Surging wage inflation is an increasingly pressing concern for insurance and broking executives in the London market, with competition to hire and retain top talent threatening to dent profitability at the same time as rating increases begin to tail off.

Numerous sources from across the London market said that staff costs had rocketed over the past year, with the combination of hardening market conditions, the broking “supercycle”, start-ups looking to hire top talent and macroeconomic pressures all combining to hike staff costs.

The sums required to hire the best brokers and underwriters has been variously described to this publication as “out of control” and “crackers”, with the situation most pronounced in strained lines of business where staff movement has been exceptionally high, such as D&O and reinsurance.

Given that most companies across the market are in growth mode, management is faced with the simultaneous challenge of hiring for new roles while defending their existing staff base.

“All of us are all both poacher and gamekeeper,” one London market CEO observed.

While it is difficult to put a precise figure on the wage changes – not least because of varying compensation structures in the market – sources estimated that wage cost inflation was running at between 10%-20%.

This is skewed by the pay rewards on offer for staff moving between firms, with 50% pay rises a common occurrence for those taking on new roles or taking counteroffers, while base pay increases are generally single percentage figures for existing staff.

All of us are all both poacher and gamekeeper

(Re)insurance is not alone in experiencing an inflationary environment for staff costs, with demographic and macroeconomic factors, exacerbated by the pandemic, leading to wage inflation across a host of industries, with pronounced changes in financial services such as law and banking.

The situation in (re)insurance is exacerbated by the sector-specific drivers outlined above.

Market anecdotes abound of offers and counteroffers, lucrative joining bonuses and companies “throwing money around” to hire.

In one scenario, sources told of an underwriter offered a pay increase from £90,000 to £200,000 to move to a large broker, eventually remaining at the existing employer for a salary of around £170,000. Such stories are common.

Wage inflation has been most dramatic in the broking market, as intermediaries look to hire quickly and capitalise on highly attractive trading conditions, where rising insurance prices and GDP growth have led to a spell of bumper broker earnings dubbed the broking “supercycle”.

“When you are in a situation where you haven’t got enough people to service your clients, and you are making a lot of money, then you throw money at it,” one source observed.

Additionally, consolidation in the broker market and the hunger of challenger intermediaries such as Lockton Re, Howden and McGill and Partners has disrupted the market, with expanding operations offering lucrative pay deals to secure top brokers or teams.

Margins impact

Executives at carriers bemoaned a “dearth of talent” for the roles they are looking to fill, with insurers willing to pay a premium for those that meet expectations.

Sources estimated that the increased wage costs seen in the past year could add around 60 basis points to a combined ratio, while at brokers, wages are understood to have a more material impact on profitability, with remuneration expenses accounting for a larger portion of the cost base for intermediaries.

Across the major brokers the cost of staff has largely reduced as a proportion of revenues in 2021, although this could in part be down to the double-digit revenue growth the brokers have enjoyed over the past year.

There are, of course, pros and cons to paying out significant sums to bring in broker talent. As sister publication Inside P&C has explored, broking sources believe team lifts in particular when executed well can deliver the highest returns, particularly judged on a cash basis. (See the full analysis of the team lift model on Inside P&C here.)

Team lifts in numbers II Red.jpg

In underwriting, some business leaders stressed that the rising cost of securing key talent was largely justified on business grounds, with the potential gains from a profitable, loss-free book dwarfing the sums of a salary increase.

However, as the costing landscape begins to transition, with the possibility of flatlining or declining rates in some classes of business, sources warned of a hangover effect on profitability caused by the wage deals that have been agreed at the height of the pricing frenzy.

In particular, there is a shortage of underwriters with the ability to move business, meaning bumper deals for those that can.

Also, technical back-room staff have seen wage increases far greater than in previous hard market cycles.

Such wage increases, it was suggested, were sustainable amid hard market conditions, but retaining such upwards momentum would be untenable.

Sources speculated that 2022 would continue to see wage inflation in classes which remained distressed, but a more benign pricing environment in other lines would lead to a correspondent cooling in the hiring market, although macroeconomic factors were likely to keep up the pressure to up pay.

