Lloyd’s: The realities of building a $100bn-premium market
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Lloyd’s: The realities of building a $100bn-premium market

John Neal’s expansion plan now has a five-year horizon, but deft execution will be needed.

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In February, we revealed CEO John Neal’s strategy to build a $100bn-premium Lloyd’s market. But what does the Corporation need to do to get there in practice?

The two-year plan involved a range of initiatives including attracting big underwriting franchises to Lloyd’s, hosting captives and encouraging innovation, as the Corporation itself moves to adopt the role of instigator and convener, rather than market policeman.

Four months on, that two-year strategy is understood to have expanded its timeline to a five-year project, as the Corporation and the marketplace works though the realities of taking the Lloyd’s marketplace into a new era.

An extensive canvass of underwriting and broking executives by Insurance Insider suggests that overall, the London market likes the ambition.

Many suggested that Lloyd’s will need to be proactive if it is not just to maintain, but to gain additional relevance in a world which is increasingly volatile – and rich with opportunity. For years, the Corporation has been on the defensive, rather than offensive.

However, there is still noticeable market scepticism on how Neal and the Corporation will achieve its $100bn goal. At the top of concerns are the optics of a punchy growth figure so late in an overextended cycle, and that the goal of reaching $100bn detracts resource and management attention from executing on the key Blueprint Two modernisation project.

Some are sceptical that major players will want to launch a Lloyd’s platform at all, with the benefits outweighed by the cost of operating at Lloyd’s and effective loss of control via the business planning process. Taking the UK’s heavy and often-inflexible regulatory regime, the uncertainty with a coming change in government and the overhang of Brexit into account, and it can be a tough sell for some.

Currently, the commercial and specialty (re)insurance market is estimated at around $1.4trn, of which Lloyd’s holds around a 5% share. There is certainly the ambition and headroom to grow. In 2023, it booked around $65bn of gross premium from around $300bn-$350bn of business flow.

Informed by sources, below is Insurance Insider’s assumption of how the Corporation could reach its $100bn goal in five years from a starting point of $65bn in 2023. We would stress that the numbers below are illustrative and could easily flex depending on under- or overachievement of targets, the rate environment and influences such as FX and inflation.

The move from a two- to a five-year timespan suggests the ambition from Lloyd’s has been tempered with a dose of realism – especially given that organic growth will likely represent a cornerstone of the expansion plan.

The key question going forward is now the execution, which will be a juggling act between multiple complex projects.

It is imperative that Blueprint Two work continues at pace in order for Lloyd’s to make this vision a reality. Recent delays have set the project back further, but the marketplace needs to show demonstrable results on bringing down expenses in the coming years.

Lloyd’s will also need a strong voice which resonates globally to bring new faces to 1 Lime Street and convene market powers for innovation and collaboration. To do that, the Corporation will need to show assured leadership, and nail the complex succession handover which is already in train with the chairman search.

All of this while maintaining robust underwriting performance in a waning cycle. Lloyd’s has previously stated its ambition to consistently generate a market combined ratio of 95% or under for the long-term, and that still stands.

Landing all of this work will be demanding. It is also not without risk – especially walking the line between growth and discipline at this point in the cycle.

Good and efficient execution will require both a deft hand from the Corporation in its hybrid role as regulator and facilitator, and a grown-up but open mindset from market incumbents as they assess the opportunity ahead of them.

But if Neal and the management team are indeed able to execute on this vision, the prize is potentially significant.

Virtually all executives spoken to by this publication applauded the idea of a bigger, more robust Lloyd’s market which competed strongly with other (re)insurance hubs, saw stronger inflows of business and was more effectively able to meet emerging risk opportunities with new products.

In this long-form article, we explore each of the components of the $100bn-premium plan and the opportunities and challenges which come with them.

Organic growth – walking the line 

One of the key criticisms of the Corporation has been that in the hardest phases of the most recent specialty cycle, the (arguably much needed) remedial work at Lloyd’s prevented the market from grabbing the opportunity, leading Lloyd’s to lose market share to other hubs.

