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'Remedial action' needed to tackle Lloyd's rising loss ratio, says CFO

Lloyd's of London underwriters need to continue to push through price increases to improve underlying underwriting performance, Lloyd's CFO John Parry said during an earnings presentation.

The London-based specialist insurance market reported a £2.00 billion loss for 2017 because of a £4.5 billion bill for major claims, including £3.6 billion for hurricanes Harvey, Irma and Maria combined. The major claims bill added 18.5 percentage points to the Lloyd's 2017 combined ratio — a measure of underwriting performance that shows claims and costs as a percentage of premiums — pushing it well beyond the 100% breakeven point to an unprofitable 114%.

But even excluding the large claims, the insurance market's underlying underwriting performance deteriorated. Its accident year loss ratio excluding the impact of major claims jumped by 5.6 percentage points to 58.9% in 2017 from 53.3% a year earlier.

Speaking to journalists at the presentation, Parry blamed the increase on "the pricing challenge the market has had for a number of years coming through."

The accident year combined ratio excluding catastrophes was 98.4% in 2017, up from 93.9% in 2016. Before the 2017 catastrophe hit, Lloyd's had enjoyed several years of unusually low levels of natural catastrophe claims.

"Underlying performance clearly needs to improve," Parry said, adding: "If you normalize the catastrophe experience, we'd be over 100%, so remedial action needs to be taken."

But according to the CFO, underwriters are well aware of the need for more pricing, particularly as rates had not hardened by as much as expected in response to the 2017 natural catastrophes.

"It is going in the right direction," he said. "I think the markets themselves would see that it hasn't been the rate increases they might have hoped for."

'Question of momentum'

Parry said that for full year 2017, prices for renewal of business across Lloyd's had fallen by just under 2%. Prices rose by around 2% in the fourth quarter of 2017, and Parry said increases had continued in the key Jan. 1 renewals, the biggest renewal date for Lloyd's, rising by a further 3%.

"It is a question of momentum now to see whether that sustains through the next most important renewal dates: April 1, June 1 and July 1," he said. "The market is already there, but we are working with them."

Parry also noted that although the expense ratio at Lloyd's had remained relatively flat, falling slightly to 39.5% from 40.6%, it was still "worse than competitors" despite outperforming its peer group on loss ratio.

"Our risk selection and improved underwriting is not being able to beat that expense challenge in the current market conditions," he said.

While administrative costs fell, the business acquisition cost ratio increased to 27% from 26.6%. Lloyd's relies on brokers and underwriting agencies acting on behalf of syndicates through delegated underwriting authority to bring it business, and Parry said that streamlining processes in the distribution chain is part of the key to cutting costs.

"What we do about that is make it easier for [delegated authority underwriters] to deal with us and have one-time data entry, make our systems compatible so all these delegated authorities can talk to us," he said.

Parry also noted that at Lloyd's there has historically been a focus on the loss ratio rather than the expense ratio when examining financial performance, and that the market was working on changing this.

"All our reporting, modelling and oversight now is [focused on] the whole aspect of the combined ratio to make sure underwriters don't just look at the loss ratio," he said. "If we are taking 40 points of premium out through expenses, you need to bring [the cost ratio] into the equation."