeys.

Lloyd’s is conducting a market-wide consultation to seek input and feedback on this first version of the CDR. This includes working with a beta group of brokers, insurers, market associations and placement providers. The beta group’s input will assist the development of the CDR through data validation and technology process testing.

Lloyd’s chose open market North American property as the initial scope for the simulation. Once this works, other classes of business will follow, and subsequently, delegated authority business.

Still no deal for London with EU

While the U.K./EU trade deal is up and running, admittedly with teething problems, the relationship between the U.K. and EU on insurance and reinsurance is no nearer a settlement. Financial services were omitted from the trade agreement because every EU state wanted to grab a piece of the U.K.’s financial services market. Previously, any U.K. Lloyd’s or U.K. registered insurer could trade in Europe. Not anymore.

During the trade negotiation, the U.K. offered the EU a deal which would enable EU customers and brokers access to London, provided the U.K. had the same arrangement with the EU. This was rejected by the EU.

London’s major organizations already have ensured their access to the EU by setting up EU subsidiaries. That’s fine for the bigger organizations, but smaller ones would find an EU subsidiary cost prohibitive. Any non-EU insurers based in London face this problem.

London is pushing for equivalence. EU regulations that the U.K. adopted include Solvency II. This means, if a U.K. reinsurer gains equivalence, an EU cedent is entitled to obtain credit for any reinsurance deal. Unfortunately, this issue was seized on by the politicians. While the U.K. granted extensive equivalence, the EU has been more restrictive.

At the moment, the U.K. allows EU insurers and reinsurers to operate as before. However, if the EU politicians start playing hardball, this could change, and that would affect the EU in two ways. The first is, if EU residents are barred from buying insurance from the U.K. directly, they would face a narrow choice of sellers, possibly less cover and probably higher premiums. The second is, if the U.K. closes, EU insurers and reinsurers would face being excluded from one of the most attractive insurance and reinsurance markets in the world. This probably explains why more than 1,500 EU-based financial and insurance service firms have applied to operate in the U.K.

Survey: Booze remains

In 2019, Lloyd’s introduced new rules following allegations of bullying and sexual harassment. Lloyd’s recently held a follow-up survey to trace the effect of these rules and check that the desired behavior changes were made.

Lloyd’s said this survey demonstrates that the actions being taken are delivering positive and measurable change, with improvements across all priority areas. Unfortunately, an internal survey seen by the U.K.’s Sunday Telegraph newspaper shows that 13 percent of respondents witnessed excessive alcohol consumption and 15 percent closed their eyes to inappropriate behavior. The good news is that these percentages are lower than previous years when nearly 24 percent of respondents reported seeing excessive alcohol consumption and 22 percent turned a blind eye.

At least, more people are willing to speak up about behavior in the market. The 45 percent, who said in 2019 they would raise concerns, has risen to 50 percent in 2020, while the percentages of those who felt they were listened to and taken seriously jumped from 41 percent in 2019 to 57 percent in 2020.

The second culture survey highlights notable progress in the experience of women working in the Lloyd’s market over the past 18 months. However, the survey shows a need for continued focus on wellbeing across the market.

The reason wellbeing is a concern is that, while fewer respondents said that working in their organization had a negative impact on their health and wellbeing (2020: 15 percent; 2019: 23 percent), there was no improvement in those who felt under excessive pressure to perform at work (2020: 40 percent; 2019: 40 percent). Nine in 10 respondents felt that their line manager had supported them throughout the coronavirus crisis.

The perceptions of those professionals in the market from Black and minority ethnic backgrounds showed that additional focus is needed to improve opportunities and experiences among these groups. They were less likely to raise concerns relating to discrimination, had a higher level of disagreement about whether their colleagues act in an honest and ethical way, and had a higher level of distrust in senior leaders. Lloyd’s will look at a way to create an environment free from injustice for Black and minority ethnic talent across the market.

Recognizing that cultural transformation takes time, Lloyd’s will rely on the continued support and guidance of Lloyd’s Culture Advisory Group.