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8 September 2018 Insurance

Bloodshed at Lloyd’s

Lloyd’s of London is expected to force some syndicates to shed capacity and even close some entire lines of business in what many market participants view as the biggest and most fundamental restructuring the market has seen since the 1990s following the asbestos crisis.

But while Lloyd’s insists that the shakeup is much-needed and will leave the market in better health as a result, many also warn that the bloodshed will have major reverberations for the London Market.

Triggered partly by the heavy losses of 2017, Lloyd’s is conducting a profitability review of underperforming syndicates and lines of business. Depending on how deep Lloyd’s chooses to cut, this could have a major impact on other parts of the London Market and further afield.

Managing general agents (MGAs) are fearing disruption as their lifeblood is curtailed; and it will cause disruption in many other lines of business as syndicates retract their capacity from unprofitable areas.

Underwriters in unprofitable lines of business are fretting about their future—with good reason. The process is expected to leave an indelible mark in the London Market’s dynamics and available capacity in many areas.

“This is the biggest issue to hit Lloyd’s since reconstruction back in the 1990s,” says Charles Manchester, chairman of the Managing General Agents’ Association (MGAA) and chief executive officer of Manchester Underwriting Management.

The issue has also been raised in the commentary accompanying several company’s results. Alex Maloney, chief executive of Lancashire Group, said: “We are witnessing some of our competitors exiting unprofitable lines of business and Lloyd’s is also beginning to take action on underperforming syndicates and lines of business. Time will tell what impact this will have on the market.”

Robert Berkley, chief executive of WR Berkley, commented during his company’s Q2 earnings call, that, in relation to property business in particular it will be interesting to see if some of the commentary coming out of London will turn out to be just chatter and noise or whether that will convert into greater discipline, action and changed behaviour.

Lloyd’s is bleeding—again

Lloyd’s is naturally playing down the significance of what it plans. Jon Hancock, performance management director at Lloyd’s, told Intelligent Insurer that the review should be regarded as positive and even capable of helping drive innovation.

“As part of our risk-based oversight programme, Lloyd’s is taking positive action to ensure the market is able to deliver the required long-term sustainable profit,” says Hancock.

“The combination of improving long-term profitable performance and delivering innovative products and services to our customers more efficiently is at the heart of Lloyd’s strategy to ensure the market thrives and remains focused on the future.”

As might be expected for an institution that has been operating for more than 300 years, the market has endured its fair share of bumps in the road before. In fact, Lloyd’s logic is partly that acting now will ensure more stability in the future, Hancock suggested.

In the 1980s and 1990s large legal awards made in US courts on asbestos, pollution and health hazard claims, some dating back 40 years or more, resulted in huge losses to Lloyd’s members, some of which faced bankruptcy as a result.

The financial challenges faced by the market were compounded when, between 1987 and 1989, a series of gigantic oil, wind and fire claims, including the loss of the North Sea oil rig Piper Alpha, also hit Lloyd’s. Accumulated losses at the market between 1988 and 1992 were estimated at around £8 billion ($10.2 billion).

David Rowland, the first full-time remunerated chairman of Lloyd’s, initiated sweeping reforms in 1993 to save the market after the catastrophes that had threatened its complete collapse. These included the establishment in 1996 of Equitas, a special reinsurer into which all pre-1993 business would be transferred by a reinsurance-to-close deal—at a cost of over $21 billion.

There were losses for many members, but Lloyd’s survived. Rowland also instigated the arrival of corporate and institutional investors into the market, an important milestone, and restricted the financial obligations of ‘Names’.

Those were dramatic times for the market, but is history repeating itself in 2018? Not quite; in fact, the market, partly due to Rowland’s changes and other advancements over the years, remains in fairly rude health. But the significance of this review and its consequences, should not be understated.

“Everything is under the microscope because generally the margins on a lot of the books of business have been vastly reduced,” says John Warwick, managing director international property and weather reinsurance at ILS Capital Management and a London Market veteran, having worked for more than 10 years at QBE.

“We’ve already seen syndicates having cut out blocks of business in aviation, some liability classes, some marine.

“Looking at Lloyd’s syndicates individually, and looking at Lloyd’s syndicates by class of business, is slightly radical.” But he also notes that while he regards the actions being taken at Lloyd’s as radical, he also deems them necessary.

Action is needed - now

The severity of last year’s losses has clearly stirred Lloyd’s to shake up things in the market. In 2017, it posted its first aggregate pre-tax loss in six years as major claims more than doubled, causing an underwriting loss of £3.4 billion ($4.3 billion).

The 2017 losses were caused mainly by natural catastrophes in North America including the losses from hurricanes Harvey, Irma and Maria (HIM). But that came on top of years of very challenging market conditions, which have squeezed margins for some time as rates came under increasing pressure due to excess capacity in the market. As such, the review is not limited to syndicates affected by the 2017 catastrophes.

“The classes they are looking at very hard weren’t necessarily affected by the cats last year. Aviation and marine didn’t bear much losses from HIM last year,” Warwick says. “But people have been writing for premium rather than for profit.”

The profitability review will apply to all syndicates. Hancock will not reveal details of which companies are in the spotlight more than others but admits that their past performance will be an important element of its assessment.

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