Analyst questioning at the brokers

Analysts are watching the situation closely at the large publicly listed brokers, with Marsh McLennan CEO Dan Glaser repeatedly quizzed on the subject after the broker reported its Q4 results last week.

The operating margin at the broker reduced by 90 bps to 20.4% in Q4, reflecting “significant investments in the business”.

The executive said that the broker, which has hired over 5,000 staff in the past year, was “very wary” about wage inflation, but confident that rising expenses were being balanced out by strong revenue growth.

Aon CFO Christa Davies said in the broker’s earnings call last week that she expected to see wage inflation into 2022, but it would be offset by other improving efficiencies at the business.

On a conference call with Brown & Brown investors, CEO Powell Brown also said his firm was “absolutely encountering wage inflation”.

The CEO said the impact of wage inflation had not shown up in a meaningful way in Q4 but added: “We are absolutely subject to the pressures of it that anybody else right now is.

“I think that I’ve read recently that we’re in a somewhere between a 30- to 40-year low in terms of labour shortage across all industries. And I’m not going to say that’s indicative exclusively of our industry, but I’m saying the industry hasn’t done a very good job of reinvesting in the teams that are there.”

Driving factors

Sources stressed that wage dynamics at play in the market were shadowing those of previous market cycles, with improved underwriting conditions inevitably adding inflationary pressure to wages.

On top of that, the amount of private equity capital entering the insurance arena and the bumper valuations placed on brokers and MGAs in M&A deals was having a trickle-down effect on staff income.

“The result is that some MGAs are throwing money around like it’s confetti,” one source said.

There is a marked difference in approach between businesses, with big brokers and some start-up underwriters most willing to offer bumper pay deals, while other established underwriting shops are said to be “playing a long game” and allowing some level of staff attrition as a result, and others counteroffering to retain talent.

Some MGAs are throwing money around like its confetti

In reinsurance, the situation is said to be “ridiculous”, especially in the broking market.

Meanwhile brokers with over 15 years’ experience in the D&O market are said to commonly expect a salary “with a two at the front”, whilst competition is incredibly tight for staff with three to five years’ experience.

Pay growth for junior staff has also been boosted, with graduates offered more attractive packages than in previous years, although sources stressed that this followed a number of years of stagnation, and that insurance pay was still well below that of finance professions like banking and the law, in part reflecting the lesser workload.

The bigger picture

The insurance sector is not unique in its experience of surging staff costs, with macroeconomic trends and the pandemic having driven up wages globally, including in financial services.

In the UK, wage levels as of October 2021 were 107.8% of those seen at the beginning of 2020, with the financial services sector outpacing average earnings growth, with wages 113% of the January 2020 figure.

The pandemic has pulled forward retirement dates for a significant proportion of employees, creating a demographic challenge, whilst economies rebounding from the hits taken during the pandemic have led to a tight labour market.

Other mainstays of the City such as banking and law have also seen staff offered better pay deals, with competition for staff corresponding with a boom period for M&A activity, huge investment bank profits and record partner payouts at law firms.

Lloyd’s CEO John Neal has said he expects to sign off on business plans allowing the market to grow by between 12% and 13% in 2021 and write up to $15bn of new business.

The CEO was speaking as part of Aon’s fireside chat series of interviews with top (re)insurance executives.

Neal also said he was confident the market would perform within expectations in 2021, and there was scope for growing both exposure and pricing.

The overall growth forecast is an upwards revision of a recent prediction Neal made of high-single-digit growth next year, though the new business forecast is at the low end of a £12bn-£13bn ($15.5bn-$16.8bn) range he previously cited. The comments come as the business planning process continues between Lloyd’s and syndicates.

Lloyd’s gross written premium in 2019 was £35.9bn.

Neal added that the Covid-19 pandemic had enhanced the importance of Lloyd’s physical presence.

“I think the physical location has perversely become more important, not because we can’t trade without it, but because that ability to connect in certain circumstances and certain instances is critical,” he explained

“And as real estate footprints reduce in the major cities, I think having a legitimate location where people can meet for the purposes of doing insurance has just gone up actually.”