Indeed, in the past five years, volume growth at Lloyd’s maxed out at 6% in 2021 even in what has been heralded as one of the best specialty pricing cycles of recent memory. It has since levelled out at 4%.

The projection of delivering ~$14bn-$18bn of premium via organic growth assumes a compound growth rate of between 4-5% over five years, taking rate and volume growth into account. The numbers in themselves do not blow the doors off – however, at this stage in an overextended cycle, it raises questions around cycle management.

The E&S boom which has fuelled the Lloyd’s market shows signs of continuing for now, though momentum appears to be slowing in pockets. And while the market still characterises current trading conditions as good, there are real concerns among market executives – brokers included – that the $100bn premium target will send the wrong message to incumbent players. Encouraging growth and more capacity at a time when a tipping point around demand and supply could be nearing is risky.

Many executives suggested that the $100bn premium target should have come with a condition of profitability – although it is worth noting that Lloyd’s maintains its long-term goal of a 95% combined ratio in any given year.

Historically, Lloyd’s has grown market share at the wrong time in the cycle, including but not limited to the most recent soft phase. Both underwriting and broking executives are keen for that behaviour not to continue. As we reported back in May, the warned-about “muscle memory” of chasing the market down is already starting to show in the London market, with pricing coming off faster than expected.

There is an argument that, after the performance work driven by the Corporation under Hancock and continued by chief of markets Patrick Tiernan, the marketplace is in a more grown-up place when it comes to discipline.

As the Corporation attempts to step away from being quite so heavy-handed in terms of performance management, this will be a fine line to tread – and requires incumbents to exercise their own discipline and resist cannibalising the market.

New entrants – Big Game Hunting and captives 

What we have previously coined “Big Game Hunting” relates to a key part of the Lloyd’s $100bn plan, which is the attraction of big insurance franchises to join Lloyd’s.

Neal and Tiernan are now taking a more proactive approach and engaging unsolicited with insurance groups that they feel should be part of the marketplace.

There have already been some successes, with Aviva having bought into Lloyd’s via Probitas, and Fidelis launching a syndicate to support the MGU with Names capacity.

Lloyd's new business hunt.png

Ultimately, big, established brand names are good for optics. And Lloyd’s believes that bringing these franchises inside the tent will draw new business to the marketplace and boost its relevancy globally.

For example – the presence of a major European player such as Allianz could theoretically go some way in attracting more continental European business to the Lloyd’s market, which is seen on the continent as a predominantly Anglo-Saxon trading hub. Lloyd’s is currently hugely underpenetrated in Europe despite its geographic proximity.

There are pockets of deep scepticism in the market over this prospect. There is a belief that bringing major global franchises into Lloyd’s will be extremely difficult to execute in practice. Aside from the cost and additional oversight that comes with a Lloyd’s platform, the stricter regulatory framework of the UK, coupled with the prospect of an unknown Labour government and the overhang of Brexit will put up barriers to entry that are difficult for the Corporation to dismantle.

Incumbent players in the Lloyd’s market can arguably be somewhat protectionist when it comes to letting new members into the club. That being said, waves of new entrants at Lloyd’s have not always brought success.

The cohort of new syndicates which launched in 2010-14 as the market softened was one of the reasons market-wide performance declined as capacity flooded into London. Inevitably, almost all players in that cohort have since been merged into another syndicate, or fell victim to what we termed the Great Lloyd’s Cull.

The targets in this new hoped-for wave of entrant are arguably a different breed – with existing track record in top-tier underwriting and brand power. As we have previously written, large launches to date have been targeted to solve a strategic problem or need – such as a vehicle to provide access to new forms of capital for an MGA, or to broaden licensing capabilities.

But the success of this initiative will depend very heavily on what kind of business these global players will bring to Lloyd’s – and this is the aspect that market incumbents are watching most carefully.

There is some market scepticism that genuinely new business will flow into Lloyd’s as the result of their presence, and there is widespread agreement among underwriting executives that using Lloyd’s to target the same wholesale and E&S business will only accelerate market softening (although brokers would argue that Lloyd’s already competes with these companies for business anyway).

