Lloyd’s result not quite as good as predicted – here’s why

Lloyd’s stated year-on-year rate improvement not reflected in reported loss ratios.

In our forecast for the market issued before Lloyd’s results announcement, we believed that the market could deliver a combined ratio of sub-90 percent.

The mood music in the market suggested rating had improved sufficiently to absorb a run of catastrophe losses and still return a very favourable result, much like after the four hurricanes of 2004.

What transpired was a slightly worse reported market combined ratio of 91.9 percent and we want to understand the driver of this.

Lloyd’s publishes rate change information each year for the market as a whole. These are summarised in the following table:

Logic dictates that the benefit of these rating improvements over the last five years would manifest principally in attritional loss ratios, as these specifically exclude major and catastrophe claims. Lloyd’s stated attritional loss ratios are:

It appears that only around half the stated improvement in rate change manifests in attritional loss ratios.

One cause could be claims leakage from major claims events into attritional claims, e.g. hurricanes which carve a path through counties where Lloyd’s has a lot of property MGA relationships.

This could be indicative of the market’s significant shift towards MGA-type business acceptance, which may be deemed more diversified but turns out to be just as cat-exposed, notwithstanding an almost static reinsurance spend. This might also call into question the market’s definition of attritional claims.

Another reason could be that there remains significant churn of policies written in the market.

Rate change information is only captured on renewal business, not new business, and the latter rarely shows improved terms over the former.

Either way, the picture may perhaps not be as rosy as at first glance.

About the authors…

A co-founder of ICMR, Markus has spent 20 years in both insurance and capital markets. He is the former head of analysis at Lloyd’s, where he set up a market wide analytical performance and price monitoring framework. Markus was head of pricing at an ILS joint venture with Lehman Brothers and Vario Partners, structuring innovative risk transfer solutions into capital markets. Markus is an expert in modelling non-life insurance portfolios and probabilistic programming, and an Honorary Visiting Fellow at Bayes Business School, City, University of London.

A co-founder of ICMR, Quentin has over 30 years Lloyd’s and capital markets experience, including directorships of managing agencies and head of research at Lloyd’s where he co-authored Lloyd’s Performance Management template in the aftermath of Lloyd’s WTC losses of 2001, helping implement Lloyd’s capital modelling and risk management. Quentin co-founded an ILS joint venture with Lehman Brothers as well as co-founding Bermuda-based ILS firm, Vario Partners. He has worked in insurance private equity, in investment banking and in actuarial consulting.