The Lloyd’s leader noted that the insurance industry had got off to a “slow start” at the beginning of the pandemic and found itself on the back foot in the media.

“We found ourselves in a similar position I think the banks did in the financial crisis, people feeling disappointed or frustrated that either there wasn’t cover in force or that they thought there might have been cover but the cover wasn’t there,” he said.

He commented that the pandemic experience had proved a “wake up call” for insurers to consider protecting intangible assets on companies’ balance sheets.

Quizzed on broker consolidation, Neal said he thought Aon and Willis Towers Watson would flourish following their merger and improve the broking market.

“I think it will lift the standards and that must be net net good,” Neal said.

Around a third of 2021 business plans being submitted to Lloyd’s at this stage in the planning season are unrealistic in terms of growth or profitability expectations, CEO John Neal has said.

Speaking at a press conference after Lloyd’s H1 results today, the executive said no business plans had yet been approved at this point in the year, with the first of four “waves” of plans now being assessed.

An early assessment shows there is still a misalignment of expectations between Lloyd’s and some syndicates.

There is a percentage of plans Lloyd’s feels comfortable with, and a further proportion where “we feel we will get to where we want to be in terms of premium expectation or performance”, Neal said.

These two cohorts and the light-touch syndicates – which get automatic plan approval – account for around two-thirds of the market, the CEO continued.

“About a third of the market we would say we don’t see a clear path yet to plans which are logical, realistic and achievable,” Neal said.

“I am not discouraged by that, it’s where we would hope to be, but there’s lots of conversations to be had.”

The CEO said Lloyd’s would grow in the “high single digits” for next year, with around £12bn-£13bn ($15.6bn-$16.7bn) of new business set to be approved and new syndicates set to join the platform.

“Two years ago we were talking about £7bn of new business,” Neal added.

“I think we are getting the balance right for giving the flexibility for business growth… I think that is pretty significant growth for 2021.”

The CEO’s comments came after a set of Lloyd’s H1 results which were battered by £2.4bn of Covid-19 claims but showed significant improvement in the underlying underwriting performance of the market, with the attritional loss ratio declining 7.1 percentage points year on year to 52.6%.

That improvement was mainly driven by the past three years of remediation efforts, Neal said, without giving further detail. Improving rates gave a further tailwind, while Lloyd’s also booked a small amount of benefit from reduced loss frequency from certain lines as a result of Covid-19.

The CEO added: “We are near to where we would hope to be on an underlying basis. We expect to see further improvement through 2021 as the market works on delivering plans which are logical, realistic and achievable.”

Lloyd’s has announced a target of 35% female representation in leadership positions as it seeks to fulfil its commitment to driving long-term culture change in the market.

The 35% target applies to the Lloyd’s market, and within that to company boards, executive committees and direct reports to the executive committee. It is expected to be achieved by 31 December 2023.  

In addition, boards and executive committees combined will be expected to achieve at least 20% female representation by the end of 2023. All new market entrants will be expected to meet these targets on arrival. 

Lloyd’s said it would also set a target for market ethnicity in Q2 2021, following extensive collection of ethnicity data in the market to determine a starting point.  

Lloyd’s today additionally published its culture dashboard, which provides a snapshot of the demographic make-up of the market, informed by the Lloyd’s culture survey last year as well as market participant data across key demographic characteristics.

The dashboard was one of five action points Lloyd’s announced in March last year following a Bloomberg article that reported instances of sexual harassment in the Lloyd’s market, citing anonymous female sources.

The dashboard shows that women currently hold 29% of leadership roles as defined above.  

However, there are still 12 firms with all-male boards and 12 with all-male executive committees.  

Out of this group, seven firms have all-male board and executive committee teams combined. One firm has all-male direct reports of the executive committee. 

Within the Lloyd’s Corporation, women fill 47% of leadership roles.

“The market [female representation] target will drive an improvement in the gender balance in leadership roles across the market in the short-term, with Lloyd’s committing to a medium-term ambition for parity over the next decade,” Lloyd’s said.

