Lloyd's of London could lose business to the rest of the London insurance market as its drive to improve profitability pushes managing general agents to look elsewhere for capacity.
However, some managing general agents, or MGAs, also say the cutbacks are focused on more mainstream business, and specialist risks are still able to find a home at Lloyd's.
Making the switch
MGAs underwrite risks on behalf of Lloyd's syndicates and other insurers, but bear none of the underwriting risk themselves. Insurers typically appoint MGAs to access markets where they do not have a presence, or lines of business where hiring a team of underwriters would be uneconomical. MGAs writing business on behalf of Lloyd's syndicates are referred to as coverholders.
Several syndicates have cut back or exited Lloyd's altogether after the market took strong measures to improve profitability in 2018. These included a requirement for syndicates to improve or withdraw from the worst-performing 10% of their portfolios, referred to as Decile 10.
"There will absolutely be a switch, I think, to company market insurers," i.e. those in London but outside Lloyd's, said Mahben Quddus, head of underwriting operations at specialty property MGA Plum Underwriting Ltd. He noted in an interview that reinsurers are increasingly providing capacity directly to MGAs, meaning less reliance on the primary insurance market.
Peter Staddon, managing director of the U.K. Managing General Agents' Association, or MGAA, said in an interview that "there will potentially be a shift" of business out of Lloyd's. He added that if business finds its way to the capital markets, where multiyear deals are more prevalent, "it is not going to go back, so Lloyd's needs to be very careful on what they don't retain."
One of the areas where finding capacity at acceptable prices has been particularly difficult is the professional indemnity, or PI, market. Alan Thorne, head of Allied World's U.K. commercial insurance division, said in an interview that a lot of PI business was historically transacted at Lloyd's, and that with syndicates pulling back, prices were rising on average by between 20% and 30%.
"There is a massive issue with PI where there is contraction in the market through the issues with Lloyd's," Thorne said. Allied World's U.K. commercial business, which uses the group's non-Lloyd's capacity rather than that provided by Syndicate 2232 at Lloyd's, has been receiving roughly three times the number of inquiries than it previously had from brokers looking for alternative cover, he added.
"If contraction on the stamp [capacity] carries on for a year, we actually think we will see even more," Thorne said.
Another area where Lloyd's capacity is reducing is construction, according to Tim James, CEO of Ensurance UK, an MGA specializing in construction and engineering cover. Here too, rates are rising by between 20% and 30%, he said.
"Quite a few of the Lloyd's markets ran off or massively reduced their construction footprint for writing business," James said in an interview, adding that this had "provided opportunities" to Ensurance UK, which gets its construction capacity through an exclusive arrangement with Swiss Re.
Lloyd's underwriters also seem to be warier of newer business without an established history of profitability. Niall Madders, head of open market underwriting at Plum Underwriting, said the company market "is probably a lot more open" for new schemes — specialist insurance offerings for a small group of policyholders with specific needs.
"I think with the Lloyd's market you need that kind of history and data to have them signed off, whereas the company market is a bit more supportive of new ventures," he said.
However, the declining role Lloyd's capacity is playing in some U.K. MGAs' business does not mean that the 330-year-old market is becoming irrelevant for them. Although the effects of the profit drive are creating opportunities for his company, Ensurance UK's James said: "We're not there to challenge Lloyd's capacity."
He added that, as a Lloyd's coverholder, Ensurance UK is "seeing more interest from Lloyd's carriers on how they can work with us, and how we can work with them." He noted that his company just launched a terrorism and sabotage non-damage business interruption product backed by Lloyd's underwriters.
Allied World vice president of business development Darren Rowe said at the British Insurance Brokers' Association conference in Manchester on May 15 that Lloyd's "needs to get back to basics" and focus more on the specialist business it is best known for, adding that he felt a lot of the market's challenges had come from diversifying into "relatively straightforward risks."
It appears Lloyd's underwriters are doing just that. Madders described the shift as "a change in appetite" at Lloyd's. He said: "Companies have exited entirely from property, but there is still available capacity for profitable niche business. There is probably less appetite for the standard market, where the margins are a lot lower."
Quddus at Plum added: "I don't think there is a lack of appetite out there as long as you approach the right market for the right products. Go to Lloyd's for the right specialist; go to the company market for niche, unproven schemes."
And while the Lloyd's drive for profitability is causing some upheaval, MGAs understand and support it. Quddus said of the hardening rates: "We think it is a good thing that the market is returning to a more sensible rating environment."
Staddon at the MGAA said that although Lloyd's has a "fantastic reputation" and he understood what CEO John Neal is trying to achieve with the profit drive, "there is a question whether or not it is too quick." But he added: "[Lloyd's] have got to get it back on track and we accept that, and we are actually working with Lloyd's in a number of different streams because it is a very important market, not only for my sector, but also for the U.K. in general."