Lloyd’s result not quite as good as predicted - here’s why
Lloyd’s stated year-on-year rate improvement not reflected in reported loss ratios
In our forecast for the market issued before Lloyd’s results announcement, we believed that the market could deliver a combined ratio of sub-90%. The mood music in the market suggested rating had improved sufficiently to absorb a run of catastrophe losses and still return a very favourable result, much like after the four hurricanes of 2004. What transpired was a slightly worse reported market combined ratio of 91.9% and we want to understand the driver of this.
Figure 1: Lloyd's 2022 actual and forecasted combined ratio shown with 50% credible interval against the RISX portfolio.
Lloyd’s publishes rate change information each year for the market as a whole. These are summarised in the following table:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | |
|---|---|---|---|---|---|---|
| Risk addjusted rate change | 7.7% | 10.9% | 10.8% | 5.4% | 3.0% | -2.0% |
| Effective compound improvement | 143.7% | 133.4% | 120.3% | 108.6% | 103.0% | 100.0% |
Logic dictates that the benefit of these rating improvements over the last five years would manifest principally in attritional loss ratios, as these specifically exclude major and catastrophe claims. Lloyd’s stated attritional loss ratios are:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | |
|---|---|---|---|---|---|---|
| Attritional loss ratios | 48.4% | 48.8% | 52.0% | 57.3% | 57.6% | 58.9% |
| Apparent rate improvement | 121.7% | 120.7% | 113.3% | 102.8% | 102.3% | 100.0% |
It appears that only around half the stated improvement in rate change manifests in attritional loss ratios. One cause could be claims leakage from major claims events into attritional claims, e.g. hurricanes which carve a path through counties where Lloyd’s has a lot of property MGA relationships.
This could be indicative of the market’s significant shift towards MGA-type business acceptance, which may be deemed more diversified but turns out to be just as Cat exposed, notwithstanding an almost static reinsurance spend. This might also call into question the market’s definition of attritional claims.
Another reason could be that there remains significant churn of policies written in the market. Rate change information is only captured on renewal business, not new business, and the latter rarely shows improved terms over the former. Either way, the picture may perhaps not be as rosy as at first glance.
This article was also published as a Viewpoint by The Insurer.