© Lloyd’s 1 © Lloyd’s 1
Current Underwriting Challenges Markus Gesmann Lloyd’s Analysis
7 June 2016
© Lloyd’s 2 © Lloyd’s 2
Agenda
► Review of Lloyd’s historical results
► Overview of Lloyd’s approach to challenge
underwriting
► Ideas for monitoring pricing and underwriting
► Conclusions
© Lloyd’s 3
-60%
-40%
-20%
0%
20%
40%
195
0
195
2
195
4
195
6
195
8
196
0
196
2
196
4
196
6
196
8
197
0
197
2
197
4
197
6
197
8
198
0
198
2
198
4
198
6
198
8
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
201
4
%
Net U/W Profit % NEP Investment Income % NEP Lloyd's Pre-tax Profit % NEP
Lloyd’s historical results 1950 - 2015
Source: Lloyd's Annual Reports, Statistics relating to Lloyd's 2001; Lloyd’s data for 1950 – 1999 on three year accounting (assuming
written=earned premium and 18% brokerage), and from 2000 onwards on annual accounting basis.
Major losses: Hurricane Betsy (1965), 1974 Super Outbreak 148 tornados in one day, Piper Alpha (1988), Hurricane Hugo (1989), the San
Francisco Earthquake (1989), Exxon Valdez (1989) North European storms (1987 and 1990), Typhoon Mireille (1991), Hurricane Andrew (1992),
Northridge Earthquake (1994) , WTC (2001), Hurricanes Charlie, Francis, Ivan (2004), Hurricanes Katrina, Rita, Wilma (2005), New Zealand,
Chile Earthquake (2010), New Zealand, Japan Earthquake, Thailand Flood (2011)
Hurricane
Betsy Super
Outbreak:
148 tornados
in one day
Piper Alpha
Hurricane Hugo, San
Francisco EQ,
Exxon Valdez
WTC
Attacks
NZ, Japan
EQ, Thai
Flood
Establishment of business planning
and new entrance process
Hurricanes
Katrina, Rita
& Wilma
© Lloyd’s 4
Lloyd’s Underwriting Results since 2000
Source: Lloyd's Annual Reports, NEP = Net Earned Premium
40% 39% 38% 37% 36% 35% 35% 30% 34% 34% 31% 32% 33% 36% 36% 32%
46% 45% 44% 44% 46% 46% 49% 49% 46% 49% 50% 54% 56%
60%
78% 91%
4% 4% 4% 10%
25% 13% 2% 13% 4% 0%
31% 11% 1%
2%
27% 2%
90% 88% 87% 91%
107%
93% 86%
91% 84% 83%
112%
97% 91%
99%
140%
125%
-7.9% -8.0% -8.0% -7.2% -6.5% -5.9% -5.6% -9.2% -6.5%
-2.1% -0.1% 2.7% 5.7% 5.9% 11.5% 10.5%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
2015201420132012201120102009200820072006200520042003200220012000
% o
f N
et
Earn
ed P
rem
ium
Financial calendar year
Net Operating Expenses % NEP Attritional Net Loss % NEP Major losses % NEP Prior Years % NEP
© Lloyd’s 5
Analysis of Lloyd’s operating expenses
Source: Lloyd's Annual Reports, NEP = Net Earned Premium
Since 2009 operating expenses increased from 35% to 40% driven by:
• Higher acquisition costs (28% - 30%) by and large due to increased Coverholders business (25% to 32% of
Lloyd’s income)
• Higher administrative expenses ratio (9% - 11%) driven by
- Softening market environment, i.e. lower premium income for the same risk exposure
- Weakening exchange rate (business predominantly sourced in US$, while admin expenses are
predominately in GBP£ (2009: $1.61 = £1, 2015, $1.47 = £1)
- Increased regulatory requirements, e.g. Solvency II
£853 movement
in exchange rates
0%
0%
1% 0% 0%
-1%
0%
-6%
-1%
2%
-1%
1% 0%
4%
30% 30% 29% 29% 28% 28% 28% 28% 27% 26%
25% 24% 26% 25%
11% 11% 9% 9% 8% 9% 8%
9% 9% 7% 7% 7% 7% 7%
40% 39% 38% 37% 36% 35% 35%
30%
34% 34% 31% 32% 33%
36%
-10%
0%
10%
20%
30%
40%
20152014201320122011201020092008200720062005200420032002
Profit (Loss) on Exchange % NEP Acquisition Costs % NEP
Admin Exp % NEP Net Operating Expenses % NEP
© Lloyd’s 6
Lloyd’s Premium Rate Index
0
50
100
150
200
250
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Accident & Health
Aviation
Casualty
Casualty Treaty
Energy
Marine
Overseas Motor
Property (D&F)
Property Treaty
UK Motor
Source: Lloyd’s Statistics (2016 Edition)
© Lloyd’s 7
Benchmark price Conditions
Limits
Perils
Claims
inflation
Regulation Marketing
Brokerage /
Commission
Expected Loss
T&C
price
waterfall
Rising tide of
Cost-to-Serve
Bound Profit
Discounts
Compression
Expenses
Cost of
Capital
Price Leakage: Profits compressed from both sides
© Lloyd’s 8
BCG Growth-share Matrix
?