Other findings from the culture dashboard include that 88% of the market identifies as heterosexual, with 2% as lesbian or gay and 1% as bisexual. Around 8% preferred not to say.

Meanwhile, just 4% of the market have a disability, while 91% are able-bodied and 5% preferred not to say.

Lloyd’s CEO John Neal said: “Last year, we committed to building a much more inclusive market – one that we are all deeply proud to be part of, and one that welcomes and represents the diversity of our customers globally. In the Corporation, we have achieved parity in less than two years and we are all the better for it.

“While we have put in place a series of actions to accelerate change, it is abundantly clear that we have much work to do and we must be impatient in our resolve to get there. The Corporation will continue to do more in leading the market on all aspects of inclusion.”

Lloyd’s CEO John Neal has said repricing “has to happen” following the substantial industry losses from Covid-19, and pledged flexibility in permitting additional growth to the market as rates rise. 

This morning, Lloyd’s released an industry underwriting loss estimate of $107bn for Covid-19. When including the expected hit to investments, this total industry impact rises to $203bn, Lloyd’s said.

The Lloyd’s market is expected to take $3bn-$4.3bn of the Covid-19 underwriting losses.

Speaking to Insurance Insider, Neal said: “You can’t put a potential $200bn loss into the non-life insurance industry and not expect the market to reprice.”

He added: “I hope we will learn from experiences of the past, whether that was 9/11 or another event, and realise that this has to be a significant pricing event.”

The Lloyd’s CEO said the Corporation would be as accommodating as it reasonably can be in permitting syndicates to grow in a hardening market.

Lloyd’s performance management directorate has been tough on growth in the past two years as it has sought to rectify market performance, a process which is still ongoing. The market has previously complained that Lloyd’s would not allow it to grow ahead of risk-adjusted rate.

“If there is growth that’s price-driven we will be very quick to support that,” Neal told this publication.

He said that Lloyd’s would do as much as it could to approve business plans quickly and simply, and “there would be forgiveness if the right opportunities are there within your plan to grow”.

The light-touch cohort of outperformers will gain automatic plan approval and therefore freedom to grow.

Neal said those which are not light touch, Lloyd’s had revamped the standard approach to business planning around some KPIs. Provided the plans are credible, and there is clear demonstration of how managing agents got to their forecasted loss picks, “we can fast track those approvals”, Neal said.

“I think the vast majority of syndicates will fall into those two buckets. If plans are sensibly constructed they will be approved,” Neal said. “But there is a third bucket, the high-touch syndicates, and if they have been a problem it will be a difficult set of discussions.”

The high-touch cohort is made up of both underperforming syndicates and those which are deemed material to the market – either due to their size or cat exposure. Lloyd’s 2020 planning documentation shows the high-touch cohort has around 20 syndicates and accounts for around 45 percent of market premium.

Lloyd’s will also be accommodating to new capital wishing to support Lloyd’s businesses as the market enters a period of opportunity, Neal said.

He pointed to the two new Lloyd’s entrants recently approved – Carbon and Ki – and said the syndicate in a box framework was generating steady levels of interest.

“Our ILS work continues, so there is no reason why that alternative capital shouldn’t come in,” he said. “There is still interest from those not yet participating in the market, who are thinking about when entry to Lloyds is the right time.

“As difficult as this pandemic is for our customers, and how devastating the broad impact has been, there is an opportunity for insurers.”

Lloyd’s is extremely well capitalised and will be able to shoulder the cost of Covid-19, Neal said, noting that the twice-yearly recapitalisation opportunities at Lloyd’s meant the market should also be able to bolster capital before the peak US wind season.

Neal also warned that the Covid-19 impact would drag out over a number of years, with the first year creating a catastrophe-type loss, then the effects of recession being felt on premium income in the following years.

“We have also got to keep a really strong eye on inflation probably for two years out,” Neal said. “I think our businesses at Lloyd’s have learned that we have got to adjust price to keep pace with the recessionary and inflationary impact that will echo through 2021 and 2022.”

