London market top performers say strong portfolio management led to 5% uptick in COR

Research by Willis Towers Watson and Lloyd’s of London has shown the importance of strong portfolio management in delivering underwriting profit, as the market’s top performers attributed a 5% uptick in combined operating ratio (COR) to strong portfolio management.

The study of London market senior executives and underwriters, including organisations representing 75% of the market’s gross written premium, aimed to better understand the impact of portfolio management on business performance.

Top quartile performers in the benchmarking study had an average loss ratio of 56% and a COR of 98%. Bottom quartile businesses, by comparison, had an average loss ratio of 65% and a COR of 106%.

The average COR across the Lloyd’s market is 103%.

Best-in-class

In the research, 72 attributes of portfolio management were identified and used to create an overall performance index.

For participating Lloyd’s syndicates, this performance was compared to their 2018 profitability, based on publicly available data, helping to establish a link between good portfolio management and the likelihood to deliver sustained underwriting profit.

Caroline Dunn, head of underwriting at Lloyd’s, said: “First-class underwriting performance is a critical foundation upon which Lloyd’s strategy to build the world’s most advanced insurance marketplace is based.

“The highest underwriting standards are essential to protect customers, the market’s reputation, the central fund and our credit rating, as well as ensuring the long-term sustainability of the Lloyd’s market.

“Despite this, relatively few companies have looked in depth at what constitutes best-in-class portfolio management and what advantages there are to adopting best practice. This is particularly relevant for underwriting, where the roles are evolving to become more rounded, managing portfolios rather than being just single-class specialists.”

The chosen 72 attributes were then grouped into 12 categories under three key dimensions: granularity, agility and coherence.

Six categories were identified as being particularly significant for outperforming organisations that have successfully developed an effective portfolio management framework. These are:

• Granularity: Segmentation and mix indices were done well or very well.
• Data and technology: Very satisfied in current tools, aside from data science for unstructured data, but confident in improvement.
• Spreadsheets: Limited reliance on spreadsheets (not at all to somewhat reliant).
• Plan testing: Confidence in robust plan testing and satisfaction in scenario modelling.
• Speed: Syndicates identify and respond within a day to a fortnight.
• People skills: Do well/extremely well in developing portfolio management skills and satisfied in the level of skills.

Richard Clarkson, head of London market consulting at Willis Towers Watson, added: “We identified three strategic drivers impacting the London market today – performance remediation, market modernisation and culture, including skills needed in the future.

“Portfolio management is a critical capability that operates across all these drivers and will become even more important as insurers move to adopt new business models as the market modernises.

“The report findings should benefit Lloyd’s market participants by describing what constitutes a strong portfolio management capability, which may allow them to systematically fully understand and improve the performance and financial sustainability of the different parts of their business.

“Portfolio management supported by more accurate data makes a huge difference to today’s market. Until recently, this latest set of renewals would have seen blanket market pricing across various business lines versus what we have today, which is very specific pricing to each client depending on loss record, portfolio composition, strength of management team and broader corporate relationships.”