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7 November 2019

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Speaker Line-up

The most thought-provoking and strategic event for (re)insurance professionals, executives and advisers involved with the London market

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Pina AlboCEO, Hamilton

Insurance Group

Bronek MasojadaChairman,

Placing Platform Limited

Stephen CatlinChairman and

Chief Executive, Convex Group

Limited

David HowdenCEO,

Hyperion

Mike SapnarPresident & CEO,

TransRe

Lucy ClarkePresident,Marsh JLTSpecialty

Dominic ChristianGlobal Chairman,

ReinsuranceSolutions, Aon

Paul GreensmithCEO, Catlin

Underwriting Agencies & XL Catlin Insurance

Company UK

Richie WhittCo-CEO,Markel

Corporation

Mark CloutierExecutive

Chairman & Group CEO,

Aspen

Sue LangleyNon-Executive

Chairman,Gallagher UK

Emma WoolleyCEO,

CathedralUnderwriting

More to be announced

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7 November 2019

RESURGENT DISCIPLINE

Speaker Line-up

The most thought-provoking and strategicevent for (re)insurance professionals,executives and advisers involved with theLondon market

BOOK YOUR TICKET:insiderlondonmarketconference.com

Pina AlboCEO, Hamilton

Insurance Group

Bronek MasojadaChairman,

Placing Platform Limited

Stephen CatlinChairman and

Chief Executive, Convex Group

Limited

David HowdenCEO,

Hyperion

Mike SapnarPresident & CEO,

TransRe

Lucy ClarkePresident,Marsh JLTSpecialty

Dominic ChristianGlobal Chairman,

ReinsuranceSolutions, Aon

Paul GreensmithCEO, Catlin

Underwriting Agencies & XL Catlin Insurance

Company UK

Richie WhittCo-CEO,Markel

Corporation

Mark CloutierExecutive

Chairman & Group CEO,

Aspen

Sue LangleyNon-Executive

Chairman,Gallagher UK

Emma WoolleyCEO,

CathedralUnderwriting

More to be announced

®

®

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ERS offered about 4 points of underwriting margin on £323mn ($422mn) of net earned premiums and was acquirable at roughly 1.1x book value of something like £150mn.

And crucially, it would have required only modest additional underwriting capital if it had been acquired by a Lloyd’s player with a sizeable multi-line book.

So why did no one buy it?Given that capital diversification credit, it is difficult to grasp why no one at Lloyd’s was willing to meet Aquiline’s reserve price.

There may have been some personnel issues, but given its specialism ERS would still have needed its own leadership.

Motor has an undistinguished recent history at Lloyd’s to say the least, but the book shrinkage seems to have addressed the issues, with the 2016 and 2017 results made to look worse by the Ogden rate change.

Which raises the question: do Lloyd’s managing agents lack strategic boldness when it comes to M&A?

There has certainly been little Lloyd’s-on-Lloyd’s M&A in recent years.Canopius chief Michael Watson is not shy of such transactions, and

the pending AmTrust at Lloyd’s acquisition-cum-merger is the biggest move in recent memory.

Beazley tilted unsuccessfully at Hardy. Novae and Chaucer flirted. Before that, Catlin acquired Wellington in what was a meaningful deal.

There has also been relatively little outbound M&A. MS Amlin’s acquisition of Fortis was a disaster, and there is little else of note in this category.

All told, it isn’t much of a hall of fame. There is in fact a distinct acquisition gap here.

Instead, Lloyd’s businesses have been sellers. They have happily sent for the man from Evercore, cashing out investors and surrendering control of their fates.

Independent firms from Catlin and Amlin, down through Novae, Chaucer, Omega and Hardy have all sold out to corporates, along with their private peers Cathedral and Antares.

Canopius aside, the independent businesses have been quiet when it comes to acquisitions, although Hamilton may now change that.

Barbican looked for a deal as an acquirer for a time and couldn’t find one, and Alasdair Locke agitated for a deal to boost Argenta’s presence but could never find one within reach.

Do Lloyd’s businesses lack strategic boldness when it comes to M&A?



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Adam McNestrie

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Scale is clearly a problem for Lloyd’s businesses looking to find viable targets. However, for much of the 2010s, the public players had currency in their paper and syndicates enjoyed a positive spread versus peers in Bermuda and the US.

