Aon recently released its report titled ‘Lloyd’s Update – Redefining the Future’, which highlights that the UK institution is at a pivotal moment in its evolution.
The ‘Future at Lloyd’s’ initiative launched by Lloyd’s CEO John Neal may result in the biggest changes in the market since the Reconstruction and Renewal process of the mid-1990s, said Aon. Potential outcomes include separate placement methods for complex and standardised risk, easier entry to the market for high-performing innovative businesses, more flexibility in the way that capital participates, a next-generation claims service and the creation of an ‘ecosystem’ of data and services.
Aon head of market analysis and author of the report Mike Van Slooten said, “Lloyd’s has had a challenging few years, but I think John Neal is now building real consensus for change. Lloyd’s retains core strengths, but it is increasingly recognised that structural issues must now be addressed to allow them to come to the fore in today’s global marketplace. The key to success is bringing costs down. Technology can be an enabler in that area, but ultimately people and behaviours drive progress, and that is why the inclusive approach offers the best chance of success.”
Back to profit in 2019
Much of the impetus for change stems from weak underlying operating performance. In particular, Lloyd’s is intent on making inroads into the market’s expense ratio, which has averaged around 40% over the last five years, a significant disadvantage relative to its comparator group.
Management expects the remediation plans now in place to bring the market back to profit in 2019, allowing for major losses equivalent to 9% of net premium earned.
Greater differentiation is being seen in Lloyd’s treatment of syndicates. Top-quartile performers now benefit from a ‘light touch’ regime, while loss-making businesses remain under pressure and subject to constraints. This has translated into in-market consolidation, which is expected to continue.
Lloyd’s had no issues recapitalising after recent major losses and the Central Fund was not impacted by these events, said the Aon report. Higher capital requirements and restrictions on the use of letters of credit are reducing capital efficiency, but the market’s partially mutualised structure continues to convey advantages.
The likelihood of a ‘no-deal’ Brexit on 31 October 2019 has increased. Lloyd’s Brussels has been formed to ensure that customers across Europe can continue to access the market’s underwriting expertise and financial security, whatever the eventual outcome of the political process. M