No going back: Lloyd’s Turk vows no return to Decile 10

Enthusiasm for deploying capital through Lloyd’s is moving to a more substantive footing, with more deals emerging. But discipline and good business planning are now critical as rates soften in a “fragile” market, which must not be allowed to “return to the days of Decile 10”, Rachel Turk, chief of market performance, Lloyd’s, has vowed.

Key points:
Capital keen on Lloyd’s structures
‘Fragile’ market needs discipline
Delegated authority in spotlight

“There is a real high level of enthusiasm for Lloyd’s among capital providers; people interested in forming risk-taking vehicles at Lloyd’s. Many of those conversations started a few years ago, but are now substantive,” Turk told Monte Carlo Today. 

“Investors are clear on what they want to do. They understand London Bridge 2 and want to deploy capital at Lloyd’s, whether that’s through funds or some other capital transaction. Everything feels more tangible compared with last year.”

She notes that London Bridge 2 has now facilitated some 20 transactions. “So the concept really has been proven. It has been used in a variety of ways; the structure works, it is efficient. That has led to a high level of interest.”

The dilemma now is managing new investors and new business plans at a time when rates are softening. Turk does not believe the situation is critical – yet. “Yes, rates are softening, but we’re still in a rate-adequate environment across the majority of lines. We are risk-aware, not risk-off. It is a question of picking intelligently through the market. But our focus must be on rate adequacy and profits margins. There are still plenty of opportunities for smart underwriters but we also need to exercise caution.”

The good news is, however, Lloyd’s now has better tools to work in a constructive way with syndicates much earlier. That should mean there is, indeed, no need to ever repeat Decile 10, a market-wide initiative launched in 2018 to address poor underwriting performance. Syndicates were ordered to fix or exit the worst-performing 10% of their portfolios.

“We are now in a very different place with our oversight regime, which makes a huge difference,” she said. Since 2022, Lloyd’s has introduced principles-based oversight, which moves from prescriptive rules to a set of 13 ‘principles for doing business’. This provides an outcome-based approach to supervising managing agents and syndicates, something Turk says is a far better system.

“You’re able to differentiate between the quality of the businesses; there are those that have a demonstrable ability for portfolio optimisation. They can talk to us about rate adequacy, how they allocate capital between various lines. With those, I can be more hands-off. It’s not all about looking at a plan, it’s about looking at capabilities and their planning process.”

Businesses unable to demonstrate such capabilities will experience a different approach. “In those cases, the process becomes more intrusive and invasive. But we’ve shifted to much more continual performance oversight. That means we have a better sense of what businesses are trying to do, what their capabilities are, what capabilities they might be building.

“That is a big shift from what previous people in a similar role to mine had at the same point of market cycles. I feel I’ve got more tools, and more sophisticated tools, this time around.”

“There are still plenty of opportunities for smart underwriters but we also need to exercise caution.”

On describing the market as “fragile”, Turk explains that she is referring to its return on capital. Over the past seven years leading up to 2024, this has averaged 7.6%, a figure boosted by a stronger performance in 2023 and 2024. Turk believes a 7.6% return is not high enough for most investors, many of which expect double-digit returns.

“So when I say the market is fragile, I am talking about how the return on capital. It illustrates that we cannot let slip on discipline now. We can’t just accept a slow march down on rates. There’s plenty of opportunities for growth. But we cannot chase growth at all costs.”

No return to bad times

She says the key to this is discipline, which is ultimately what slipped to the point Decile 10 was necessary. She describes that period as a “really painful” one for the market and something “we never want to go back to”.

It is not just about rates. Discipline must also hold on terms and conditions. She notes that there is talk about aggregate covers in Monte Carlo this year, something Turk is sceptical on. “It feels like there could be an asymmetry of information. But you have to look at all parts of a structure. Attachment points, retentions; we must maintain discipline. If everything this year just renewed as it was last year, that  would be a good result. The market could really benefit from some genuine stability.”

Finally, Turk also has her sights set on the oversight of delegated underwriting authorities, which represent in some form some 40% of business in the market. She acknowledges that the term “delegated authorities” is a “very broad church” and includes consortia, single broker facilities, line slips, cross-class broker facilities and coverholders, all of which have different risk profiles. 

She describes the “flavour of the month” as index-based cross-class broker facilities, a market structure where brokers place a portfolio of diverse risks that are then structured and underwritten by a syndicate based on an external index. She believes this is a structural change rather than a cyclical trend. 

But she wants to ensure bad practice, and a lack of discipline, do not slip through the net. Her job is to ensure they are writing business at sustainable rates.

“We need to ensure everybody who are writing those facilities have lead capabilities, and that they’re able to have constructive conversations with brokers to manage their exposures,” she said. “That’s one of the things that I’m able to manage.” She warns that increased delegation can risk over-capacity and put downward pressure on rates.

Slew of capacity enters

The final point on her substantial to-do list is to keep a watchful eye on the cyber market. She describes this as a huge opportunity. But she also has concerns.

First, demand has not increased as quickly as anticipated by a slew of capacity that entered this space. “So you've got a supply-demand balance, which is driving down rates. Rates started at very high levels, but there is a large degree of uncertainty around cyber from a modelling perspective. That means a greater uncertainty margin needs to be factored in.”

Secondly, she argues the cyber market has not truly been tested yet. She describes CrowdStrike as a “lucky escape”. She added: “The watch for me is how will it actually respond to a big event.”

Finally, she regards systemic cyber as a concern, though also an opportunity. “This is an untapped market opportunity. I would love to see the market create a product that addresses systemic cyber rather than trying to exclude it. The challenge when we exclude things is that customers would like them covered. That’s where I’d like to see some genuine product innovation.”

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