Lloyd's Market Experiences Measurable Performance Improvements

The Lloyd's market is experiencing marked improvements in its underlying performance while it continues to outperform the US and Bermudian reinsurance market and the four major European reinsurers in terms of loss experience, according to A.M. Best.

In a Best's Market Segment Report titled The Lloyd's Market Can Point to Measurable Improvements in Underlying Performance, Best notes that reinsurance is the Lloyd's market's largest segment, accounting for 33 percent of gross written premium in 2022. That reinsurance business includes property, casualty, and specialty reinsurance.

Lloyd's ranks seventh largest among global reinsurers in terms of reinsurance gross written premiums based on its 2022 writings and ranks fourth if life premiums are excluded, according to Best.

Best notes that while the Lloyd's portfolio is well diversified, there is some geographical bias toward North America and product bias toward commercial specialty lines.

The distribution of Lloyd's business is dominated by insurance brokers, the Best report says, particularly by the three largest global brokers. In addition, Lloyd's brokers play an active part in placing risks and providing access to regional markets, Best says.

"The Lloyd's distribution model is expensive, with business often passing through several distribution links before arriving at Lloyd's," the September 7, 2023, Best report says. "The market's reliance on brokers also makes it vulnerable to price-based competition."

The Best report suggests that overall, Lloyd's distribution model is seen placing the market at a competitive disadvantage compared to large global reinsurance groups, which enjoy stronger individual positions with brokers as well as being able to distribute some business directly to ceding companies.

Best notes that Lloyd's syndicates follow a robust market-wide capital setting regime. And Lloyd's financial flexibility is enhanced by the diversity of its capital providers, which include corporate and individual investors, Best says.

"Traditional Lloyd's businesses remain committed to the market," the Best report says. "In addition, Lloyd's continues to attract new investors, drawn by its capital efficient structure and global licenses."

The Best report notes that one of the goals of the market's Future at Lloyd's prospectus was to improve the ease of doing business at Lloyd's and, in particular, make it easier for capital to enter the marketplace. "This included reinventing the way that capital comes into the market and making it flexible to access a diverse set of insurance risks on the Lloyd's platforms," Best says.

Best points to Lloyd's sponsoring a new multi Insurance Special Purpose Vehicle (mISPV), London Bridge Risk PCC Ltd. (LB1), a protected cell company acting as a reinsurance risk transformation vehicle, onshore in the United Kingdom in 2021. The special purpose vehicle was intended to support the Lloyd's market and facilitate the participation of institutional investors in (re)insurance risk underwritten at Lloyd's, Best says. It has been used twice since its creation.

In 2022, Lloyd's sponsored a second transformation vehicle, London Bridge 2 PCC Ltd. (LB2), the Best report says. LB2 differed from LB1 in that it allows the issuance of both preference and/or debt securities to fund the reinsurance obligation of each cell, Best says. LB2 was used for the first time in February.

Best says that for several years the Lloyd's market's underwriting performance fell short of the rating agency's expectations, as seen in a 5-year combined ratio of 100 percent from 2018 to 2022 and a 10-year combined ratio of 98 percent from 2013 to 2022.

"However, remedial work undertaken by the market and robust performance oversight by the Corporation, as well as improving market conditions in more recent years have supported measurable improvements in underlying performance, with the accident year combined ratio (excluding major claims) falling in each year since 2017, the Best report says.

In 2022, the market's overall combined ratio fell to 91.9 percent from 93.5 percent the prior year, Best says.

Best suggests that the Lloyd's market's underwriting performance in 2022 compared favorably to that of the US and Bermudian reinsurance markets that reported a 92.9 percent combined ratio, as well as the four major European reinsurers (the Big Four) that posted a 99.7 percent combined ratio.

"In terms of loss experience, Lloyd's continues to outperform the US and Bermudian reinsurance market and the Big Four, as evidenced by its 5-year (2018–2022) weighted average loss ratio of 63.5 percent versus 67.3 percent for US and Bermuda and 70.1 percent for the Big Four," the Best report says.

Best notes that while Lloyd's expense ratio has consistently underperformed those of its peers, it has improved significantly in recent years.

The strong pricing environment has continued this year, which combined with an increased focus on underwriting discipline and risk selection by the Lloyd's market should support good performance in 2023, Best says. Still, rate increases are needed to offset the impact of claims inflation and the trend of higher catastrophe losses, the report says.

The Best report suggests that Lloyd's underwriting performance is subject to volatility due to the nature of the business the market underwrites. Major claims contributed 12.7 percent to the market's combined ratio in 2022, according to Best. Natural catastrophe losses included Hurricane Ian, Hurricane Fiona, and Australian floods.

Losses from the Russia-Ukraine conflict also had a material impact on the market's 2022 results, Best says. "There is significant uncertainty as to the magnitude of potential direct and second-order losses associated with the conflict, and as of year-end 2022, the incurred but not reported component represented more than 90 percent of the loss," the Best report says.