But there was no concerted move to use M&A as an offensive strategy.

One could perhaps argue that now is not the moment to change this with performance challenges still very real, Brexit adding uncertainty and the future shape of the market yet to be determined.

Equally, though, these things may make it the very moment when opportunity is greatest – and there is a host of businesses at Lloyd’s that are stuck.

Sub-scale, with expense problems they cannot grow out of and loss ratio problems which will only partially be addressed by accelerating rate rises, an in-market move on a business like ERS could change the game for them.





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When London Market Group (LMG) CEO Clare Lebecq left school she took herself off to France for her gap year to learn French from scratch.

In a typically happenstance way, the decision she took at 18 eventually led her into insurance: as a French claims translator for a motor insurance firm.

The operations and project management-type roles Lebecq held in the decade or so before taking the LMG job in November included heavy involvement with the Target Operating Model (Tom) and the PPL electronic placement initiative. The former JLT Specialty operations director is now determined that modernisation comes to fruition, with the quote and back-office integration key priorities.

“Getting to a 40 percent [electronic placement] adoption rate is something we should congratulate ourselves on,” she said.

“The league tables create excitement when they are released. People are becoming more and more willing to give out their data as their statistics improve,” she added. “If you hear the banter between (Hiscox CEO) Bronek (Masojada) and (Beazley CEO) Andrew (Horton), it is fun and healthy.”

The massive consultation that proceeded Tom, in which 81 firms and 147 individuals participated, with 13,500 hours contributed for free, provides pointers to the work Lloyd’s CEO John Neal must now undertake as he seeks to transform the 331-year-old institution, Lebecq explained.

“Working across the market was really important for the success of the project. There’s a very good lesson he can learn from that activity.”

From her experience of project management, Lebecq made observations equally applicable to Neal’s masterplan.

She cited the importance of “letting people know the what and the why, giving people the confidence that you have a plan and are actioning it”.

Lebecq said the organisation continues to have concerns about Brexit, including contract continuity and market access.

However, an opinion from the European Insurance and Occupational Pensions Authority in February issued to national supervisors “unblocked some of the conversations around business models with regulators” by leaving individual states to define certain rules of the game.

She believes that, in the near-three-year period since the referendum, the LMG has got the commercial specialty and reinsurance sector firmly on the UK government’s agenda.

“I am always incredibly encouraged whenever I speak to anybody

LMG’s Lebecq looks beyond Brexit



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within the government from the House of Commons or the House of Lords about how well appraised they are of the London market and our issues.

“That must be down to the work we’ve done in educating and representing the views and positions we have in relation to Brexit.”

During the period, the LMG has worked closely with the Department for International Trade, HM Treasury and the Department for Exiting the EU. It’s held talks with MPs, MEPs and EU opinion formers and policymakers, and collaborates closely with bodies including the London & International Insurance Brokers’ Association.

Government ministers, senior civil servants and MPs will now regularly come to the LMG to seek advice or information, as City Minister John Glen did in December 2018, when the organisation laid on a roundtable about cyber risk.

“We have moved from being a lobbying group to advising,” Lebecq explained.

She said the LMG is taking a “glass half full” approach to opportunities after Brexit.

The industry group last month announced a strategy for expanding in countries outside the EU.

On the agenda are alliances with Indonesia and Malaysia, and the LMG is working with the Lord Mayor’s office and Asia Pacific Trade Commissioner Natalie Black in these markets.

The LMG is also seeking greater ties with Latin America, the Middle East and Africa. It is working to capitalise on a recent bi-lateral agreement for (re)insurance with Switzerland and collaborating with CityUK over opportunities in the US following the December finalisation of a (re)insurance pact that mirrors the US/EU covered agreement.

The organisation’s preferred outcome is economic dialogues and memoranda of understanding.

“Free Trade Agreements are often long and drawn out in coming to a conclusion and we believe there are other mechanisms that we can use to create the opportunities for the London market,” Lebecq noted.

Career pathLebecq’s insurance career has been multi-faceted following that first job as a translator.

She described her role as an account handler at reinsurance broking Carvill as representing the steepest learning curve.

“The position wasn’t a traditional account handling role but covered every aspect of the client relationship,” she said.

