Lloyd’s Reforms “Painful” but Delivery “Essential”, Says Berenberg

It’s going to be a “painful process”, but the specialist Lloyd’s of London insurance and reinsurance marketplace is finally starting to address its high expense issue and deteriorating profitability, reports Berenberg.

Source: Reinsurance News - Luke Gallin | Published on April 12, 2019

Lloyd's underwriting profit

Overall, Berenberg believes that the Lloyd’s and wider London market has finally started to reform, with initiatives underway across the marketplace to lower costs and improve profits after years of high expense ratios and declining underwriting profits, which ultimately became unsustainable.

“The London market finally seems to be committed to make the reforms necessary to tackle the operational and financial challenges it faces,” says Berenberg in a recent report, titled Insurance – A Brave New World.

The report highlights both the Performance Management Directive (PMD) and the Target Operating Model (TOM). The first is designed to address under-performance of irrational underwriting behaviour, while TOM, which includes things such as the electronic placement scheme PPL, has the potential to improve efficiency across the London market.

“These initiatives will prove challenging for some; however, delivery is essential to restore market profitability,” says Berenberg.

The implementation of the Lloyd’s performance review, which looks to tackle the performance of the worst performing Syndicates, led to improved results for the Lloyd’s market in 2018.

The marketplace then announced the introduction of risk-based oversight for underperforming syndicates as part of its ongoing performance review, all of which targets improved underwriting profitability.

The implementation of TOM is the London market’s attempt at improving the technological capabilities of Lloyd’s, increasing automation and making it a more efficient and simpler place to do business.

“Delivery on this is essential in order to cement Lloyd’s position as the international insurance hub,” warns Berenberg.

Another area of focus for Lloyd’s is costs, with the marketplace being a notoriously expensive place to do business. The market “clearly has a cost problem,” says Berenberg, noting that some have suggested that this is threatening its position as a leading, global hub for insurance and reinsurance business.

“Overall, we believe that significant changes are underway in the London market that will eventually – after several years and several business planning cycles – restore underwriting profitability to more acceptable levels,” says Berenberg.

The challenges facing the Lloyd’s and London market are vast, but if it’s going to improve its profitability and efficiency, at a time when other, emerging insurance and reinsurance hubs are starting to gain traction, performance measures, greater use of technology and an overall push to lower costs are all going to be essential moving forward.

John Neal, the Chief Executive Officer (CEO) of Lloyd’s, recently outlined a number of potential ideas for building a more efficient and successful insurance and reinsurance marketplace.