Share
Growth
$
Visit: https://www.bcgperspectives.com/content/articles/corporate_strategy_portfolio_management_strategic_planning_growth_share_matrix_bcg_classics_revisited/
© Lloyd’s 9
BCG Growth-share Matrix
?
Share
Growth
$
Invest
Profits
© Lloyd’s 10
BCG Growth-share Matrix Life Cycle
?
Share
Growth
$
© Lloyd’s 11
Which line of business would you put where?
Question marks
Dogs Cash Cows
Stars
Share
Growth
© Lloyd’s 12
-1%
5% 3% 11%
7%
-9%
-28% -36% -38%
-26%
0%
13% 12% 7%
-6%
-19%
-35%
-23%
-71%
14% 21%
13%
-1%
31% 29%
14%
24%
12%
-3%
15% 16% 15% 9%
-100%
-50%
0%
50%
100%
150%
200%
%
Lloyd's Return on Capital Capital / Net Earned Premiums
Lloyd’s return on capital 1983 - 2015
Source: Lloyd's Annual Reports, Statistics relating to Lloyd's 2001; Lloyd’s data for 1983 – 1999 on three year accounting (assuming
written=earned premium and 18% brokerage), and from 2000 onwards on annual accounting basis. Capital = Total Net Resources
of the Society of Lloyd’s and its members less subordinated debt
Boom and bust phases. After profitable years, capital
flows into the market, driving prices down
Lloyd’s loses 71% of capital: poor pricing, prior
years deterioration, WTC and weak capital
Establishment of business
planning and new entrance
process
Ratio stays constant,
demonstrating a more
disciplined market
© Lloyd’s 13
You can only be proven wrong
Karl Popper Black Swans
Good tests kill flawed theories;
we remain alive to guess again.
© Lloyd’s 14
You make money until you don’t
© Lloyd’s 15
► A Lloyd’s syndicate is planning to enter a new
class of business, where historically only 15% of
the syndicates met its planning loss ratio and
85% failed.
► The syndicate has a track record of meetings its
business plan loss ratio 4 out 5 years.
► How much confidence would you have that this
syndicate can achieve its planning loss ratio in
the new class of business?
Chances of entering a new class of business successfully
© Lloyd’s 16
► There are two kinds of casualty underwriters, the
skillful ones and the ones who run away from their
tails.
► Reviewing the historical market data reveals that
only 15% of casualty underwriters are skillful and
85% are running away from their tails.
► A CEO employs a new casualty underwriter.
► The CEO believes that she can identify the skillful
underwriter with 80% confidence.
► What is the probability that the CEO actually
employed a skillful underwriter?
Hit and run … away from your tail
© Lloyd’s 17
► Market submits data to
Lloyd’s
► Lloyd’s analyses the data
► Bespoke management
information is generated
► Agent specific reports and
tools are played back
internally and externally
► Lloyd’s and agents use the
MI to review and improve
their performance
Performance review cycle at Lloyd’s
Plan still
sensible?
