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Sep 24, 2023

Lloyd's Market Message - Q3

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Patrick Tiernan recently presented his Q3 2023 Market Message to managing agents at Lloyd's providing his guidance on what Lloyd's expects of syndicates in the upcoming 2024 business planning period. The video recording is available here on Youtube. (It does contain advertisements unfortunately.) A summary of the points made that seem most relevant to Hampden clients, as follows:-

1. Performance

Lloyd's HY-2023 results with a 85.2% combined ratio demonstrates Lloyd's is building resilience, according to Patrick, as rate improvements are giving the market sustainable underlying profitable performance. The drive for rate adequacy (particularly seen in property) continues to be needed to cover increasing exposure values, changes in demographics. The first half of 2023 has not experienced much impact from the weather events so far.

Key areas for improvement are:

  • Casualty and in particular US General Liability ("GL") where rates are not keeping up with inflation despite the continuing deterioration of the 2014-2018 Years of Account. Syndicates need to be ready to cope with rising casualty reinsurance costs. The property insurance market anticipated much more costly renewals last year and managed to cope successfully.
  • Some specialty classes (excluding aviation) where rates have responded to losses but not taken into account macro factors. In the political violence, strikes, riots and civil commotion classes, last year many syndicates did not apparently reflect tightening reinsurance coverages and prices. Lloyd's will not tolerate syndicates ignoring this mismatch in their 2024 plans.
  • D&O was singled out as seeing "irrational underwriting behaviours" driving a "shambolic" market. Some "moronic" approaches in parts of the market! In June Patrick's department saw rate reductions of 20%, increased line sizes, widening coverage, with these trends visible in both US and non-US areas.

2. Volatility

The dangers for underwriters to focus on according to Patrick are:

  • Natural catastrophe losses: Insured losses are increasing and will continue to do so. Slide 7 of his presentation (available in the Youtube video) showed a rising trend line from 2004 to 2022 for worldwide catastrophe events. The upward pressure on insured losses is derived from:
    • increasing insured values,
    • increase of these values in high hazard locations,
    • claims inflation.

These factors are in addition to climate change which will "amplify the increases in claims that we have already seen." Whilst the science is clear on the effects of climate change on sea surface temperatures and wildfires, it is not so clear on events such as severe convective storms, hail, tornado.

Rating/pricing needs to reflect past loss experience and also the uncertainties inherent in forecasting the future claims environment. Lloyd's will increase the number of peak perils examined (US wind and quake, Japanese wind and quake, northern european wind) as they are material to the market and as there has been a 42% increase in losses from non peak perils at the 1 in 250 return period since 2017. US inland flood, US severe convective storms, US wildfires and NZ earthquake, for example to be added.

  • Non-natural catastrophe losses or man-made catastrophe losses e.g., Covid and war, have demonstrated a concerning upwards trend and so Lloyd's wants to get ahead of the issues and obtain from syndicates their potential exposure to three Taiwan Straits war scenarios and three cyber loss scenarios.

3. Opportunity

Patrick and Dawn Miller then set out what Lloyd's offers managing agents to facilitate their commercial strategy and for Lloyd's to be their strategically essential market. Whilst, Lloyd's is not focused on growth for growth's sake, Lloyd's wants to enable the great businesses of the market to be able to out-manoeuvre and to out-perform. The market is operating in some of the most attractive underwriting conditions in a generation and wants the businesses and capital to take advantage.

Dawn Miller, Lloyd's Commercial Director, said that at c.US$70bn of gross written insurance premium, Lloyd's is the largest global provider of commercial insurance. Lloyd's intends its network of worldwide licenses to rival all other markets so that more multi-national business can be written at Lloyd's.