Briefing: Higher Lloyd’s profits cannot mask scale of challenge

Briefing by Saxon East 

The headline story is pleasing enough. Lloyd’s profits up to £2.3bn, a vast improvement from the £600m at the half year in 2018.

But scratch the surface, and today’s half-year report reveals the scale of the challenge ahead.

First the positives. Encouragement can be taken from the improved expense ratio, from 38.1% compared to 39.3%.

If Lloyd’s can push more business through electronic platforms, a big ’if’ considering the cultural resistance that brokers have shown in the past, then the expense ratio will drop further.

Underlying premium dropped 6.5% showing syndicates are shedding the worse parts of the book amid Lloyd’s pressure.

Underwriting work needed 

Now to the outstanding challenges. The accident year loss ratio barely improved 99.2% (H1 2018: 99.3%).

The property line, experiencing lower cat loss, was the only sector to experience an accident year below 100%.

These margins are too thin to absorb losses in the event of a major catastrophe season. 

It is clear there is still much work to do in improving underwriting performance, and perhaps for all the talk of Jon Hancock’s crackdown on under-performing business being tough, maybe he needs to press syndicates even harder.

Then there is the big elephant in the room of the major brokers.

Big broker question 

Acquisition costs have risen steadily over the last 15 years.

The big brokers argue they deserve this because they do more in serving their clients than 20 years ago.

Those arguments aside, many secretly hoped the FCA would do the hard work with its London Market thematic review, yet the regulator has pretty much given the London brokers a clean bill of health.

Lloyd’s is absolutely right to push for a lower cost and more efficient way of transacting business as part of the solution.

It is also on the right track in paving the way for more competing capital to flush into the market as part of its six-point plan. 

But how does the market address the need for greater broking competition? 

This is something much easier said than done in a market so utterly dominated by the top brokers who have the carriers, desperate not to lose market share, on a leash.

The challenges are so immense, many market watchers believe Lloyd’s is on a trajectory of gradual decline as more competitive global insurance markets rise up.

Despite some positive signs today, chief executive John Neal and his hard-working team will have their work cut out proving the doubters wrong.