Lloyd’s takes stronger stance on expenses for 2020 business planning

Lloyd’s will move from “encouraging” to “demanding” to see more progress on expense ratio reduction during the 2020 business planning process, performance management director Jon Hancock has said.

In an interview with The Insurance Insider, Hancock said as with last year, any business plans which do not include expense ratio improvement will be sent back.

Last year the Corporation was “moderately successful” in pushing syndicates to reduce expenses, but there were exceptions due to some syndicates having to meaningfully cut premium to improve their underwriting, which would have negatively impacted the expense ratio.

“We have to take a balanced approach – last year was very much about improving the underwriting performance but it cannot all be expected to be done in one go,” Hancock said.

“If the cost of that is to say, in the short term my expense ratio goes up because I have to fight hard for underwriting discipline to improve, that’s a good thing. But ultimately, there are about two-thirds of syndicates in Lloyd’s which run an above [the Lloyd’s market] average expense ratio.”

The drive to reduce expenses is a “principle not a rule” and the performance management directorate (PMD) will not enforce set targets on expense ratio reduction, as every syndicate is different, Hancock explained.

He noted that there were some syndicates in Lloyd’s which had “super competitive” expense ratios and it would be foolish to expect them to cut those even further.

In 2018, the Lloyd’s market ran an expense ratio of 39.2 percent, a 0.3-point improvement year on year. 

Looking to H1 results, which are published on 18 September, Hancock said the numbers should show “demonstrable” improvement as a result of the actions the market has taken to remediate underwriting profitability.

“I think you will see really good progress,” he said. “But I also think you will see there is still a long way to go.”

Lloyd’s PMD has moved to a continuous form of performance management throughout the year, but Hancock said he didn’t want to “overburden or over-monitor” the market.

The Lloyd’s portfolio review, which last year identified the eight worst-performing classes at Lloyd’s, has been dropped. Hancock said the method had created “the wrong focus” and disruption, which the Corporation didn’t want for the market.

“I don’t believe there is a bad class of business, but there are better or worse ways of pricing and selecting risk,” he said. “Therefore, let’s treat the market like that, let’s make sure everybody is qualified and skilled to write what they do.

Lloyd’s is continuing with its decile approach, which segments each individual syndicate’s portfolio by performance and acknowledges each business’ strength and weaknesses.

“We are aspiring for a world-class underwriting performance, and you don’t just do that by cutting the bad business,” said Hancock. “We also do it by growing the best-performing classes and recognising new opportunities and products. That’s got to be really personal to each underwriting firm.”

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