To lead, or to follow: that is the question!

Successful follow-only strategies can create more value than those of traditional leadership roles.

Markus Gesmann and Quentin Moore – Lloyd's

For many years, the traditional view of value creation in underwriting has involved securing leadership positions on preferred business.

The unarguable logic is that how else can pricing, terms and conditions or claims be monitored and controlled successfully without being a leader?

This same logic led to the rapid evolution of Lloyd’s from an exclusively agency market in the early 1990s to the predominantly verticalised underwriting and capital market it is today.

If capital directly employs and controls underwriters who directly control terms and pricing, then a virtuous loop is created for capital investors.

The logic is obvious, but it isn’t strictly true in practice.

“There is much circumstantial evidence that illustrates how successful some companies which specialise in following specific leaders have been over many years”

The early years of verticalisation saw many of the same bad underwriting habits continue, leading to the failure of many companies, while the needs of cycle management has led many underwriters to move back to agency arrangements once more. Plus ça change!

There is much circumstantial evidence that illustrates how successful some companies which specialise in following specific leaders have been over many years.

Unfortunately, there is no public domain database to interrogate about who leads and who follows.

But this precise point can be proven by induction using public domain information from listed global (re)insurance companies, specifically the constituent companies of the RISX equity index.


This index was established as an “as if” equity proxy for the Lloyd’s market, based on the global (re)insurers that Lloyd’s has admitted to trade there.

The first essential question for any successful following market to pose is about whether certain leaders are consistently good, or consistently bad.

This is where the analysis of relative performance becomes so powerful.

The following table shows just how consistent these 40+ companies’ relative (not absolute) performance has been over the past 15 years:

Transition frequency table

Taking this knowledge into consideration, the next question to ask is how to tell if one is not “buying in” to an outperformer at too high a price (the equivalent of following a leader downhill).

Again, relative performance analysis is crucial to answer this question, but now overlaying the pure relative performance with actual relative pricing.

Here we use trailing price-to-book multiples of each company’s shareholders’ equity.

This clearly points not only to where superior performance can be followed, but also crucially when to follow:

Identifying opportunities

Combining these two analytical concepts creates an algorithmic smart follow (or smart beta) strategy.

As can be seen from the following chart, applying such a simple approach can generate intrinsically superior returns, as well as lower volatility:

Cumulative returns: RISX Index vs Smart Follow strategy

The key point is that inherently superior returns, and therefore value, can be derived from simple follow only strategies, potentially even superior to some leaders’ strategies.

However, the most essential part is understanding the data and asking the right questions to inform strategic decision making.

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.