Bullish Lloyd’s expects to be in the top quartile – Tiernan

Lloyd’s is bullish on current underwriting fundamentals despite critical volatility challenges, according to a speech made by Patrick Tiernan, chief of markets, Lloyd’s at a Fitch Ratings event.

Outlining “ambitious but achievable plans”, Tiernan (pictured) said Lloyd’s “now delivers top quartile returns for risk takers consistently”.

He said “combined ratios comfortably sat at 95%” is what the market is striving for.

“The past three years demonstrate the strength and resilience of the Lloyds market, and the renewed primacy of underwriting with GWP be expected to grow by north of 60% from 2020 through to the bottom in 2024,” Tiernan said.

“We will be disappointed that we’re not in the top quartile,” he said, referring to the market’s upcoming results statement.

“The H1 [2023] numbers have the combined ratio at 85.3%. The second half of the year for us has not thrown up a lot of curveballs,” he added.

Tiernan acknowledged that “we operate in a world of elevated risk” and that uncertainty that continues to cloud the underwriting outlook across classes of business, despite recent gains.

However, there had been “compounding rate improvements in critical areas of the portfolio”, said Tiernan.

He emphasised “continued discipline that we’re seeing across the market” and “a determined push for raise adequacy”.

Portfolio shift

Across its syndicates, the aggregate portfolio has shifted in recent years, particularly from a major loss perspective, Tiernan noted.

“Understanding that shape is critical to understanding what’s coming out of Lloyd’s in the next couple of years…Longtail business in Lloyds over the last 10 years has grown from 29% of the portfolio to 40% of the portfolio,” he said.

Much of this is intangible and liability risk, Tiernan noted.

“That matches the underlying risks and the balance sheets of the customers and the companies that we insure and reinsure,” he said.

In geographic terms, the market continues to focus on the Anglosphere.

“In terms of where this growth over the last couple years is coming from, it’s very dominated by North America, and the US in particular. In 2023, the US, Canada and Australia will again be our three largest markets in that order,” Tiernan said.

“However, the Lloyd’s international platform, the platform’ we have in Singapore, in Europe, and around the world, are an increasingly important part of the syndicates’ ambitions,” he added.

The market’s five peak catastrophe perils remain familiar: US wind; American earthquake; Japanese earthquake; Japanese wind; and European wind.

However, the bottom of those five – Japanese wind – is fast being caught up in materiality by a number of other emerging perils, which have risen to prominence in underwriting books in recent years.

These include US wildfire, US inland flood, US severe convective storm and New Zealand earthquake, Tiernan revealed.

“We’ve got to ensure that we’re on the front foot, we’re considering the approach to collecting these perils separately, and therefore, increasing our oversight requirements to write risk in these areas,” he said.

“This is so we don’t have aggregates that we’re now not on top of. I think we’re going to hear an awful lot more about these. It’s a big problem. People call them secondly, perils, but we don’t think there’s any such thing,” he added.

A quiet revolution

Under the hood, Lloyd’s is engaged on several avenues of internal reform and innovation, he suggested, with a focus on analytics, including sharing “a quarterly rhythm” of forward-looking data insights.

“At Lloyds, the way we think about volatility from an underwriting perspective is we try to use that vantage point…to try and look around the corner and see what’s coming,” he said.

“I’ve got a I’ve got a hunch that there’s a quiet revolution going on in the corporation, that’s been going on over the last five years. I think this may prove to be some of the most meaningful changes for the market in that time,” added Tiernan.

Focus has been not just on data relating to natural catastrophe risks, but also war risk and geopolitical threats, such as the effect of sanctions on supply chains – namechecking the risk of a crisis with China over Taiwan.

“I believe that due to external factors, the 2024 is going to be a continuation of the current super-cycle and not another sort of recoil back to a predictable triennial cycle that we’ve seen before,” he said.

2024 cyber strategy

This year will be the year for “executing our cyber market management strategy”, Tiernan explained.

“Our focus is to ensure that we maintain our position as the leading cyber market in the world, but do so in a way that maintains profitability, and allows us to comfortably provide the platform for the market to grow in the way it needs to,” he said.

There are four pillars to this Lloyd’s strategy for cyber insurance business, Tiernan explained.

The first of these is “assessing underwriters capability”, aimed at “ensuring that the underwriting pen…is with the tools and expertise to do this best”, he explained.

This is followed, second and thirdly, by “Understanding exposure wordings, and event definitions,” he explained, aimed at defining cat events and building resilience.

“This is critical to taking meaningful steps to developing probabilistic models for cyber, which is what we really need, in our view,” Tiernan said.

Lastly, developing better data and management information (MI), “to remain on the front foot and be that leader in global cyber risk taking”.

He added: “We think getting this right will give us the conviction we need to grasp the new opportunities by creating demand and attracting the capital that is required to bridge the yawning protection gap when it comes to cyber, with still very low penetration around the world.”