Lloyd’s expects rate to be primary driver of 2021 growth

The Lloyd’s insurance and reinsurance market is expecting hardening market conditions to enable its syndicates to grow largely through achieving better rates, with many not expected to assume greater exposures according to plans, CEO John Neal said today.

In a sign of the continued underwriters market, this suggests that prudent players will be able to create much more performant portfolios of insurance and reinsurance risk for 2021, something that applies equally to the traditional side, including Lloyd’s, as well as to the insurance-linked securities (ILS) fund market.

Neal’s comments today suggest a Lloyd’s marketplace where it is now expected that participants should take advantage of growth opportunities presented by rate increases, but definitely not at the expense of quality.

After all of the performance management work Lloyd’s has undertaken, there is a clear desire not to let the market conditions carry any participants away and Lloyd’s is cracking down on the under-performers still.

Importantly, Neal is focused on sustainable profits, saying today that, “We have to future proof the Lloyd’s marketplace. Not to produce a satisfactory return in 2021, but to produce a sustainable long-term profitable path for the benefit of all market constituents.

“If we do that well, then we know that rating agencies will be satisfied, our regulators will be satisfied, frankly, so will our customers who want to be part of a marketplace that’s successful and profitable.”

Performance management is going to be an ongoing process at Lloyd’s Neal said, explaining that, “The performance actions must continue, in fact they must continue forever. It’s an every year process, as far as we’re concerned.”

The focus will be on profit over growth, Neal said, although growth is targeted for 2021, some 6% plan for plan, or nearer 13% across the market Neal said, but this growth is not being targeted by growing the market’s exposure, it’s all expected to come from rate.

“Whilst the rating environment is supportive and market conditions are favourable, it doesn’t give rise to exponential growth. We’ll support the right growth for the right risk at the right price,” Neal continued.

Adding that, “Our ultimate goal is to achieve sustainable, long-term profitability at Lloyds.”

In a sign of the opportunity current market conditions are set to provide good underwriters, Neal said that Lloyd’s will be expecting “growth driven predominantly by rate momentum” with exposure growth only set to be seen among the higher performing syndicates in the marketplace.

In fact, the Lloyd’s syndicates that have demonstrated the best performance and the least need for added oversight, or “light touch” syndicates as Neal calls them, will be allowed to grow a little bit more with exposure, than with rate, in 2021.

While regular, or the mid-tier of syndicates will be expected to derive around 72% of their 2021 growth through rates, but the lowest or “high touch” tier of poorer performing syndicates at Lloyd’s will actually be expected to shrink their exposure and only grow thanks to rate.

This tiering of syndicates at Lloyd’s is a further repositioning of some capital in the market as no more than following really, as the lowest performers will not be able to proactively grasp new opportunities in the same way as the highest performing tier.

How this plays out over the coming years will be fascinating, as the lowest performers may not have all that much life left in them, especially if their capital providers identify better opportunities that offer them a higher return, from a similar insurance and reinsurance market exposure.

Could this all lead to a further shrinking in the number of truly active underwriting shops active in the Lloyd’s market, while more capital becomes following or actually exits in year’s to come?

It’s entirely possible and what really needs to happen is a concerted effort to offer new opportunities to source risk-linked returns for this capital, plus the market and participants needs to dramatically lower costs and expenses to make operating at Lloyd’s more cost-effective and give some lower-performers a greater chance to survive over the longer-term.

With Lloyd’s set to introduce its own insurance-linked securities (ILS) structure, to enable third-party capital to connect with participants and risks in the market more easily, it will have to balance the prioritisation of such initiatives with the need to enhance the efficiency of operating in the market for incumbents, without snubbing the nose of capital that is already active there but perhaps locked into some of the lesser performing syndicates.