“At the time Carvill was at the forefront of reinsurance broking and it had a really good reputation in the market. The people who worked there were pretty clever and the expectation was that you would be pretty clever too and that you would have to hit the ground running.”

Lebecq is firmly against quotas as a means to increase female representation at senior levels.

“I think people should get jobs on their merit. There are good women in the market and if they believe in themselves they will rise to the top,” she stated.





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The London market’s efforts to improve diversity suffered a setback in March with a Bloomberg article alleging widespread sexual harassment, which spawned policy initiatives at Lloyd’s.

Lebecq said the incidents reported did not chime with her own experience.

“That’s not to say that I am doubting anything these young women talked about but for myself I have not had any experience of that, ever,” she noted.

She added: “Harassment of any type – not just of women – should not happen in any environment and certainly not in the workplace.”

On the diversity agenda she said: “There’s a lot we can do but we have moved on since when I first joined.”

“The pipeline of female talent we have been nurturing for the past 10 years or so is finally starting to come through and that’s a clear indication that things are changing.”

She also cited a string of women in leadership roles including AGCS UK CEO Sinead Browne and Kate Markham, CEO of Hiscox’s UK direct operation and Lloyd’s Market Association CEO Sheila Cameron.

One slightly overlooked aspect of diversity that she believes is essential to the health of the market is that of nationality.

The LMG CEO is worried about the impact Brexit will have on luring talent from Europe and the uncertainty it will create for those who won’t qualify for settled status.

Lebecq has a bi-lingual family with a French husband and her twin teenage children have dual nationality.

She said: “We need to get better at our language skills. If you want to get close to clients the thing to do is to speak their language.”

The LMG will next week publish a report it has compiled with KMPG on skills that will be needed in the London market.

Lebecq sees the work as an example of one of the LMG’s prime functions.

“It’s about leveraging the resources we have to create a collective view to then stimulate debate and action on things that really matter. That’s’ the power of the LMG.”

In terms of the LMG’s external face, Lebecq said: “The beauty of us is that we give a proper cross-market opinion. We represent the whole of the ecosystem.”





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The London market is witnessing continued rate momentum in an uneven specialty lines market, with pockets of significant rate hardening contrasting with a background of gentle rate firming.

CUOs and active underwriters canvassed by this publication said they were seeing rates rise in low-to-mid single digits in the aggregate.

This is broadly in line with 2019 expectations outlined by The Insurance Insider’s canvass of London executives before Christmas, when it was hoped the market would achieve mid-single-digit increases on average over the course of the year.

It also marks a continuation, or more likely a slight acceleration, of the 3 percent risk-adjusted rate increase achieved by the Lloyd’s market in 2018.

In contrast to the US market, there has been no sharp change in tone in the discussions about market conditions. However, the conversation around market performance and the need to spur positive rate momentum started in earnest in EC3 in the third quarter last year, when Lloyd’s Decile 10 exercise entered full swing.

Aviation, professional indemnity, property direct and facultative (D&F) and cargo were among the classes named by underwriting executives as encouraging in terms of rate increase.

Meanwhile, rates in marine hull are proving to be stubbornly resistant to market forces which should, by logic, lead to rate correction.

The Insurance Insider has provided a detailed breakdown of London rate movements by class, which can be found on the links at the bottom of this article.

Sources said this period of rate correction was being driven by a number of factors, but overwhelmingly there appears to be a fresh resolve on the part of London underwriters to cut out the rot which has dragged down the results of the market over the past few years.

Lloyd’s full-year results have laid that rot bare. The market’s accident-year ex-cat combined ratio improved by 1.6 points in 2018 to 96.8 percent – driven largely by an uptick in rates – but this was still 4.3 points worse than just two years prior.

The ongoing remedial work being executed by Jon Hancock and the rest of the Lloyd’s performance management team has honed underwriters’ focus and contributed to the forward momentum seen in the market today.

However, Lloyd’s executives said that the Decile 10 work has also worked to strengthen underwriters’ hands in the face of brokers looking to mitigate hefty rate increases at renewal.

