Lloyd’s will close syndicates that can’t map route to profits: Hancock

Lloyd’s syndicates have just weeks to submit a business plan mapping a route to profits, and those that fail will be closed, Jon Hancock, performance management director of Lloyd’s, confirmed to Monte Carlo Today.

“If they cannot see a route to profit, we expect their backers to shut them down anyway; if they do not, we will step in and close them,” he said.

The Rendez-Vous has been awash with rumours of the possible implications of Hancock’s watershed profitability review. The consensus seems to be that a retraction of capacity from many lines of business is almost inevitable, with some commentators confident that as many as seven syndicates will be forced to close completely.

Hancock described such rumours as “complete falsehoods” insisting he will not be drawn on numbers. “We know which syndicates we are concerned about and, more importantly, they know that,” he said.

“But this is not about numbers or targets. It is about a process to move the market back to sustainable profitability. As for the rumours: it is because people care about the market.”

The profitability review follows the same timeline as the business planning process which the market goes through every year. Syndicates submit high-level plans in July, receive feedback from the market in August and develop more detailed business plans.

Some of these were submitted the week before Monte Carlo; others will be submitted in early October. The entire process should be completed by mid-November.

This year is different because Lloyd’s has requested a lot more detail from the syndicates—especially those losing money, which after 2017 was the majority. They are required to map a route to what Hancock calls “sustainable profitability” in the near term. Those that cannot do this will close—or be closed.

The process is, however, not black and white. Many judgement calls will be needed around what constitutes a route to profitability and even what level of profit will be acceptable, Hancock admitted, risking accusations of there being one rule for some and another for others in the market.

“Different syndicates are at different stages in their evolution and face different challenges,” he said. “Our desire is to make the right decisions for the market. We want a safe, sustainable, vibrant and innovative market, but to achieve all those things we need underwriting profits.

“We are not stipulating a combined ratio of X but we will want syndicates to be realistic. Maybe 99.9 percent is too high—but we can’t really demand a combined ratio in the 80s. It will be a negotiation.”

Hancock stressed that there is no target in terms of how big or small Lloyd’s should be but he admitted that, given the challenges, it is more likely to shrink, at least in the short term.

“Each business will make its own decisions, there are no prerequisites. Some syndicates are profitable and will enjoy growth.

“But overall, it is more likely to lead to a smaller market for now,” Hancock said.

Some have suggested that moves by many syndicates to diversify in recent years are one reason for Lloyd’s ailing profitability. Propelled largely by a changing regulatory landscape, syndicates have been driven to diversify—but not necessarily with the correct level of expertise.

Hancock partly agrees. “Generally, yes, many syndicates are more diversified than they used to be,” he said. “Any business needs to ensure it understands what it is doing. Sometimes diversity is good, sometimes not. We would encourage syndicates to look at the breadth of their portfolio and leave lines they cannot write successfully.”

The profitability review also asks syndicates to lower their expense ratios.

“We accept that overall costs of operating at Lloyd’s are around 40 percent and that is too high,” Hancock said. “The market is working on many initiatives to reduce these, but we expect every business plan to show an improvement in the expense ratio as well.

He also reiterated Lloyd’s commitment to exploring the use of the ILS markets as a way of reducing costs. He said an internal programme is ongoing designed to establish whether there was a more efficient way of managing the central fund.

“We want an environment where the market is leveraging all forms of capital,” he said.

Hancock believes that the process—and its subsequent fallout—will have the potential to move some parts of the wider market. He noted that where Lloyd’s is extremely influential in certain speciality lines there will likely be a knock-on effect.