Over the last couple of years, a series of Lloyd’s syndicates has cut back or exited treaty lines, leading this publication to describe the Corporation as being a “fading star” in reinsurance.
At the same time, the market – having cut back its peak cat exposure – was able to come through 2022/23 in a strong position.
CEO John Neal believes Lloyd’s should have a bigger market share in reinsurance, even if it remains a small player. Key to this growth, he told Insurance Insider, will be simplifying and unifying its offer to buyers.
What role do you think reinsurance can play in Lloyd’s ambition to become a $100bn premium market?
Lloyd's isn't a reinsurance marketplace anymore, it's an insurance marketplace.
And I think it always will be an insurance marketplace. But there is a space for reinsurance for sure.
We've certainly got the capacity and risk appetite to accept more reinsurance. What it might mean is we need to think slightly differently about the way in which risk is syndicated as opposed to being subscribed.
It's too hard for the buyer of reinsurance to think they might want to deal with 30 different markets with 30 different wordings and 30 different terms and conditions. If we are going to present a value proposition, we've got to do it in conjunction with two or three of the leaders who have a leg inside Lloyd’s and outside the Lloyd’s market, and with the largest reinsurance brokers and say: “Well, can we syndicate a value of a line at Lloyd’s that makes sense?”
Does this mean more consortia?
Yeah. You've got to get some commonality around if it's a Lloyd’s line. Then it's got to be a Lloyd’s line, and it's got to be on a Lloyd’s wording.
To me, it feels inevitable that the world will move away from subscription to syndication. If you look at our market versus financial services, financial services is all syndicated, it's all consistent. The wordings are all the same.
If you look at property cat reinsurance, there are infinite wordings. Over quite a short period of time – the next three to five years – as we look at syndication, there'll be a lot more consistency around coverage policy, wordings and intent.
Going back to your comment that we're primarily an insurance marketplace, but there's always a role for reinsurance. What do you think that role is at Lloyd’s?
It's always going to be our bailiwick to provide insurance cover. We’re +10% in the reinsurance space today [setting aside facultative reinsurance, which is insurance by another name].
We could be 15%-20%, so we could be 50%-100% larger in the reinsurance space if we get that value proposition right. But I don't think we're any bigger than that. I don't think we're going to be a global reinsurer.
Is the timing going to make it harder to find those opportunities in reinsurance now, a couple of years into the hard market?
No, not really... the reinsurance market has been slower to the party than I thought it would have been. But it is showing good discipline.
Does Lloyd’s have room to start growing again in property cat risk?
When we looked at [the five peak perils] exposures in 2018, they were way above where they should have been at Lloyd’s, in my view. So we said no, we've got to get the framework and discipline right and understand what level of exposure we're prepared to take.
Today, we are well within our risk appetite for those peak exposures, so there is the capacity to support some growth. The market is not constrained by Lloyd’s, not at all.
We've certainly got capacity to take on more reinsurance risk and more nat cat perils, and no qualms about doing so, but it needs to be for the right people. They've got to be able to demonstrate a consistent track record of good performance. They've got to be able to demonstrate their ability to understand and measure their own risk exposure well. And they've got to demonstrate that they've got a franchise the market would be attracted by. They've got to have all the ticks in the boxes you'd expect to them to have.
You alluded to walking the line between growth and discipline. How well do you think Lloyd's syndicates can keep that up as the market transitions?
We put the hard yards into performance management, performance expectations and the frameworks [to oversee this]. Educationally, the industry’s in a much smarter place than it was seven to eight years ago. Therefore, I don't think we need to put ourselves in the penalty box again on performance.
When you see our half-year results, we're still looking at price increases through the first half of this year. There is no price reduction. Prices do still need to go up, particularly in a world where people are looking at inflation.
On a related point, I think it's really important from an investment perspective because you've not got this flood of capital coming into insurance at the moment, at a point when you would have thought it would. That's because we've not performed well for long enough.
We've got to demonstrate to investors that the good performance they're seeing at the moment is not a flash in the pan, that it is sustainable. When we do that and we put another year or two behind us, then you'll see genuine long-term capital expressing interest in the industry.
Where do you see growth opportunities for the market?
We're trying to promote innovation. We've got ICX and TCX, being the innovation class and the transition class around climate [which allows syndicates to write 5% additional business in these areas].
The climate transition and the opportunity it creates is the best opportunity the insurance industry has ever seen. In a world that's perceived to be riskier – whether that's the financial issues of interest rates and inflation, whether that's systemic exposure, whether that's climate related or just organic risk – we're seeing insurance penetration grow at twice the rate of GDP. I've never seen that before.
But, if you look at a riskier world, the big challenge for the insurance industry is to be better connected with the end customer. What are the risks that are troubling them? What are the solutions [they’re] actually looking for? And how can we help?
Lloyd’s is remarkably well set up for that because, if you look at the different capital constructions that exist... the different capabilities... [there is a lot on offer]. Lloyd's value proposition in this world of higher risk goes up, not down.