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Lloyd’s and future profitability: the role of effective portfolio management in insurance

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Insurer Solutions

By Richard Clarkson | February 27, 2020

With competition mounting from overseas markets, Lloyd’s is at a crossroads and has already begun to heed calls for more radical change. Effective portfolio management has a key role to play in delivering sustainable profits and ensuring the survival and growth of the 333-year old insurance market.

Lloyd's of London insurers recorded a loss of £1bn ($1.3bn) in 2018, attributed to an above average number of major natural catastrophes, such as Hurricanes Florence and Michael, Typhoon Jebi in Japan, as well as the Californian wildfires in the fourth quarter. Claims from these disasters cost the Lloyd's market £2.9bn, significantly higher than the long-term major claims average of £1.9bn. Overall, the market paid out £19.2bn of gross claims in 2018.

Reviewing the Corporation’s 2018 performance, Caroline Dunn, Lloyd’s Head of Class of Business, stated that unprofitable syndicates had been placing undue strain on better performing ones and that there was still work to do to get Lloyd’s back on track to a sustainable and profitable position. After several years of rate softening, the encouraging news for Lloyd’s is that pricing improvements were seen across the market in 2018 and positive rates have now been achieved for the first time since 2012 and across seven consecutive quarters, particularly on distressed classes.

...more still needed to be done to place the Lloyd’s market on a firmer footing, with a priority being to support syndicates in rebalancing their portfolios towards more profitable business.”

Caroline Dunn
Lloyd’s Head of Class of Business

However, Caroline emphasised that more still needed to be done to place the Lloyd’s market on a firmer footing, with a priority being to support syndicates in rebalancing their portfolios towards more profitable business. One of the foundations she identified as being key to improving underwriting discipline and lowering exposures to deliver sustainable profitability is active and effective portfolio management.

While there are standards that currently support most elements of portfolio management - including pricing, reserving and capital - Caroline indicated that as best practice frameworks are developed the next step will be for Lloyd’s to consider how best to bring these strands together. She also revealed that Lloyd’s are developing a best practice pricing approach and, as part of this process, Lloyd’s will be engaging with pricing experts and consultants from across the market. Caroline also anticipates that there will be some overlap between pricing best practice and underwriting, with Lloyd’s having already spent some time analysing what differentiates underwriters that manage to achieve positive results in classes that are on average performing poorly.

Effective portfolio management

Improving portfolio management capabilities is clearly going to be an important step in enabling London Market insurers to steer through future challenges that lie ahead. It is a core discipline that makes it easier to divide the book into meaningful portfolios to drive focus and trading activities, as well as creating faster and more effective processes.

At Willis Towers Watson, we believe that effective performance management can be recognised by three common and essential building blocks:

  1. 01

    Granularity

    Dynamic groupings of risk that can be sliced and diced for effective analysis to isolate performance drivers. So, by channel, segment, trade, lead/follow, binder, geography and perils; or drawing from an integrated data set, starting with pricing, claims, reserving and exposure, augmented by external datasets.

  2. 02

    Agility

    Agile operational processes that quickly identify the issues, uncover causes, drives action plans and remediate the issue. This should have a defined operational rhythm, and best practice involves use of scenario planning.

  3. 03

    Coherence

    Operating transversally across the operating model to bring together all the functions. This will set expectations on performance management, pricing and underwriting; it will bring together underwriting, capital, reserving, claims, reinsurance, pricing, sales and distribution; and it will act as a convening authority to create a “coming together into one place”.

Underwriting transformed

Underwriting in insurance is essential to performance excellence, yet historically the role has been slow to change. Today’s carriers are under pressure to evolve the role, as clients – and the perils they face – are rapidly changing, with more skills now needed around portfolio management.

Insurers are starting to invest in the technologies they need and UK Personal Lines insurers have become increasingly sophisticated in deploying Portfolio Management. We are also starting to see London Market insurers adopt these practices. However, it is difficult to find the skills needed as they are increasingly in demand, and insurers are having to find ways to train and develop their people.

Portfolio Management boosts performance

When seeking to improve performance, it is important to recognise that underwriting is more than risk selection and pricing. It requires a comprehensive set of capabilities across hard and soft skills, at the heart of which is rigorous portfolio management.

Portfolio management improves execution capabilities on underwriting results (especially as investment income declines through low yields). It overcomes the operational fragmentation that is still typical in carriers. It improves allocation of the portfolio as capital moves towards quality, reducing cost of capital relative to peers. It creates confidence on which adjacencies to move into and when. And it insures against macro value chain compression trends.

The performance and competitive benefits of proactive portfolio management are becoming increasingly apparent. Yet, relatively few companies have looked in depth at what constitutes best-in-class portfolio management and what advantages there are to adopting best practice.

We are currently working in partnership with Lloyd’s of London to benchmark market capability in portfolio management, with our ground breaking, co-published Portfolio Management Survey launching in February 2020. During 2020 we will be publishing a series of thought leadership articles that talk in detail on good portfolio management with insights from the benchmarking study. In addition, we are developing a 360° analysis tool for insurers to use to profile the issues within their own organisations.

Contact

Richard Clarkson
Head of London Market Consulting Insurance Consulting and Technology

Richard Clarkson is Head of London Market Consulting, at Willis Towers Watson and has 25 years’ experience working in the insurance sector. He specialises in Commercial Lines with experience covering both underwriting and claims. Richard focusses on strategy, data analytics, and operationalising insights, which can comprise: embedding decision support into expert processes, organisational design, E2E process/customer journey, business transformation and operational improvements. Richard is a chartered insurer.


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