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Lloyd's syndicates told to assess outwards reinsurance assumptions

Corporation's chief of markets says Lloyd's is 'closely watching the availability, structure, pricing and terms of upcoming placements in property and certain specialty classes'

Managing agents ‘cannot have head in the sand’ as Lloyd’s says its will keep close watch on forthcoming placements

Lloyd’s managing agents have been told to examine their outward reinsurance assumptions amid concerns rapidly changing market conditions will materially affect underwriting plans for 2023.

Speaking to senior executives today, Lloyd’s chief of markets, Patrick Tiernan, said underwriters “can’t go around with their heads in the sand” over challenging reinsurance market conditions.

“Reinsurance has changed materially… and requires close attention,” Tiernan said. Reinsurance buyers have faced rising rates and reduced capacity in recent renewals – a trend that is expected to continue at the January 1 renewal season.

Lloyd’s is closely watching the availability, structure, pricing and terms of upcoming placements in property and certain specialty classes, Tiernan said. 

“Experience tells us to judge the deals that are bound and not the warnings sounded, but at the same time we can’t go around with our heads in the sand,” he continued.

Around one-quarter of the Lloyd’s market’s £39bn ($43.94bn) of gross written premium is ceded to third-party reinsurers. 

“Our inherent expectation is that managing agents consider the feasibility of their planned reinsurance strategy with a reassessment of risk appetite, underwriting strategy and capital if [reinsurance] placement differs from plan,” Tiernan said.

Tiernan said all syndicates have been asked to provide their assumptions around outward reinsurance pricing, limit, retention and availability of cover to help evaluate their underwriting plans for 2023.

“We do need to be cognisant of current conditions and ensure the 2023 business plans have thoughtful assumptions and sensible contingency arrangements,” he said.

But Lloyd’s recognised hardening reinsurance market conditions also presented opportunities for writers of inwards reinsurance, which represents around 15% of Lloyd’s market premiums, Tiernan said. 

“We will look to actively support those who wish to take advantage of any opportunities. Hopefully this is evidenced in the flexible catastrophe risk appetite capital requirements.”

Speaking more generally on syndicate business plans for 2023, Tiernan said Lloyd’s would continue to focus on achieving a “sustainable, profitable performance” for the market, adding there was “still a way to go” in delivering this.

At the half-year point, the Lloyd’s market delivered an attritional loss ratio of 48.9% – a 1.6-point improvement on the same period a year earlier.

Tiernan said it was vital “not to give up the hard-won gains of the remediation years”.

Lloyd’s, he continued, would focus on inflation, attachment points and “clarity” of cover.

To maintain an “acceptable” loss ratio, rate increases and structural changes need to be adjusted for inflationary impact and deal with pre-existing pricing adequacy shortfalls, Tiernan said.

On inflation, Lloyd’s was seeing “increasing homogeneity” in the market’s inflation assumptions, which provides “increased confidence in prospective risk-adjusted rate change assumptions”, he added.

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