London specialty rate momentum continues as select classes soar

Catrin Shi





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Meanwhile, re-underwriting efforts on the part of US domestic carriers including AIG and FM Global, and a general firming in the US market, have given an additional rating tailwind and brought a stream of new business into Lloyd’s, where US risks account for 51 percent of business written

A broader correctionThe continued rate momentum in London market specialty lines lies against a broader picture of an improved pricing environment for (re)insurers.

As this publication has reported, recent stress in excess and surplus (E&S) lines is pointing to a broader – and accelerating – improvement in the US P&C market. And in property catastrophe, early firm order terms on major Floridian accounts are pointing to big double-digit rate

Class Current Previous Notes

Property D&F loss-free Average +20% 5 +10% & up 5 10% at a minimum

Property D&F loss-hit Up to +100% 5 +25 to +50% 5 There appears to be market consensus that D&F rate momentum will continue throughout this year

Yacht High double-digit 5 +30% & up 5 Meaningful contraction in capacity

Marine loss-free +2.5 to +7.5% 5 Some slight risk-adjusted rate rises on clean accounts at recent renewals but even those achieved fell within the low-single-digit range

Marine loss-hit +15 to +20% 5

Marine liability loss-free +5 to +15% 5 Consensus varied

Marine liability loss-hit +20 to +30% 5 Capacity concerns

Marine cargo +20 to +30% 5 Pharma and stock-only business received more significant rate hikes. 50% at renewal for some “bad” loss-free accounts

Aviation loss-free +10 to +20% 5 +10% 5 Some airlines in South East Asia and Middle East struggling to renew post 737 Max crash

Aviation loss-hit +20% & up 5 Up to 20% 5 Premiums doubled for one airline

General aviation +10% & up 5 Most carriers are seeking to curtail their exposure

Aviation war average +10% 5 Low-single-digits 5 Carriers kept increasing leverage over pricing and terms & conditions

Energy loss-free +10 to +20% 5 Inconsistent across the market

Energy loss-hit +20% & up 5 Some rates approached 100%

Energy downstream +5 to +10% 5 +5 to +10% 5 Helped by uncertainty in the downstream and wider marine market

Energy upstream Low-single-digit 5 Flat 0 Low level of loss activity

Construction +35 to +50% 5 +20 to +50% 5 Some risks have risen by 80-100%. Arguably, premiums are still low relative to history

Vanilla international GL 0 to +5% 5 0 to +5% 5 Some risks, e.g. mining, oil and gas pipelines, Canadian roofers’ and Australian bushfire experienced steeper rate increases, up to 100%

US utility GL +100% & up 5 Capacity for US utility risk had contracted by 35%

Professional indemnity loss-free

+5% 5 +5% 5 A combination of a poor loss record, weak profitability and increased Lloyd’s scrutiny led carriers to exit, e.g. Chaucer, Brit, Pioneer

Construction professional indemnity

+30 to +40% 5 +30 to +40% 5 Seriously distressed risk rates went up us much as 300%

International D&O – no equity listing

+5 to +10% 5 Underwriters and brokers agree that the market needs more to address severely challenged profitability

International D&O – with equity listing

+10 to +15% 5 In Australia rates in some cases spiked 200% or more

Cyber loss-free Flat 0 Softening 6 Not enough information about the risk to underwrite it properly

Cyber distressed +5 to +10% 5 +5 to +10% 5 Not enough information about the risk to underwrite it properly

Source: The Insurance Insider





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increases at 1 June. This followed a Japanese 1 April renewal where catastrophe excess of loss pricing was up between 8 and 10 percent, with 20-30 percent rises on loss-hit wind covers.

London-based executives believe their market is always quicker to respond to losses or poor performance than their US or global counterparts, due to smaller balance sheets and tighter oversight from Lloyd’s.

Many are of the opinion that the correction happening in the US market started in London around nine months ago.

London executives agreed the current rating momentum was positive, and believe this low-to-mid-single digit increase should continue or even slightly tick up over 2019 as the market continues efforts to remedy years of weak profitability.

However, any optimism in EC3 tends to be tinged with caution, and executives were keen to point out that there was still a long way to go before they find themselves in a comfortable position.

“[The rating momentum] feels more sustainable because this isn’t a knee-jerk reaction to losses – this is will on the part of the market to drive change,” one underwriting executive said. “But we cannot get ahead of ourselves. We are trying to reverse years of rate concessions, and we have a long way to go.”

