Lloyd’s has room to let the attritional loss ratio slip this year – even if it does not want to

“The market can grow profitability,” Lloyd’s chief executive, John Neal, proclaimed yesterday as Lloyd’s reported its full-year 2022 results, which saw the market book an underwriting profit of £2.6bn ($3.18bn).

In a departure from previous years, the corporation also provided an outlook as to what it expects the market to achieve this year. This includes increasing gross written premiums to £56bn and achieving a sub-95% combined ratio.

“The market and the corporation’s continued collective focus on sustainable performance and underwriting discipline permits the Lloyd’s market to grow through 2023,” Neal said.

Let’s take these targets in turn.

Gross written premiums of £56bn represent a 20% increase on the 2022 figure of £46.7bn. This would be achieved through a combination of rate increases (4%), inflation adjustment (6%) and organic growth (4%), according to Lloyd’s.

The projected growth in 2023 is comparable to the 19% achieved in 2022 and contains a similar level of organic volume growth from new and existing syndicates.

The rate change is difficult to compare, however, as 2022’s figure does not break out a separate inflation adjustment – a combined 8% price increase (for rate and inflation) is reported for last year.

It is clear, however, the corporation is not allowing the market to get carried away in terms of exposure growth this year. 

Turning to the sub-95% combined ratio target, the corporation has given itself some headroom here.

Key to the hitting the target is keeping the attritional loss ratio in check.

The ratio has been steadily falling in recent years, reflecting the remediation work the corporation has done to improve the market’s underwriting performance, with syndicates forced to exit unprofitable business and increase rates.

The market booked an attritional loss ratio of 48.4% in 2022, compared with 48.9% in 2021 and 51.9% in 2020.

Since 2018, the attritional loss ratio has fallen 9.2 percentage points.

This year presents some challenges for Lloyd’s, however. 

While some classes such as property reinsurance and specialty reinsurance are expected to see continued strong rate increases this year, price increases in other classes are slowing and, in some cases, softening – for example, cyber and directors’ and officers’ (D&O) liability lines. 

In addition, inflation, both economic and social, must also be grappled with. Syndicates have been told to assess the impact of inflation on their portfolios and business plans, but there is still uncertainty here.

It therefore not surprising Lloyd’s is increasing underwriting oversight of cyber, D&O and property binders business this year “to ensure adequate pricing of risk across the book”.

Additionally, Lloyd’s has also warned changes to reinsurance programmes at the January 1 renewal had introduced “an untested structural volatility” at the one-in-10-year return period, which syndicates must respond to.

Despite these challenges, Lloyd’s has room to let the attritional loss ratio slip a little and still hit the combined ratio target.

The sub-95% target assumes a normal catastrophe year – let’s assume 10 points on the combined ratio (for comparison, major losses added 12.7% points in 2022).

If the expense ratio remains flat at 34.4% (and it is likely to drop further in 2023, given the market modernisation work under way) then this would allow the attritional loss ratio to reach 50.6% – some 2.2 points higher than in 2022.

Of course, the corporation would presumably like to show continued improvement in the attritional loss ratio in 2023 – and catastrophe losses are uncertain. 

But the 2023 combined ratio target suggests the market may have reached the attritional loss ratio floor.