]]> http://www.artemisfinancial.co.uk/group-regulatory-and-reporting-manager-2/feed/ 0 http://www.artemisfinancial.co.uk/house-of-lords-calls-for-revamp-of-ir35/ http://www.artemisfinancial.co.uk/house-of-lords-calls-for-revamp-of-ir35/#comments Tue, 28 Apr 2020 10:42:23 +0000 http://www.artemisfinancial.co.uk/?p=2056 Find out more...]]> 27th April 2020

Inquiry found rules to be “riddled with problems, unfairness and unintended consequences… the potential impact on the wider labour market has been overlooked by the government. A wholesale reform of IR35 is required.”

The report is critical of “numerous flaws” that “treats contractors as employees for tax purposes but do not qualify for employment rights, thus creating a class of zero-rights employees” and “places too great a burden on businesses”.

Summary of Lords Inquiry

It is right that everyone should pay their fair share of tax. But the evidence that we heard over the course of our inquiry suggests that the IR35 rules—the Government’s framework to tackle tax avoidance by those in ‘disguised employment’—have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed.

Until the beginning of the COVID-19 pandemic, the Government had planned to extend off‑payroll working rules to the private sector in April 2020. The off‑payroll working rules build on IR35, and the new proposals were designed to mirror similar rules implemented in the public sector in 2017. Under the new rules IR35 itself will not change. Instead, large- and medium-sized businesses will be responsible for enforcing a regime which HMRC has struggled with.

The Government’s aim was to legislate for the new private sector rules in this year’s Finance Bill. But following the COVID-19 outbreak, and the Government’s assessment that introducing new rules was inappropriate at an extremely difficult time for the economy, the implementation of the rules will be deferred for a year.

We welcome this delay. It is right not to impose unnecessary burdens on business at such a difficult time. However, given the dysfunctionality of the existing system, we call on the Government to use the extra time to rethink fundamentally its approach to the legislation. We understand why, in order to improve compliance and protect the tax base, transferring responsibility for operating the rules to clients was deemed a remedy for the problems which have beset IR35. But the Government made this decision after considering the issue too narrowly, in terms of its tax take. It has severely underestimated the costs to business of implementing the changes. It did not take full account of concerns raised by stakeholders. And it did not analyse sufficiently the unintended behavioural consequences of the proposed reforms or their wider potential impact on the labour market, and on the gig economy in particular.

It is likely that the off‑payroll changes will cause widespread disruption. Many of our witnesses described how the proposals had already encouraged blanket status determinations and the early termination of contracts. We also heard that many contractors had been left in an undesirable ‘halfway house’: they do not enjoy the rights that come with employment, yet they are considered employees for tax purposes. In short, they are “zero-rights employees”. Separating employment status for tax purposes from employment status under employment law also fails to acknowledge that contractors bear all the risk for providing the workforce flexibility from which both parties benefit.

The Government should therefore take the opportunity afforded by the delay to analyse holistically the problems that we have uncovered. If the Government continues with its plan to introduce the off‑payroll reforms in April 2021, it should commission an independent review of the earlier introduction of the off‑payroll rules in the public sector to analyse how introducing off‑payroll rules to the private sector will affect the labour market. It should also, after two years of promising to do so, finally implement the recommendations of the Taylor Review of modern working practices: that the taxation of labour should be made more consistent across different forms of employment, while at the same time improving the rights and entitlements of self-employed people. We believe that the Taylor Review proposals offer the best long-term alternative solution to the off‑payroll rules, and provide an opportunity to consider tax, rights and risk together.

The UK economy is facing its most severe crisis since the Second World War. Even if the economy were to begin to recover in the next 12 months, the severity of the economic impact of COVID-19 is so great that it would be completely wrong for the Government to impose a new burden on business in the form of the existing off‑payroll proposals. However, business is likely to need considerably longer than a year to recover from the disruption caused by the COVID-19 pandemic. The Government should announce by October 2020 whether it will indeed implement the off‑payroll rules in April 2021, or whether any on-going impact to the economy resulting from the COVID-19 pandemic will require their implementation to be delayed further. In the longer term the Government should reassess the flawed IR35 framework, and give serious consideration to the fairer alternatives to the off‑payroll working rules which we lay out in this report.