Lloyd’s Market Oversight: learning the lessons of 2018
07 February 2019
Many people have asked me whether it was possible to foresee the significant change in approach that Lloyd’s took towards business planning in 2018. My initial response was a clear “no” - it was both unexpected and with a different level of focus and intensity than in any recent year.
With the benefit of hindsight (and a bit of searching), I now conclude that it was possible, but that no-one that I have spoken to (outside of the Corporation) actually did. I’ll explain why.
For the first time a year ago, January 2018, we saw the advent of the “Market Oversight Plan” issued by the Corporation of Lloyd’s. This plan sets out the annual key risks statements but joins then up with specific oversight activity that would be undertaken with each individual managing agent. This risk based oversight gave managing agents certainty on the what, when and how of their Lloyd's oversight activity. Few people really took notice, but it was the beginning of the change.
Through 2018, we then saw a significant change in approach by Lloyd's in their oversight activity, other commentators have even called it "unprecedented intervention", especially in the class of business reviews. Instigated through Jon Hancock's requirement to "close the performance gap" and with the challenge of the rating agency in sharp focus, the reviews included remediation plans for poorly performing syndicates across all their classes and decile 10 reviews for every syndicate whatever their level of profitability.
The result of the change in approach was not identical for every managing agent. Most saw significant reduction in premiums, many closed specific lines of business, some moved business out of Lloyd’s and onto other platforms and a few exited the market altogether. What every agent did experience though was additional work: greater requirements for analysis; in-depth explanations and justification; new and enhanced remediation plans; increased governance; and always more time spent. No one enjoyed the experience, but there were winners and losers.
So following a very busy but often frustrating renewal period, what should Agents expect for 2019? The answer is set out in the Lloyd’s 2019 Market Oversight Plan [https://www.lloyds.com/market-resources/requirements-and-standards/market-oversight] where it is crystal clear how the 2018 class of business review has played through into the 2019 planned oversight activities.
The plan is lengthy and well written – it includes a continuation of underwriting review topics but also, on the upside, a "what good looks like" exercise to highlight best of class underwriting and, on the downside, the potential for specific Board and governance reviews.
These governance reviews will kick in where Lloyd's is concerned that Boards:
- were ignoring the key Lloyd's messages in 2018;
- just signed off the 2019 business plan without appropriate review and challenge; or
- had an overriding commercial imperative not to use historical data or consideration of current market condition for the 2019 business plan (e.g. a need for a certain ROC)
I expect an approach during 2019 for the 2020 business planning which is at least as onerous as last year – if underwriting performance does not improve, there is a real risk that some syndicates will struggle to justify their viability.
So what else are the key points to pull put from Lloyd’s plan. For a start, they have set out their approach across 4 key areas of oversight:
- Thematic reviews – 8 areas where a sample of managing agents will be selected to identify best practice (or because Lloyd’s expects to find issues)
- Minimum Standards reviews – where Lloyd’s know about or suspects deficiencies, you will be subject to a specific review
- Additional oversight – 9 areas which are current year hot topics and will differ for each managing agent mainly dependent on business model and previous findings
- Lloyd’s returns – many and varied – they contain a vast amount of data and allow Lloyd’s to benchmark, cross-check and focus their efforts.
Unsurprisingly, within these areas, I can see some of Lloyd's 2019 Market Oversight aligning with the regulators’ key areas of focus; from the PRA, overoptimism (in pricing and reserving) in the London Market, and for the FCA, with pricing practices and fair value to customers. Part of Lloyd's oversight will focus on capital modelling and the difference between the planned vs actual loss ratios used, especially pertinent given the ongoing concerns around reserve adequacy, originating from 2018 oversight reviews. On pricing, all personal lines insurers, including Lloyd’s, will be reviewing their loyalty pricing for customers, with a focus on considering price discrimination.
There isn’t enough time (well there is, but I’m running out of energy) to cover every area in detail, but there a few others worthy of mention.
- The thematic review into cyber underwriting promises to be interesting and I expect it to throw up a combination of unexpected findings alongside some opportunities.
- The thematic on Governance and Board effectiveness could be challenging for some agents, particularly as last year’s oversight identified some shortcomings in the business planning process and the scrutiny being placed by Boards on those plans.
- Finally, the last area is that of Shared Services and TPAs. Lloyd’s has identified this as a growing area of concern as managing agents look to reduce their expense base by outsourcing to either group functions or third party outsourcing specialists. In addition, a PRA focus under the heading of “Operational Resilience”, Lloyd’s wishes to understand its aggregated risk exposure to service providers especially in the event of stressed scenarios.I have already seen Lloyd’s kick off its consultation on this at the end of January, [https://www.lloyds.com/market-resources/delegated-authorities/a-new-approach-to-third-party-oversight]
So what should agents prepare for?
- Firstly, learn the lessons that the last year has taught. Lloyd’s has set out an oversight plan that is risk based and they have told everyone what they will be focused on. They are even setting it out in a clear letter for each agent – make sure you know what is in yours and that it has the Board’s attention.
- Secondly, have a view on every area of oversight. They are all areas which management teams and Board should be comfortable with – if you find a problem, proactively put a plan in place for remediation.
- Thirdly, get your returns right – and make sure that you know what they say about you. They should be subject to internal process, control, oversight and governance and you can then manage any issues rather than have Lloyd’s flag them for you.
The best way to avoid additional oversight and reactive issues is to plan, prepare and proactively deal with the areas of focus. With few signs of any significant rate increases, do not expect 2019 to be any easier than 2018.