An inexperienced market?Seasoned executives in London have said this new environment has shone a light on the relative inexperience of the market, both on the part of brokers and underwriters.

“There is a growing awareness that we are at the bottom of the cycle and we need to push for more rate,” said one Lloyd’s market executive.

“But looking at how differently individual markets are responding, it is clear that a lot of people do not know how to trade in a hard market. Similarly, not all brokers have the experience to manage client expectations when the market simply will not concede more rate.”

An additional challenge facing Lloyd’s underwriters is managing their 2019 budget in a time of opportunity which for many classes has turned out to be greater than initially planned.

The Lloyd’s PMD had taken a particularly hard line on growth for 2019 during the business planning process, with a minority of syndicates permitted stamp increases, and others pushed to shrink.

Rumours are swirling that some syndicates are close to exhausting budgets and are preparing to return to PMD to ask for more stamp.

In a previous interview with this publication, performance management director Hancock confirmed that some syndicates had already done so, with varying degrees of success.

Hancock would not confirm which syndicates had submitted amended business plans, but confirmed that some requests had been made.

“We’ve had some requests to increase business plan size,” Hancock told The Insurance Insider during the RIMS conference in Boston.

“Some we’ve said yes to, and some we’ve said no to. Our principles are – if you’re seeing good opportunity and you are sure it is opportunity that will deliver you the returns that you’ve committed to





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in your plans, then that’s a good thing.”Executives speaking to this publication said they believed that having

a good track record and a decent cache of pricing data to support your case was the key to gaining a pre-emption. Others noted that Hancock and his team had continually underlined the stance that they would not approve stamp increases unless the additional business would translate to bottom-line improvement.

“It’s a balancing act and you have to exercise restraint,” one active underwriter said. They added that their team was using this rating opportunity to drop bottom-quartile business from the book and underwrite in new business at a better rate.

Lloyd’s PMD is still keeping a watchful eye over syndicates and is demanding performance updates on deciles on a quarterly basis. Sources said PMD had made it clear they could still demand a syndicate pull out of a class at any given time, if performance did not satisfy requirements.

And most in the market agree that Lime Street had not seen the back of market withdrawals, redundancies or even the threat of businesses being placed into run-off, as seen at the end of 2018.

“There will be more blood on the streets,” one executive said. “The market still isn’t where it needs to be.”





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In his high-level vision of Lloyd’s future, CEO John Neal painted a picture of a market that was faster, more flexible, and technology-enabled.

However, a crucial component of his masterplan was the concept of more freedom – that Lloyd’s was not only more open to allowing new business and fresh capital access the market, but was also more willing to allow new underwriting models with which the market could trade.

A big part of this idea was to drive more distinction between leading and following markets, with the potential for expense-light, follow-only syndicates to be fast-tracked into operation.

A greater divide between lead and follow syndicates could theoretically change the way the Lloyd’s market operates, and have ripple effects throughout the broker market.

It should be noted at this stage that Neal and his team have not yet decided on the final plan of action for a revamped Lloyd’s market, with the picture still fluid at least until the publication of the prospectus in May.

However, it is already possible to give some indication of the ways in which this major change could transform the market:

c Greater distinction between leaders and followers will create greater divisions in the marketplace, from which winners and losers will emerge

c Existing syndicates that are not already market leaders in any given class will come under pressure as they will not be able to compete with expense-light, follow-only syndicates.

c Lead-and-follow 2.0 would take a lot of duplication – and therefore cost – out of Lloyd’s

c It is not clear who would emerge as the owners of this new follow market: major lead syndicates; current following markets; or start-ups from a mix of underwriting entrepreneurs, asset managers, brokers or technology firms

c The creation of a small number of market leaders would ease the Corporation’s regulatory burden and enable better control of overall market performance by narrowing its regulatory focus

c This will probably represent a net negative for brokers by putting slightly more balance into the playing field, and could ensure the cost benefits of a move towards blind underwriting are shared between underwriter and broker

Challenging the status quoCurrently, few syndicates in the market would describe themselves as “market followers”, with most wanting to be seen as leaders.

Winners and losers to emerge from Neal’s lead-follow 2.0Catrin Shi and Adam McNestrie



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Neal told this publication late last month: “I’ve spoken to all the managing agents and I’m yet to find the one that runs a follow syndicate – they all lead apparently.”