© Lloyd’s 18
Predict Correct
In a nutshell
© Lloyd’s 19
► Underwriting performance
benchmarks vs. notional market
and plan
– Top performing syndicates or
classes sit in the top right
quadrant
– Bottom performers sit in the
bottom left quadrant
– Movements over time highlight
changes in performance
Example: Benchmarks vs. peers and plan
better
Performance vs. peers
Perf
orm
ance v
s. pla
n
worse
wors
e
be
tte
r
Source: Quarterly Performance Information reports from Lloyd’s
© Lloyd’s 20
Relative Renewal Price Movements
Ab
so
lute
Pri
ce A
deq
uacy
0 +10% -5%
100%
50%
125%
150%
75%
-10% +5%
Write as much as
you can
Focus on future
growth
Attention required,
prices becoming
marginal
Do not write
-15% +15%
Original diagram by David Bracewell, Deutsche Bank
Illustrative example for price monitoring
© Lloyd’s 21
Signal and Noise
© Lloyd’s 22
Signal and Noise
© Lloyd’s 23
►Monthly data feed from syndicates’ underwriting
systems
►Information on premium income by risk, including
– Price changes for renewals
– Price comparison against business plans
►Key tool to monitor syndicates’ business plan and
performance oversight
Since 2009: Performance Management Data Return (PMDR)
Past Present Future
Quarterly Monitoring Return Syndicate Business Plan PMDR
© Lloyd’s 24
► PMDR highlights potential issues before loss ratios have
to deteriorate.
PMDR in practice
Example with dummy data
Syndicate No /
COB
PMDR
Written
Premium
(000's)
Current
Year
PMDR %
of
Approved
Plan
Lapsed
Premium
%
New
Premium
%
Current
Year Pure
Rate
Change %
(RARC)
Previous
Year Pure
Rate
Change %
(RARC)
% of Total
Premium
with
Benchmark
Price
Benchmark
Price Overall
Plan
Loss
Ratio %
Loss Ratio %
with
benchmark
price applied
Latest
Actual
Loss
Ratio %
xxx yyy 51% 18% 25% -1% 3% 100% 94% 68% 72% 74%
xxx yyy 66% 18% 18% 0% 2% 100% 95% 68% 72% 67%
xxx yyy 51% 13% 19% -1% 4% 85% 117% 73% 62% 78%
xxx yyy 62% 30% 30% -2% 5% 100% 111% 72% 65% 71%
xxx yyy 52% 23% 17% -1% 8% 46% 115% 65% 56% 67%
xxx yyy 59% 32% 34% -1% 5% 87% 111% 67% 60% 82%
xxx yyy 53% 26% 11% -1% 3% 47% 100% 64% 63% 75%
Overall: 10,743,532 53% 23% 26% -1% 4% 67% 105% 70% 66% 73%
Premium and policies Rate Change Benchmark Price Loss Ratio %
© Lloyd’s 25
Calibrating pricing models takes time …
Incurred
loss ratio
Pricing
loss ratio
Updated
reserving
loss ratio
Development Quarter
Underwriting Year
2010 2011 2012 2013 2014
© Lloyd’s 26
0%
20%
40%
60%
80%
100%
40% 90% 140%
Casualty
40% 90% 140%
MAT
Worst case
Best case
0%
20%
40%
60%
80%
100%
40% 90% 140%
Motor
40% 90% 140%
Property
… but can enhace better monitoring of risk appetite
Loss ratio Loss ratio
Exce
ed
an
ce fre
qu
en
cy
Range of prices Portfolio Mix
© Lloyd’s 27
Cycle Management Decision Tree
• Does our current portfolio deliver targeted return on
equity over the cycle?
• Can less cyclical (sub-)segments be identified?
• Is focusing on these segments a valid strategy?
• Does our business model support a flexible exit/entry?
• Can we gain customers back when re-entering the
market?
• Can we preserve underwriting expertise during exit
periods?
• Can an active price management compensate for the
expected price decrease over the next cycle?
• Can we establish the required skills/tools for systematic
price management?
• Can we align the mindset and behaviour of individual
underwriters?
No
No
Follow the
cycle
Flexible
exit/entry
Active price
management
Value-
maximising
exit
No
Yes
Yes
Yes
Source: “Three strategic approaches to active cycle management”, Thomas Sepp and Oliver Bäte,
Cycle proficiency. Post Magazine, 1 July 2004, pages 22 – 23,
© Lloyd’s 28
► Underwriting conditions are challenging
► Business planning and monitoring are essential
► Better data and risk modelling should allow for better
portfolio cycle management
► Solvency II capital models should allow for better
allocation of capital to risk appetite
Conclusions
© Lloyd’s 29
► Directory of data and reports from Lloyd’s:
– www.lloyds.com/data
► Lloyd’s Statistics:
– www.lloyds.com/stats
► PMDR framework and examples:
– www.lloyds.com/pmdr
► Guidance on claims inflation
– www.lloyds.com/claimsinflation
References
© Lloyd’s 30 © Lloyd’s 30
Thank you
► Questions?
► Contact:
– Markus Gesmann
– +44 (0) 20 7327 5694