Lloyd’s of London announced it plans to stop accepting admitted market accounts in the United States in a year and focus on the U.S. reinsurance and excess and surplus (E&S) insurance market, where it is the market leader. In this interview with Insurance Journal’s Andrea Wells, Hank Watkins, Lloyd’s U.S. chief, discusses the change, Lloyd’s efforts to keep a “heavier touch” on poor performing syndicates and advice for finding the right solutions in an ever-changing and riskier world.
Lloyd’s recently announced it would exit admitted business in the U.S. What kind of business are you exiting, and why?
Hank Watkins: Over the past 10 years, E&S as a segment of the industry has grown 5% or 6%, sometimes 7% per year, and Lloyds has grown right along with that. Sometimes more, sometimes less, depending on what’s needed that year. Sometimes we’re writing more cyber risks than other types of things, but our business has grown in E&S by a healthy margin every year for the past 10 years. Same with our reinsurance business.
If you look at the admitted platforms, we’re really just in Kentucky, Illinois and the U.S. Virgin Islands. That business has not grown in 20 years. And so, this was a strategic decision. You look at what you excel at? And for Lloyd’s, it’s E&S and reinsurance. There’s no argument there. We’re number one in the U.S. in E&S, and number three or four, depending on how Berkshire or Munich Re or Swiss Re are doing in reinsurance in a given year, but still a very solid business for us.
Syndicate performance is important for Lloyd’s. How are performance goals affecting the Lloyd’s market overall?
Watkins: As I talked about the growth over those past 10 years, Lloyd’s wrote business, as did other markets around the world, that didn’t perform very well in 2017 and 2018. So, we came in at 114% combined ratio in 2017 and about 104, 105 in 2018. Nothing to be proud of. And so, that’s why we implemented the “decile 10” exercise towards the end of 2017. And over time have moved the market toward a more profitable position. We ended 2019 at about 102, which was better, but a lot of that improved profitability was due to investment income, not really the underwriting improvement that we’d wanted to see.
So, we’re currently in the business planning process for 2021, and there are about 50% of the syndicates that are performing well. And they’re going to be what we call “light touch” business plans. Some of them submit their plans. Our teams in London spend their entire latter half of each year, reviewing the plans, going back and forth and ultimately, reaching a decision with the syndicates as to what they’re going to write, where they’re going to write it, etc. … There’s still about 50% of the market though that’s not performing to where we want them to be, which is under 100% combined. And so, they’re going to have a “heavier touch” and require a lot more attention by us to get their plans approved. … It’s a really robust process we go through because we all know that if we were to lighten up, there will always be syndicates as there will always be underwriters in the world that aren’t successful in a given year. And we just can’t afford to go through many more years of combined ratios in excess of 100%.
Any advice for wholesalers and retail agents going forward in this changing world?
Watkins: The pandemic is something that clearly nobody expected ever. There were a couple of markets out there pre-COVID that had offered pandemic coverage to their clients. Very few people bought it. A lot of the claims that we are paying for pandemic losses had that coverage. You look at event cancellation, some properties, travel accidents, E&S business. Lloyd’s is currently looking at between $3.5 billion to $4 billion through the first half of the year, in claims we’re going to pay globally associated with the pandemic.
So while there has been a fair amount of pandemic coverage out there, very few people across the world actually purchased what they in retrospect needed. … People just didn’t anticipate that a pandemic could come this quickly and this broadly across the entire world. That’s going to change.
But my advice for retail agents and brokers is, clearly, if you’re in this business, you’ve grown up knowing that you have to try to anticipate everything, whether it’s a flood, a potential earthquake, a product liability claim, a cyber-attack. And these are really complex risks, especially cyber. …
It’s an increasingly complex world. We have to constantly keep our eyes open. And to that end, there are a lot of organizations in the insurance space that have terrific thought leadership papers out there, you can download for free. Go get them because they might help you figure out a way to convince your client to reconsider that risk they didn’t want to buy insurance for.
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