Brokers also doubt that clients would be any more likely to want their business placed in Lloyd’s purely for the new brand names that operate there. For them, capital and product remain top priorities.

In addition, market incumbents questioned the willingness of these global players to bow to Lloyd’s as a regulator. Would they agree to the level of disclosure required by the Corporation, or even drop business a la Decile 10 if they were pushed to?

Sources noted that in the last remediation phase, many global companies with Lloyd’s syndicates decided to exit the market altogether (think AFG-Neon, The Hanover-Chaucer, Sompo-former Endurance syndicate).

After all, for major global players their Lloyd’s platform is likely to represent only a sliver of their portfolio – and there is a question over how invested these companies will be in the future of the Lloyd’s market when compared to a pure-play Lloyd’s managing agent.

There is a similar argument to be had for the captive initiative.

Google is certainly a major win for the relaunch of hosting captives at Lloyd’s, and its huge brand power will certainly work to put Lloyd’s and its risk transfer benefits on the map for the highest spheres of business.

How a captive syndicate operates at Lloyd’s-pg.png

In theory, hosting captives at Lloyd’s could bring more reinsurance to the market, as these vehicles seek their own protection. In addition, there is a school of thought that proximity to the Lloyd’s market via a hosted captive could throw off other business opportunities to the incumbent market – such as a slice of a D&O or property programme.

However, market participants are not convinced as to how much tangible benefit they will gain here.

Innovation and the challenge of regulation 

The global specialty market is facing a huge opportunity with the rapidly changing risk environment – and Lloyd’s wants to be front and centre of the push to address new customer needs.

Such is the opportunity that a number of executives questioned why Lloyd’s management had not made more of this growth driver in its messaging around the $100bn strategy.

Lloyd’s has a huge opportunity sitting in front of it in the form of products to support the transition to a greener society. However, to date, the London market has not fully realised this opportunity – as highlighted in the LMG’s London Matters report.

The Corporation of Lloyd’s has some track record of exercising convening power when it comes to addressing global issues which are bigger than it. A keen example is the Sustainable Markets Initiative task force, which commits to the provision of climate positive financing and risk management solutions to encourage businesses and individuals to transition to a sustainable future.

On an urgent-need basis, the market itself also has form in pulling together when it matters – such as the Black Sea grain facility, or the innovative marine insurance placement supporting a United Nations mission to prevent a disastrous oil spill off the coast of Yemen.

However, it has lacked somewhat in product innovation – and it remains a truth that brokers are often the ones to take it upon themselves to drive enhancements or new products.

The Corporation has recently increased its ICX innovation premium budget from 2% to 5% and introduced a new transition class (TCX) budget.

But it remains a reality that virtually no syndicate in the market took advantage of the ICX budget when it was at 2% – and it is not clear what an enhanced 5% would achieve.

Underwriting executives said that the double regulation of Lloyd’s and the PRA creates a mindset and resource burden which stymies and even dissuades real product innovation – that the fear of failing (and the consequences of that) means it is often easier to not try at all.

There are also structural challenges. First-mover advantages are limited, products can be copied, and making bets with limited data can lead to losses.

It is understood that the Corporation of Lloyd’s is in discussions with the UK regulators to try to remove duplication of oversight, and is also looking to streamline its own processes. However, there is still a residing sense in the market that this will not be enough to change a market mindset on innovation.

The presence of bigger global players could have pros and cons in the Lloyd’s innovation push.

Some sources suggested that the introduction of bigger global players could mean Lloyd’s as a market is slower to move to launch new products or facilities to address customer need – purely because of the layers of approval which will likely be required at global corporates.

Others have said the presence of these franchises – particularly those with large SME or personal lines arms – could have a better understanding of the end customer and could provide a fresh take on innovation with regards to customer experience.

They also acknowledged that access to bigger balance sheets would be needed to fully address the scale of the challenge in insuring the transition.

A new level of global relevance 

The prospect of a $100bn-premium Lloyd’s is an ambitious but exciting one, and if delivered to its full potential could see the London market as a whole propelled to a new level of global relevance.

However, the path to $100bn is laden with execution risk – and will require both discipline from the market and determined leadership from the Corporation.

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