Probability of success at Lloyd’s

ICMR’s Markus Gesmann and Quentin Moore examine how follow-only strategies can model data to improve outcomes

With the publication of syndicates’ 2023 financial statements, and ICMR's retrieval of gross underwriting class-of-business performance data, the attention of many follow-only propositions has turned to parameterising their underwriting models.

These will use historical performance data to form a view on which syndicates and which classes to follow for their business plans.

But the most important question is, how?

As we showed in our recent joint report with the LMA a range of highly volatile deterministic history doesn't easily lend itself to reliable extrapolation, as the following example for the direct specialty segment of Lloyd’s syndicates shows:

How to turn this messy but empirical fact into prospective probability of outperformance?

The answer will be beamed to us through our screens this summer from the Paris Olympics.

Using the latest sports modelling techniques, where RELATIVE outcome is a much more reliable indicator of form than ABSOLUTE times, we find the same attributes apply to portfolios of (re)insurance risk.

This isn't surprising as most portfolios have fairly stable books of renewal business and consistent management.

Whether major claims events occur or not will naturally affect everyone's profitability, but not necessarily everyone's relative performance – a bit like athletes who target doing enough to qualify from heats into the final.

Applying these principles using probabilistic programming reveals distributions of how likely it is that a given class of business within a given syndicate will outperform the Lloyd's market as a whole.

The following chart gives an illustration for three syndicates and the lines of business they write.

Feeding this information into follow-only models, along with correlation across syndicates, can help develop more successful strategies, as well as give insight into when, perhaps, to slow up premium growth, for those targeting the gold medal.