With nearly one-fifth of all merchant shipping insured at Lloyd’s of London, any trouble there is will likely have a profound impact on the rest of the market — and trouble there certainly is right now.
After suffering a loss of £2bn ($2.64bn) last year and an abrupt change of chief executive, the Lloyd’s insurance market has now put all aspects of its business under review.
That includes the performance of the syndicates underwriting marine insurance, a growing number of which have been suffering losses and hold little optimism for improvement.
Lloyd’s heavy losses in 2017, after five years of profits, were mainly down to catastrophes, but all other lines of business also did badly including motor, aviation and notably marine.
Adding to the pressure, questions have grown about Lloyd’s fundamental business model, its cost, slow adoption of digital technology and loss of market share to international rivals.
With costs — the "expense ratio" — accounting for around 40% of premium income, industry analysts say Lloyd’s is about 10% more expensive than its competitors, partly due to its dated approach to conducting business.
Electronic trading
Slow adoption of Lloyd’s PPL electronic trading system has frustrated Inga Beale, who was the first woman to lead the 332-year-old market when appointed in 2014 and who will leave next year.
Under threat of making its use compulsory, its take-up has accelerated, it emerged this week. Some 3,000 polices were written on it in June, double the number a year earlier.
But there remains a long way to go. In the second quarter of this year, the system was only used for 16% of the policies it was available for inside Lloyd's.
Questions are also being asked about Lloyd’s fundamental function, which currently sees it act as a marketplace for roughly 85 syndicate members, an umbrella body that is effectively an insurer, and the regulator of its members on behalf of UK authorities.
Brexit has also raised fresh challenges for Lloyd’s, with the UK government keen to ensure London and Lloyd’s remain a global centre for insurance business.
As TradeWinds has reported in recent weeks, these questions have brought intense scrutiny on the many loss-making marine syndicates.
Earlier this summer, Lloyd’s said enough was enough. Marine syndicates that have been unprofitable for each of the past three years have until next month to propose a realistic short-term plan to return to profit or face being closed.
Brexit has also raised fresh challenges for Lloyd’s, with the UK government keen to ensure London and Lloyd’s remain a global centre for insurance business
Already, it is estimated that seven syndicates have cut as much as $100m from their capacity — and more are expected to follow that lead.
Underwriting capital
For a change, the problem for marine cover in Lloyd’s is not the level of maritime casualties and claims, which are considered to be under control. The problem has been the surge in underwriting capital entering the market pushing premiums to ever lower levels.
Some fleets are now understood to be insured for as little as 0.1%, which equates to a premium of $50,000 for a $50m vessel. As a result, only 16 syndicates were profitable on hull and related business over the past three years, with another 55 losing money.
An added problem has been the reduction from 23% to 11% in the overall volume of premiums for war risk and other higher-risk areas, which is often more profitable than hull business.
Some market players estimate rates need to double to ensure profitable and sustainable hull underwriting. Shipowners may cry foul at such an increase and their brokers may threaten to move their business elsewhere.
But rival insurers may see Lloyd’s problems as a turning point for the market after years of grim results and seize it as an opportunity to move the whole market towards more sustainable pricing.
