Lloyd’s “walking a narrow tightrope” with Covid pricing opportunity

Hiscox’s Paul Lawrence has warned Lloyd’s must balance performance management with the opportunity to write business at increased pricing, while Willis Re’s James Kent believes “it would almost be a crime” for the best performing syndicates not to be able to take advantage.

The comments came during a state of the market interview with Willis Re global CEO Kent hosted by Hiscox London Market’s chief underwriting officer Lawrence.

In a sign of the market opportunity, Lloyd’s has stated that its syndicates have requested to write £11bn of new business next year, which is 60 percent more than in 2020.

Hiscox’s Lawrence cautioned that Lloyd’s is trying to improve underwriting performance at the same time as trying to capitalise on the post-pandemic boom.

“Lloyd’s are walking a really narrow tightrope,” he said. “On the one side, they are staring down the barrel of a fourth consecutive loss-making year, if you include Covid with rating agency pressure and well over half the syndicates performing at greater than 100 percent combined.

“And then on the other side, there is not allowing the market to capture the opportunity and being labelled as an entity that has in the past, missed hard markets.”

He added: “From our experience we are facing the headwinds of Lloyd’s when it comes to 2021 and we expect to have a relatively tough planning process.”

Lawrence noted that Bermuda gained a lot of ground on Lloyd’s following 9/11 in 2001 and Katrina, Rita and Wilma in 2005.

Willis Re’s Kent agreed there is a big opportunity for Lloyd’s at the moment.

“If you talk to the E&S brokers, the wholesalers, there is huge growth in demand and placement, and that fits very well with the Lloyd’s market,” he said. “But do I think £11bn gets approved? Irrespective of whether £11bn is the right number I think the performance improvement mantra that has come from the senior officers of Lloyd’s over the last two planning cycles is likely to be a sentiment that continues.”

“It would almost be a crime for the best performing syndicates not to be able to take advantage of that”

Willis Re’s James Kent on the hard market opportunity for Lloyd’s

Therefore, Lloyd’s will closely scrutinise how capacity will be used and how that will affect the market’s exposure. Kent said the progress Lloyd’s has made means it may be able to more quickly establish who are the optimal performers, however, but it will be a tough balancing act.

“The handcuffs can’t be too great because a company like Hiscox has the opportunity to trade in so many other segments outside Lloyd’s,” he said. “So if the handcuffs become too great you’re going to deploy capital elsewhere.”

He continued: “What I don’t think will happen is Lloyd’s moving away from that performance improvement goal that they do have. I do think there is an intent from John Neal and Bruce Carnegie-Brown to make Lloyd’s more relevant and part of that is supporting growth but it comes back to performance of those syndicates and individuals that are seeking to generate that new capital and put it to work.”

Kent agreed with Lawrence’s comment that Lloyd’s had lost ground in the past. But he said a difference this time around is Lloyd’s has Blueprint One in place.

“So Lloyd’s has already conducted its planning before Covid in terms of creating a decision-making framework,” he said. “And therefore I think it does allow Lloyd’s to move more quickly than perhaps in the situation in ‘01 and ‘05.”

Kent said that second quarter earnings calls made clear that (re)insurance CEOs believe market conditions are going to be better for the next 12 to 24 months than they were for the preceding 12 to 24 months.

“And it would almost be a crime for the best performing syndicates not to be able to take advantage of that,” he said.

Covid claims

Discussing the impact of Covid-19 on the market, Kent said that the eventual bill from the pandemic could be less than half of the high end of some early estimates of about $200bn.

“I think the view that it goes past $100bn diminishes by the day,” Kent said.

Willis Re’s analysis of public filings revealed that $17bn of losses have so far been reported. Kent said (re)insurers have taken contrasting attitudes on reserving, with some putting up very high incurred by not reported claims estimates and others so far announcing much lower figures.

The executive said that it will take a long time for the full effect of the pandemic to be known.

“There is going to be a lot of E&O losses to come out of this, potential D&O losses and many of these losses are not going to be known for many, many quarters yet,” Kent said.

Commenting on the recent June and July reinsurance renewals, Kent said that insurers with Florida risks saw price rises ranging “from mid-single digit all the way up to 40 percent or 50 percent, depending on the performance of that company and depending on the appetite [of] the reinsurers.”

Lawrence and Kent agreed that the rates have been mainly driven by loss creep from Hurricane Irma rather than a post-pandemic backlash. Kent said it would be wrong to say Covid-19 didn’t have an impact at all but it was not dominant.