However, being a lead market comes with heavy associated cost – including procuring talent and owning the resource to process claims and handle compliance checks.

The huge amount of duplication of effort contributes greatly to the expense burden of the market which, in 2018, accounted for 39.2 percent of net earned premium.

Under Neal’s plans for more distinction between leaders and followers, a market leader would receive fees for their work in quoting business, providing wordings, ensuring compliance and agreeing and settling claims.

The elimination of duplication would play a major part in helping Neal deliver his ambition to see a big cut in operating costs at Lloyd’s.

Neal believes this lead-and-follow strategy, alongside a suite of additional plans for a leaner, faster Lloyd’s, could halve costs for the market.

The new leaders In thinking about what a leader would look like under Neal’s new plan, it is easy to look at the largest syndicates in the market as a starting point.

However, there is weak correlation between size and performance at Lloyd’s, with major players such as MS Amlin and Axa XL struggling in 2017 and 2018, while a host of small- and medium-sized players like MAP, Aegis, Munich Re Syndicate and DL Dale are among the standout performers.

This potentially suggests two competing visions of a Lloyd’s lead market. One is an all-lines leader, with big capacity and cross-class capabilities – like Liberty Specialty Markets or Beazley. The other is a niche leader with a specialism in which they excel – like MAP with US property cat treaty or Munich Re Syndicate with Gulf of Mexico energy business.

Most likely the two competing visions will operate side-by-side.

Who will own the follow space? In his interview with this publication unveiling his vision for changing the market, Neal did not go into detail about what a follow-only syndicate might look like. However, he indicated the scale of the change he envisaged by suggesting that there was no reason such a platform could not commit $1bn of capital, with an expense base of as little as 2 percent.

Lloyd’s expense ratio development 2012-20182012 2013 2014 2015 2016 2017 2018

Admin expense ratio 12.2% 12.6% 14.3% 14.1% 14.1% 12.5% 11.9%

Acquisition expense ratio 24.5% 24.5% 24.8% 26.0% 26.6% 27.0% 27.3%

Total expense ratio 36.6% 37.1% 39.1% 40.2% 40.6% 39.5% 39.2%

Source: Lloyd’s, The Insurance Insider





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With the lion’s share of the £36bn ($47bn) Lloyd’s market written by following capacity, there is a major market opportunity for businesses that can move quickly to exploit the cost arbitrage being offered by the Corporation of Lloyd’s.

Nevertheless, with Neal yet to move beyond stating an ambition with regard to a new set of operating models, he has only really gestured towards that opportunity.

As such, it is difficult to forecast who will emerge as the owners of this new follow market.

The all-class leaders could choose to set up their own supplementary follow-only syndicates and get an early hold on the market.

They could leverage their scale and market presence with the brokers and clients to secure a flow of business, while using their significant balance sheets or name recognition with investors to support the additional risk.

Beazley has in a sense anticipated this move with its facilities-only “beta” syndicate.

Smaller market incumbents could also turn themselves into a new breed of follow-only syndicate, but to do this they would have to be prepared to gut their operations to take on low-cost competitors.

There is no reason why follow-only underwriting could not be supported by aligned underwriting capacity, but the operating model and risk profile may well suit third-party capital – as Beazley again indicated with its own tracker syndicate.

This could point towards ILS funds or asset managers as new entrants. However, entrepreneurial underwriters frustrated by recent Lloyd’s strictures could see this as their opportunity, with delegated authority underwriters potentially the most likely to be attracted.

If these enterprises are not taking underwriting decisions and typically operate with third-party capital, this model could also appeal to brokers looking to own a bigger share of the value chain and defend their early wins around monetising passive underwriting via facilities.

And with Neal’s plans for fast-track entry for new syndicates, there is the potential for this section of the market to grow rapidly.

There is already a suppressed market appetite to explore this kind of model, with half a dozen managing agents said to have shelved plans for facilities-focused beta syndicates last year as a result of the crackdown on start-ups that accompanied the performance gap process.

With these businesses forced to compete on cost, over time the market is likely to tend towards consolidation as platforms seek greater efficiency through scale.

