Syndicate analysis: Admin costs falling but size still irrelevant in managing expenses at Lloyd’s
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Syndicate analysis: Admin costs falling but size still irrelevant in managing expenses at Lloyd’s

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When Lloyd’s launched a thematic review of syndicates’ administration costs in June 2019, it was adamant that there had been “no sign of reduction” in expenses in recent times.

Two years on from that announcement, there is now evidence that syndicates are becoming more adept at controlling their outgoings.

However, one of the fundamental planks of the Corporation’s thinking in this area – that there is little or no factual basis to the idea that larger syndicates can leverage economies of scale to manage down costs – still holds.

According to analysis performed by Insurance Insider on data for the 2020 financial year, there is still minimal correlation between a syndicate’s admin expenses and its size – here represented as gross written premium in a given year.

To illustrate: four of the 10 lowest admin expense ratios recorded in 2020 belonged to syndicates with annual gross written premium below the median figure for this cohort (£311mn).

However, a number of these top-performing syndicates – including Axa XL 2003, Hiscox 3624 and Cincinnati Global 318 – do not directly employ the staff who work on their affairs. These individuals are employees of separate service or management companies, with an element of their respective salaries recharged to the syndicate.

On the other hand, only one syndicate wrote more premium in 2020 than Brit 2987 – but 58 of the 74 syndicates analysed were able to post a lower admin expense ratio last year than Brit 2987’s ratio of 13.2%.

The findings of this analysis follow previous data work by Insurance Insider which showed that the size of a Lloyd’s syndicate by premium continues to have no influence on its underwriting performance.

Nonetheless, there has been a general move towards better cost control across the market.

In 2020, a quarter of syndicates recorded an admin expense ratio of 7% or better; four years earlier, the cut-off for the 25th percentile by this metric sat two percentage points higher.

In 2016, three quarters of syndicates posted admin expense ratios below 17%; by last year, the figure for the 75th percentile had fallen to 13%.

Overall, Lloyd’s own calculation of its market-wide admin expense ratio sat at 11.1% for the full year 2020. Through work in Blueprint Two and other modernisation efforts, the Corporation is hoping to bring admin expenses down lower to make the Lloyd’s market more competitive compared to other global hubs.

Of the 57 “mature” syndicates analysed – that is, syndicates with at least three years of trading history prior to 2016 – 41 improved their admin expense ratios over the five financial years to 2020.

The biggest improvement was recorded by Axa XL 2003, which had an admin expense ratio of 14.1% in 2016.

However, the majority of that positive movement came during the 2017 financial year. In that period, the syndicate’s admin expense ratio dropped significantly (to 4.5%) after the transfer of its staff into a newly formed group service company on 31 December 2016.

This service company recharges relevant expenses to Axa XL 2003 each year, but the syndicate remarked in its 2016 financial statements that “it is not possible to ascertain separately the element of the expense recharge that relates directly to staff costs or staff numbers”.

In contrast, MAP 2791 reduced its admin expense ratio by 10 percentage points during this period, while reporting that the number of individuals working on its affairs remained unchanged.

At 31 December 2016, it stated that an average 50 employees of its managing agent worked on the syndicate during that year. The figure disclosed for the 2020 financial year was identical.

At the opposite end of the spectrum, the biggest increase in admin expense ratio during this period was recorded by ERS 218, which jumped from a mark of 3.9% in 2016 to 11.6% in 2020.

The syndicate’s single largest year-on-year jump in this span came between 2016 (3.9%) and 2017 (9.4%), when admin expenses increased from £14.6mn to £30.5mn and net earned premium fell from £377.8mn to £323.5mn.

However, this movement was concurrent with a decrease in reported acquisition costs from £96.3mn to £78.6mn, meaning that the annual change in its overall expense ratio was less severe.

In total, 16 mature syndicates recorded a higher admin expense ratio in 2020 than they did in 2016 – but this group is a clear minority.

As our analysis shows, the majority of established syndicates have exerted better control of their expenses in recent years.

In the wake of their 2019 thematic review, this development will be an encouraging one for Lloyd’s – and a spur to greater action for those market participants who are still lagging on cost efficiency.

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