Maximising Value in a Lloyd's Business

LMA Academy 2019

Part of the “LMA Academy Maximising Value in Lloyd's” Business Programme we delivered three modules on capital, underwriting and invesment management. abstract: Part of the “LMA Academy Maximising Value in Lloyd's” Business Programme we delivered three modules on capital, underwriting and invesment management.

Lloyd's building

Managing the captial base: Attracting & keeping investors

(Re)insurance competes against a wide variety of other financial service investment opportunities so investors need to achieve comparable risk adjusted returns in order to continue to supply their capital. Managing and structuring capital, through modelling a pre-defined risk appetite and other appropriate checks and balances over the course of the underwriting cycle, is crucial in maintaining these returns. In this way, (re)insurers can maintain or increase footprint and maximise opportunities for investor value crystallisation.

Managing the cost base: Understanding the combined ratio

Underwriting profitability is vital. Monitoring performance of underwriting and operating expense is key to maintaining a profitable underwriting outcome. Given the risk appetite of the capital providers, the volatility of the gross underwriting must be managed via adequate reinsurance and other forms of hedging, such as Insurance Linked Securities (ILS). However this can suppress net premium and therefore exacerbate expense ratios. Syndicates need to develop an economic rationale for their strategy in developing their risk portfolio, long versus short-tail, technical versus relationship underwriting, niche lines with deep expertise versus diversified portfolio, where to lead and where to follow underwriting.

Managing investment strategy

Investor returns are driven by premium leverage and asset leverage. Although the latter has been low in recent years, three month $ LIBOR is back around 2%, so asset leverage is becoming an important component of total returns once more. The ability to increase returns must always be balanced with the need for liquidity to pay both expected and unexpected claims. At the same time, investment risk and its symbiotic relationship with underwriting risk must be factored into a syndicate’s overall economic capital risk assessment.