Challenges of follow-onlyThe lean follow-only model could be highly attractive if it allows 8 or 10 points of expense to be taken out, and could be extremely competitive on price as a result, particularly if low-cost third-party capital was brought in to support it.

However, as pure following capacity with virtually no underwriting control, the performance of these syndicates would largely be at the mercy of the underwriting cycle.

Pros and cons of operating a follow-only syndicate Pros:c Potentially wider underwriting

margins as result of low expense base with ability to commit high volumes of capital

c Act as a fund manager and charge fee income as a conduit for third-party capital providers to access Lloyd’s risk

c Lead markets that run a follow-only syndicate in parallel will be able to secure a new revenue stream and additional market relevance

Cons:c Your performance is largely at the

mercy of the market cycle c Hard to guarantee access to good

businessc Low barriers to entry means

competition will be fiercec As essentially only a capacity

provider, it will be highly challenging to establish a clear competitive advantage or to build a franchise





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They would also have to battle the perception that they will suffer adverse selection. Barriers to entry look likely to be extremely low too, creating the potential for fierce competition and making this a precarious business model.

As solely a vehicle for capacity, these syndicates would have to work hard to establish and market their value proposition so they are more compelling to leaders and/or brokers than their rival followers.

And ultimately, if lead syndicates chose to step in and write their shares, it would be easy for standalone following syndicates to be cut out entirely.

These follow-only syndicates may have to compete on being the leanest, having the best technology or the strongest relationships with brokers.

The difficult middle ground Neal’s ambitions for greater distinction between leaders and followers presents a challenge for a vast swathe of the Lloyd’s market.

Those syndicates with average intellectual property, technological capabilities or talent face being competed out of existence as they cannot afford to be a follow-only syndicate with the cost infrastructure of an old-world leader.

Again, this could result in market consolidation although, as this publication has previously noted, there are few in-market consolidators at Lloyd’s at present. As such, it could result in businesses being forced to close or Lloyd’s again pushing underperformers towards the exit.

Other syndicates will look to establish themselves as hybrid players, leading in areas where they have top talent and following elsewhere – although some may struggle to establish themselves in this way.

The leader

Source: The Insurance Insider

Possible operating models under lead-follow 2.0

Managing agent

Lead market on 100% of classes

The niche leader

Managing agent

Lead market on select classes

Follow-only syndicate to

participate in other select classes

The leader with follow sidecar

Managing agent

Lead market on select, or even

100% of actively underwritten

classes

Follow-only syndicate for

broker facilities and/or portfolio

underwriting

The follower

Managing agent

Follow-only syndicate to

participate on all chosen classes

Follow-only syndicate for

broker facilities and/or portfolio

underwriting

and/or





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If existing markets that primarily follow are unable to compete with low-cost competitors, the other alternative is for them to force through major cost-cutting programmes.

Overall, the concept of a more marked divide between lead and following markets forces the market as whole to streamline and will indirectly address the huge issue of personnel expense in London, as businesses are forced to make difficult decisions on how to trade forward.

Broker impactThis new lead-and-follow model at Lloyd’s will have ramifications for the broking market and impact the perceived power imbalance between the brokers and the underwriters on Lime Street.

Currently, 27.3 percent of the market’s net earned premium goes towards acquisition costs – a metric that has crept up by 2.8 percentage points over seven years.

With the emergence of a cohort of fewer but stronger market leaders, the playing field will be somewhat more balanced, potentially helping to bring down this component of Lloyd’s cost burden.

However, the potentially more important dynamic is who benefits from the cost savings created by a move to passive underwriting.

To date, brokers have owned this change in underwriting with the facilities they have created allowing them to capture the gains.

If the business is placed in the open market, or if Lloyd’s is able to match-make to create powerful consortia, then leaders (through leaders’ fees) and following markets running at a cost advantage will be able to split the savings.

As such, the structure that “low-oversight” underwriting takes in the future will be crucially important, as will be the balance between facilities, the open market and consortia.

If brokers do see their position threatened by alternative low-cost underwriting structures to the facilities that have generated high margin revenues, they may be forced to respond by forming follow-only syndicates themselves.

This would continue a recent trend that has seen the lines between brokers and underwriters blur, as intermediaries look to stake a claim to a bigger share of the value chain.



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